CHAPTER 6 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 year) and comprises 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

Budgeted performance is better than past performance for judging managers. Why? Mainly because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past.

6-5

Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing battles 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

A company that shares its own internal budget information with other companies can gain multiple benefits. One benefit is better coordination with suppliers, which can reduce the likelihood of supply shortages. Better coordination with customers can result in increased sales as demand by customers is less likely to exceed supply. Better coordination across the whole supply chain can also help a company reduce inventories and thus reduce the costs of holding inventories. In addition, a company can gain information about competitors that will be useful in strategic planning and benchmarking.

6-7

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. 6-1

6.8

A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by adding a period (month, quarter, or year) in the future as the period just ended is dropped. A four-quarter rolling budget for 2004 is superceded by a four-quarter rolling budget for April 2004 to March 2005, and so on.

6.9

The steps in preparing an operating budget are: 1. Prepare the revenues budget 2. Prepare the production budget (in units) 3. Prepare the direct materials usage budget and direct materials purchase budget 4. Prepare the direct manufacturing labor budget 5. Prepare the manufacturing overhead budget 6. Prepare the ending inventories budget 7. Prepare the cost of goods sold budget 8. Prepare the nonmanufacturing costs budget 9. Prepare the budgeted income statement

6-10 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.

6.11 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine
how budgeted amounts change with changes in the underlying assumptions. This assists managers to monitor those assumptions that are most critical to a company attaining its budget or make timely adjustments to plans when appropriate.

6.12 Factors reducing the effectiveness of budgeting of companies include:

1. 2. 3. 4. Lack of a well-defined strategy, Lack of a clear linkage of strategy to operational plans, Lack of individual accountability for results, and Lack of meaningful performance measures.

6.13 Kaizen budgeting explicitly incorporates continuous improvement during the budget period
into the budget numbers.

6.14 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity based 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.

6-15 The choice of a responsibility center type guides the variables to be included in the
budgeting exercise. For example, if a revenue center is chosen, the focus will be on variables that assist in forecasting revenue. Factors related to, say, costs of the investment base will be considered only if they assist in forecasting revenue.

6-2

6-16 (15 min.) Advantages of budgeting.

(a) Budgets compel strategic planning and facilitate implementation of plans. An organizations strategy, plans, and budgets are interrelated. Formulation of budgets is necessary for implementation of plans which, in turn, is necessary for the organizations strategy. Sometimes the feedback from budgets may result in a revision of strategic plans. Budgets provide a framework for judging performance. Budgeted performance measures are preferable to using past performance for evaluating actual results for two reasons. First, past performance may have been mediocre and not suitable to serve as a benchmark. Secondly, due to globalization and the advances in information technology, communication technology, and distribution technology, the future environment may be expected to be very different from the past. Budgeted performance measures take into account anticipated changes and improvements. Budgets motivate managers and employees. Budgets promote coordination and communication within the organization. Coordination compels managers to think of interdependencies and interrelationships. Communication helps all employees understand and accept the organizational objectives. (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 (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) (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 Direct Materials Purchases Budget: Direct materials needed for production (44,000 3) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Finished Goods (units) 42,000 24,000 66,000 22,000 44,000 Direct Materials (in gallons) 132,000 110,000 242,000 90,000 100,000 11,000 111,000 7,000 104,000 1,500,000 50,000 1,550,000 20,000 1,530,000

(b)

(c) (d)

6-17

6-18

6.19

6-3

Direct materials to be purchased

152,000

6-4

6-20
1.

(30 min.)

Sales and production budget.

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

12-ounce bottles 4-gallon units

a b

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
Budgeted production

2.

3.

Beginning inventory

Budgeted sales

Target ending inventory

= 1,200,000 + 200,000 1,300,000 = 100,000 4-gallon units

6-21

(45 min.)

Direct materials usage, unit costs and gross margins.

12-ounce Units 4-gallon Units

1. Direct Materials Usage Budget Physical Units Budget To be used in production: 12-ounce units 4-gallon units Cost Budget Available from beginning inventory: 12-ounce units 4-gallon units To be used from purchases of this period: 12-ounce: $0.06 (4,500,000 500,000) 4-gallon: $0.30 (1,300,000 0) Direct materials to be used
a

4,500,000 1,300,000

$ 30,000a $ 240,000 _ $270,000 0

390,000 $390,000

$0.06 500,000 = $30,000

6-5

6-21 (Contd.) 2. 1. 2. 3. 4. 5.
a b

Output units produced Number of ounces Equivalent 8-ounce units (line 2 8) Direct labor cost per 8 ounces Total direct labor cost (line 3 line 4)

12-ounce Bottles 4,500,000 54,000,000a 6,750,000 $0.01 $67,500

4-gallon Units 1,300,000 665,600,000b 83,200,000 $0.01 $832,000

4,500,000 12 ounces per unit = 54,000,000 1,300,000 128 ounces per gallon 4 gallons per unit = 665,600,000 Total direct labor cost is: 12-ounce bottles 4-gallon units $ 67,500 832,000 $899,500 12-ounce bottle Cost per Unit of Input Inputs Total Direct materials 12-ounce bottles 4-gallon containers Direct labor (per 8 ounce) Manuf. overhead Unit manuf. cost $0.06 0.01 0.15 1.0 1.5 1.0 $0.060 0.015 0.150 $0.225 12-ounce Bottles $0.250 0.225 $0.025 10% $0.30 0.01 0.15 1.0 64.0 1.0 $0.30 0.64 0.15 $1.09 4-gallon container Cost per Unit of Input Inputs Total

3.

4. Selling price Unit manuf. cost Gross margin Gross margin percentage 4-gallon Container $1.500 1.090 $0.410 27.3%

5. The chosen cost allocation base is units of production, with different products (12 - ounce bottles and 4-gallon containers) being given the same weight. A key issue here is whether there is a cause-and-effect relationship between units produced and manufacturing overhead. Alternative allocation bases include direct material costs, direct manufacturing labor costs, direct manufacturing labor hours, and time on the production line.

6-6

6-22 (15-20 min.) Revenue, production, and purchases budget.

1. 2. 800,000 motorcycles 400,000 yen = 320,000,000,000 yen Budgeted sales (units) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct materials to be used in production, 780,000 2 Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased (units) Cost per wheel in yen Direct materials purchase cost in yen 800,000 100,000 900,000 120,000 780,000 1,560,000 30,000 1,590,000 20,000 1,570,000 16,000 25,120,000,000

3.

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

6-23 (15-25 min.) Budget for production and direct manufacturing labor.
Roletter Company Budget for Production and Direct Manufacturing Labor For the Quarter Ended March 31, 2005 Budgeted sales (units) Add target ending finished goods a inventory (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 a January 10,000 16,000 26,000 16,000 10,000 2.0 20,000 $200,000 10,000 3,000 8,000 15,000 $236,000 February 12,000 12,500 24,500 16,000 8,500 2.0 17,000 $170,000 8,500 2,550 6,800 12,750 $200,600 March 8,000 13,500 21,500 12,500 9,000 1.5 13,500 $135,000 6,750 2,025 5,400 10,125 $159,300 50,500 $505,000 25,250 7,575 20,200 37,875 $595,900 Quarter 30,000 13,500 43,500 16,000 27,500

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

6-24 (20-30 min.) Activity-based budgeting.

1. This question links to the ABC example used in the Problem for Self-Study in Chapter 5 and to Question 5-24 (ABC, retail product-line profitability). 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 costs Cost Hierarchy Batch-level Batch-level Output-unitlevel Output-unitlevel Soft Drinks $1,260 984 336 828 $3,408 Fresh Produce $ 2,160 5,084 3,612 6,156 $17,012 Packaged Food $1,260 1,558 1,974 1,935 $6,727 Total $ 4,680 7,626 5,922 8,919 $27,147

2. 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 26.9 12.9 5.7 9.3 Fresh Produce 46.2 66.7 61.0 69.0 Packaged Food 26.9 20.4 33.3 21.7 Total 100.0% 100.0 100.0 100.0

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

6-25 (20-30 min.) Kaizen approach to activity-based budgeting

(continuation of 6-24). 1. March 2002 rates Activity Ordering Delivery Shelf-stocking Customer support Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level January $90.00 82.00 21.00 0.18 February $89.82000 81.83600 20.95800 0.17964 March $89.64 81.67 20.92 0.179

These March 2002 rates can be used to compute the total budgeted cost for each activity area: 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 Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level Soft Drinks $1,255 980 335 823 $3,393 Fresh Produce $2,151 5,063 3,598 6,122 $16,934 Packaged Food $1,255 1,552 1,966 1,924 $6,697 Total $ 4,661 7,595 5,899 8,869 $27,024

2. A kaizen budgeting approach signals management's commitment to systematic cost reduction. Compare the budgeted costs from Question 6-24 and 6-25. Ordering $4,680 4,661 Delivery $7,626 7,595 ShelfStocking $5,922 5,899 Customer Support $8,919 8,869

Question 6-24 Question 6-25 (Kaizen)

The kaizen budget number will show unfavorable variances for managers whose activities do not meet the required monthly cost reductions. This likely will put more pressure on managers to creatively seek out cost reductions by working "better" 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

6-26 (15 min.) Responsibility and controllability.

1. (a) Purchasing agent (b) Purchasing agent 2. (a) Purchasing agent (b) Supplier 3. (a) Production department supervisor (b) Purchasing agent 4. (a) Production department supervisor (b) Production department supervisor 5. (a) Production department supervisor (b) Maintenance department supervisor 6. (a) New division manager (b) Former division manager 7. (a) *Production department supervisor (b) Plant superintendent / Bottleneck department supervisor *The production department here refers to the one operating below capacity, and not the next, bottleneck, production department.

6-11

6-27 (30 min.) Cash flow analysis, Chapter Appendix.

1. The cash that TabComp Inc. can expect to collect during April 2005 is calculated below. April cash receipts: $100,000 April cash sales ($400,000 .25) 115,200 April credit card sales ($400,000 .30 .96) Collections on account: 151,200 March ($480,000 .45 .70) 63,000 February ($500,000 .45 .28) January (uncollectible-not relevant) 0 Total collections $429,400 (a) The projected number of the MZB-33 computer hardware units that TabComp Inc. will order on January 25, 2005, is calculated as follows. MZB-33 Units 110 a 27 137 33 104

2.

March sales Plus: Ending inventory Total needed

b Less: Beginning inventory Projected purchases in units a 0.30 90 unit sales in April b 0.30 110 unit sales in March

(b) Purchase price = c $3,000 selling price per unit 60% Projected unit purchases Total MZB-33 purchases c $ 1,800 104 $187,200

Selling price = $2,025,000 675 units, or for March, $330,000 110 units = $3,000 per unit

3. Monthly cash budgets are prepared by companies such as TabComp Inc. in order to plan for their cash needs. This means identifying when both 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 borrowing when the

6-12

company needs it. At the same time, a company should be aware of when there is excess cash available for investment or for repaying loans. 6-28 (40 min.) Budget schedules for a manufacturer. a. Revenues Budget Units sold Selling price Budgeted revenues
b. Production Budget in Units

Executive Line 740 $ 1,020 $754,800

Chairman Line 390 $ 1,600 $624,000 Executive Line 740 30 770 20 750 Oak Legs 4 750 3,000

Total $1,378,800 Chairman Line 390 15 405 5 400 Red Oak Legs

Budgeted unit sales Add budgeted ending fin. goods inventory Total requirements Deduct beginning fin. goods. inventory Budgeted production
c. Direct Materials Usage Budget (units):

Oak Executive Line: 1. Budgeted input per f.g. unit 2. Budgeted production 3. Budgeted usage (1 2) Chairman Line: 4. Budgeted input per f.g. unit 5. Budgeted production 6. Budgeted usage (4 5) 7. Total direct materials usage (3 + 6) Direct Materials Cost Budget
8. Beginning inventory 9. Unit price (FIFO)
10. Cost of DM used from beginning inventory (8 9)

Red Oak

Total

16 750 12,000

12,000

25 400 10,000 10,000

3,000

4 400 1,600 1,600

320 $18 $5,760

150 $23 $3,450 9,850 $25 $246,250

100 $11 $1,100 2,900 $12 $34,800

40 $17 $680 1,560 $18 $28,080 542,730 $10,990

11. Materials to be used from purchases (7 8) 11,680 $20 12. Cost of DM in March 13. Cost of DM purchased and $233,600 used in March (11 12)

6-13

14. Direct materials to be used (10 +13)

$239,360

$249,700

$35,900

$28,760

$553,720

6-28 (Contd.) Direct Materials Purchases Budget: Oak Budgeted usage (from line 7) 12,000 Add target ending inventory 192 Total requirements 12,192 Deduct beginning inventory 320 Total DM purchases 11,872 Purchase price (March) $20 Total purchases $237,440 d. Red Oak 10,000 200 10,200 150 10,050 $25 $251,250 Oak Legs 3,000 80 3,080 100 2,980 $12 $35,760 Red Oak Legs Total 1,600 44 1,644 40 1,604 $18 ________ $28,872 $553,322

Direct manufacturing labor budget Direct Output Manu. LaborUnits Hours per Produced Output Unit Executive Line 750 3 Chairman Line 400 5 e. Manufacturing overhead budget Variable manufacturing overhead costs (4,250 $35) Fixed manufacturing overhead costs Total manufacturing overhead costs Total manufacturing overhead cost per hour = = $45 per direct manufacturing labor-hour Fixed manufacturing overhead cost per hour = = $10 per direct manufacturing labor-hour

Total Hours 2,250 2,000 4,250

Hourly Rate $30 $30

Total $ 67,500 60,000 $127,500

$148,750 42,500 $191,250

f.

Computation of unit costs of ending inventory of finished goods:

Executive Line Direct materials Oak top ($20 16, 0) Red oak ($25 0, 25) Oak legs ($12 4, 0) Red oak legs ($18 0, 4) Direct manufacturing labor ($30 3, 5) Manufacturing overhead Variable ($35 3, 5) Fixed ($10 3, 5) Total manufacturing cost $320 0 48 0 90 105 30 $593

Chairman Line $ 0 625 0 72 150

175 50 $1,072

6-14

6-28 (Contd.)
Ending Inventories Budget

Cost per Unit Direct Materials Oak top Red oak top Oak legs Red oak legs Finished Goods Executive Chairman $ 20 25 12 18 593 1,072

Units 192 200 80 44 30 15

Total $ 3,840 5,000 960 792 10,592 17,790 16,080 33,870 $44,462

Total g. Cost of goods sold budget Budgeted finished goods inventory, March 1, 2005 ($10,480 + $4,850) $ 15,330 Direct materials used (from Dir. materials cost budget) $553,720 Direct manufacturing labor (Dir. manuf. labor budget) 127,500 Manufacturing overhead (Manuf. overhead budget) 191,250 Cost of goods manufactured 872,470 Cost of goods available for sale 887,800 Deduct ending finished goods inventory, March 31, 2002 (Inventories budget) 33,870 Cost of goods sold $853,930 2. Areas where continuous improvement might be incorporated into the budgeting process: (a) Direct materials. Either an improvement in usage or price could be budgeted. For example, the budgeted usage amounts could be related to the maximum improvement (current usage minimum possible usage) of 1 square foot for either desk: Executive: 16 square feet 15 square feet minimum = 1 square foot Chairman: 25 square feet 24 square feet minimum = 1 square foot Thus, a 1% reduction target per month could be: Executive: 15 square feet + (0.99 1) = 15.99 Chairman: 24 square feet + (0.99 1) = 24.99 Some students suggested the 1% be applied to the 16 and 25 square -foot amounts. This can be done so long as after several improvement cycles, the budgeted amount is not less than the minimum desk requirements. (b) Direct manufacturing labor. The budgeted usage of 3 hours/5 hours could be continuously revised on a monthly basis. Similarly, the manufacturing labor cost per hour of $30 could be continuously revised down. The former appears more feasible than the latter. (c) Variable manufacturing overhead. By budgeting more efficient use of the allocation base, a signal is given for continuous improvement. A second approach is to budget continuous improvement in the budgeted variable overhead cost per unit of the allocation base. (d) Fixed manufacturing overhead. The approach here is to budget for reductions in the year-to-year amounts of fixed overhead. If these costs are appropriately classified as fixed, then they are more difficult to adjust down on a monthly basis. 6-15

6-29 (45 min.) Sensitivity analysis, changing budget assumptions, and kaizen approach.
1. Revenues Chippo, $3 500,000 Choco, $3 500,000 Cost of goods sold Chocolate chips ($2 250,000a; $2 125,000b) Cookie dough ($1 250,000a; $1 375,000b) Direct manufacturing labor ($20 2,000; $20 3,000) Indirect manufacturing costs (50% $160,000; 50% $160,000) Cost of goods sold Gross margin
a

Chippo $1,500,000 $1,500,000

Choco $1,500,000 $1,500,000

Total $1,500,000 1,500,000 $3,000,000

500,000 250,000 40,000 80,000 870,000 $ 630,000

250,000 375,000 60,000 80,000 765,000 $ 735,000

750,000 625,000 100,000 160,000 1,635,000 $1,365,000

Chippo: 500,000 0.50 = 250,000 pounds chocolate chips; 500,000 0.50 = 250,000 pounds cookie dough b Choco: 500,000 0.25 = 125,000 pounds chocolate chips; 500,000 0.75 = 375,000 pounds cookie dough 2. Chippo Revenues Chippo $3 500,000 Choco $3 500,000 $1,500,000 $1,500,000 Cost of goods sold Chocolate chips ($1.94 250,000; $1.94 125,000) 485,000 Cookie dough ($0.97 250,000; $0.97 375,000) 242,500 Direct manufacturing labor ($20 2,000; $20 3,000) 40,000 Indirect manufacturing costs (50% $160,000; 50% $160,000) 80,000 847,500 Gross margin $ 652,500 $1,500,000 $1,500,000 242,500 363,750 60,000 80,000 746,250 $ 753,750 Choco Total $1,500,000 1,500,000 $3,000,000 727,500 606,250 100,000 160,000 1,593,750 $1,406,250

6-16

6-29 (Contd.) 3. Chippo Revenues Chippo $3 500,000 Choco $3 500,000 $1,500,000 $1,500,000 Cost of goods sold Chocolate chips ($1.94 250,000; $1.94 125,000) 485,000 Cookie dough ($0.97 250,000; $0.97 375,000) 242,500 Direct manufacturing labor ($20 1,980c; $20 2,970d) 39,600 Indirect manufacturing costs (50% $156,800e; 50% $156,800e) 78,400 845,500 Gross margin $ 654,500 $1,500,000 $1,500,000 Choco Total $1,500,000 1,500,000 $3,000,000

242,500 363,750 59,400 78,400 744,050 $ 755,950

727,500 606,250 99,000 156,800 1,589,550 $1,410,450

c2,000 (1 0.01); d3,000 (1 0.01); e$160,000 (1 0.02)

6-17

6-29 (Contd.)

6-29 Excel Application

Master Budget and Responsibility Accounting Choco Chips Original Data % Chips % Dough Projected Sales (Packages) Estimated Selling Price per Pack. Cost of Chocolate ($/lb) Cost of Cookie Dough ($/lb) Budgeted Direct Manuf. Labor Hours Direct Manuf. Labor Rate ($/hr) Indirect Manufacturing Costs Problem 1 Chippo Revenues Chippo, $3 x 500,000 Choco, $3 x 500,000 Total Revenues Cost of Goods Sold Chocolate Chips ($2 x 250,000a;$2 x 125,000b) Cookie Dough ($1 x 250,000a;$1 x 375,000b) Direct Manufacturing Labor ($20 x 2,000; $20 x 3,000) Indirect Manufacturing Costs Total Cost of Goods Sold Gross Margin $1,500,000 $1,500,000 $1,500,000 $1,500,000 Choco Total $1,500,000 1,500,000 $3,000,000 Chippo 50% 50% 500,000 $3.00 $2.00 $1.00 2,000 $20 $80,000 Choco 25% 75% 500,000 $3.00 $2.00 $1.00 3,000 $20 $80,000

500,000 250,000 40,000 80,000 870,000 $630,000

250,000 375,000 60,000 80,000 765,000 $735,000

750,000 625,000 100,000 160,000 1,635,000 $1,365,000

aChippo: 500,000 x 0.50 = 250,000 pounds chocolate chips; 500,000 x 0.50 = 250,000

pounds cookie dough

bChoco: 500,000 x 0.25 = 125,000 pounds chocolate chips; 500,000 x 0.75 = 375,000

pounds cookie dough

6-18

6-29 (Contd.)
Problem 2 Chippo Revenues Chippo, $3 x 500,000 Choco, $3 x 500,000 Total Revenues Cost of Goods Sold Chocolate Chips ($1.94 x 250,000;$1.94 x 125,000) Cookie Dough ($0.97 x 250,000;$0.97 x 375,000) Direct Manufacturing Labor ($20 x 2,000; $20 x 3,000) Indirect Manufacturing Costs Total Cost of Goods Sold Gross Margin Problem 3 Chippo Revenues Chippo, $3 x 500,000 Choco, $3 x 500,000 Total Revenues Cost of Goods Sold Chocolate Chips ($1.94 x 250,000;$1.94 x 125,000) Cookie Dough ($0.97 x 250,000;$0.97 x 375,000) Direct Manufacturing Labor ($20 x 1,980; $20 x 2,970) Indirect Manufacturing Costs Total Cost of Goods Sold Gross Margin $1,500,000 $1,500,000 $1,500,000 $1,500,000 Choco Total $1,500,000 1,500,000 $3,000,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 Choco Total $1,500,000 1,500,000 $3,000,000

485,000 242,500 40,000 80,000 847,500 $652,500

242,500 363,750 60,000 80,000 746,250 $753,750

727,500 606,250 100,000 160,000 1,593,750 $1,406,250

485,000 242,500 39,600 78,400 845,500 $654,500

242,500 363,750 59,400 78,400 744,050 $755,950

727,500 606,250 99,000 156,800 1,589,550 $1,410,450

6-19

6-30 (30-40 min.) Revenue and production budgets.

This is a routine budgeting problem. The key to its solution is to compute the correct quantities of finished goods and direct materials. Use the following general formula: =+ 1. Thingone Thingtwo Budgeted revenues 2. Scarborough Corporation Revenue Budget for 2006 Units Price 60,000 $165 40,000 250 Scarborough Corporation
Production Budget (in units) for 2006

Total $ 9,900,000 10,000,000 $19,900,000

Budgeted sales in units Add target finished goods inventories, December 31, 2006 Total requirements Deduct finished goods inventories, January 1, 2006 Units to be produced 3.

Thingone 60,000 25,000 85,000 20,000 65,000

Thingtwo 40,000 9,000 49,000 8,000 41,000

Scarborough Corporation Direct Materials Purchases Budget (in quantities) for 2006 A Direct Materials B 130,000 123,000 253,000 32,000 285,000 29,000 256,000 C -41,000 41,000 7,000 48,000 6,000 42,000

Direct materials to be used in production Thingone (budgeted production of 65,000 units times 4 lbs. of A, 2 lbs. of B) Thingtwo (budgeted production of 41,000 units times 5 lbs. of A, 3 lbs. of B, 1 lb. of C) Total Add target ending inventories, December 31, 2006 Total requirements in units Deduct beginning inventories, January 1, 2006 Direct materials to be purchased (units)

260,000 205,000 465,000 36,000 501,000 32,000 469,000

6-20

6-30 (Contd.) 4.

Scarborough Corporation Direct Materials Purchases Budget (in dollars) for 2006 Budgeted Expected Purchases Purchase (Units) Price per unit Total Direct material A 469,000 $12 $5,628,000 Direct material B 256,000 5 1,280,000 Direct material C 42,000 3 126,000 Budgeted purchases $7,034,000 5. Scarborough Corporation Direct Manufacturing Labor Budget (in dollars) for 2006 Direct Budgeted Manufacturing Rate Production Labor-Hours Total per (Units) per Unit Hours Hour Total Thingone 65,000 2 130,000 $12 $1,560,000 Thingtwo 41,000 3 123,000 16 1,968,000 Total $3,528,000 6. Scarborough Corporation Budgeted Finished Goods Inventory At December 31, 2006 Thingone: Direct materials costs: A, 4 pounds $12 $48 B, 2 pounds $5 10 $ 58 Direct manufacturing labor costs, 2 hours $12 24 Manufacturing overhead costs at $20 per direct manufacturing labor-hour (2 hours $20) 40 Budgeted manufacturing costs per unit $122 Finished goods inventory of Thingone $122 25,000 units $3,050,000 Thingtwo: Direct materials costs: A, 5 pounds $12 $60 B, 3 pounds $5 15 C, 1 each $3 3 $ 78 Direct manufacturing labor costs, 3 hours $16 48 Manufacturing overhead costs at $20 per direct manufacturing labor-hour (3 hours $20) 60 Budgeted manufacturing costs per unit $186 Finished goods inventory of Thingtwo $186 9,000 units 1,674,000 Budgeted finished goods inventory, December 31, 2006 $4,724,000

6-21

6-31 (30 min.)

Budgeted income statement.

Easecom Company Budgeted Income Statement for 2005 (in thousands)

Revenues Equipment ($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 ($150 1.06) Customer maintenance costs ($1,000 + $130) Administrative costs Total operating costs Operating income
6.32

$6,996 1,908 $8,904 5,022 3,882 850 159 1,130 900 3,039 $ 843

(15 min.) Responsibility of purchasing agent.

The time lost in the plant should be charged to the purchasing department. The plant manager probably should not be asked to underwrite a loss due to failure of delivery over which he had no supervision. Although the purchasing agent may feel that he has done everything he possibly could, he must realize that, in the whole organization, he is the one who is in the best position to evaluate the situation. He receives an assignment. He may accept it or reject it. But if he accepts, he must perform. If he fails, the damage is evaluated. Everybody makes mistakes. The important point is to avoid making too many mistakes and also to understand fully that the extensive control reflected in responsibility accounting is the necessary balance to the great freedom of action that 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 from a responsibility accounting system should pinpoint misbehavior and provide answers. The point is that no accounting system or variances can provide answers. However, variances can lead to questions. In this case, in deciding where the penalty should be assigned, the student might inquire who should be askednot who should be blamed. Classroom discussions have also raised the following diverse points: (a) Is the railroad company liable? (b) Costs of idle time are usually routinely charged to the production department. Should the information system be fine-tuned to reallocate such costs to the purchasing department? (c) How will the purchasing managers behave in the future regarding willingness to take risks? The text emphasizes the following: Beware of overemphasis on controllability. For example, a time-honored theme of management is that responsibility should not be given without accompanying authority. Such a guide is a useful first step, but responsibility accounting is more far-reaching. The basic focus should be on information or knowledge, not on control. The key question is: Who is the best informed? Put another way, "Who is the person who can tell us the most about the specific item, regardless of ability to exert personal control?" 6-33 (30 min.) Activity-based budgeting. 6-22

a. Machining Indirect materials [$0 + ($10/hour 10,000 hours)] Indirect labor [$20,000 + ($15/hour 10,000 hours)] Utilities [$0 + ($5/hour 10,000 hours)] b. Setups and quality assurance Indirect materials [$0 + $1,000/run 40 runs] Indirect labor [$0 + $1,200/run 40 runs] Inspection [ $80,000 + ($2,000/run 40 runs)] c. Procurement Indirect materials [$0 + ($4/order 15,000 orders)] Indirect labor [$45,000 + $0] d. Design Engineering hours [$75,000 + ($50/hour 100 hours)] e. Material handling Indirect materials [$0 + ($2/sq. ft. 100,000 sq. ft.)] Indirect labor ($30,000 + $0)

$100,000 170,000 50,000 $320,000 40,000 48,000 160,000 $248,000 $ 60,000 45,000 $105,000 $ 80,000 $200,000 30,000 $230,000

6-23

6-34 (60 min.) Comprehensive operating budget, budgeted balance sheet.

1. Schedule 1: Revenues Budget For the Year Ended December 31, 2004 Units Selling Price Snowboards 1,000 $450 Schedule 2: Production Budget (in Units) for the Year Ended December 31, 2004 Snowboards 1,000 200 1,200 100 1,100

Total Revenues $450,000

2.

Budgeted unit sales (Schedule 1) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 3. Schedule 3A: Direct Materials Usage Budget For the Year Ended December 31, 2004 Wood Physical Units Budget Wood: 1,100 5.00 b.f. Fiberglass: 1,100 6.00 yards To be used in production Cost Budget Available from beginning inventory Wood: 2,000 b.f. $28.00 Fiberglass: 1,000 b.f. 4.80 To be used from purchases this period Wood: (5,500 2,000) $30.00 Fiberglass: (6,600 1,000) $5.00 Total cost of direct materials to be used 5,500 5,500

Fiberglass

Total

6,600 6,600

56,000 4,800 105,000 $161,000 28,000 $32,800 $193,800

Schedule 3B: Direct Materials Purchases Budget For the Year Ended December 31, 2004 Wood Physical Units Budget Production usage (from Schedule 3A) 5,500 Add target ending inventory 1,500 Total requirements 7,000 Deduct beginning inventory 2,000 Purchases 5,000

Fiberglass 6,600 2,000 8,600 1,000 7,600

Total

6-24

6-34 (Contd.) Cost Budget Wood: 5,000 $30.00 $150,000 Fiberglass: 7,600 $5.00) $38,000 Purchases $150,000 $38,000 $188,000 4. Schedule 4: Direct Manufacturing Labor Budget For the Year Ended December 31, 2004 Cost Driver DML Hours per Labor Category Units Driver Unit Total Hours Wage Rate Total Manufacturing Labor 1,100 5.00 5,500 $25.00 $137,500 5. Schedule 5: Manufacturing Overhead Budget For the Year Ended December 31, 2004 At Budgeted Level of 5,500 Direct Manufacturing Labor-Hours Variable manufacturing overhead costs ($7.00 5,500) $ 38,500 Fixed manufacturing overhead costs 66,000 Total manufacturing overhead costs $104,500 Budgeted manufacturing overhead rate:
$104,500 = $19.00 per hour 5,500 $104,500 = $95.00 per output unit 1,100

6. 7. 8.

Budgeted manufacturing overhead cost per output unit:

Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2004 Cost per Unit of Inputa Inputsb Total Direct materials Wood $30.00 5.00 $150.00 Fiberglass 5.00 6.00 30.00 Direct manufacturing labor 25.00 5.00 125.00 Total manufacturing overhead 95.00 $400.00 a cost is per board foot, yard or per hour b inputs is the amount of each input per board 9. Schedule 6B: Ending Inventories Budget December 31, 2004 Cost per Units Unit Total Direct materials Wood 1,500 $ 30.00 $ 45,000 Fiberglass 2,000 5.00 10,000 Finished goods Snowboards 200 400.00 80,000 Total Ending Inventory $135,000

6-25

6-34 (Contd.) 10. Schedule 7: Cost of Goods Sold Budget For the Year Ended December 31, 2004 From Schedule Beginning finished goods inventory January 1, 2004, $374.80 100 Given Direct materials used 3A Direct manufacturing labor 4 Manufacturing overhead 5 Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, December 31, 2004 6B Cost of goods sold 11. Budgeted Income Statement for Slopes For the Year Ended December 31, 2004 Revenues Schedule 1 Cost of goods sold Schedule 7 Gross margin Operating costs Variable marketing costs ($250 30) Fixed nonmanufacturing costs Operating income 12. Budgeted Balance Sheet for Slopes as of December 31, 2004 Cash Inventory Property, plant, and equipment (net) Total assets Schedule 6B $ 10,000 135,000 850,000 $995,000 $ 17,000 178,000 800,000 $995,000 $450,000 393,280 56,720 $ 7,500 30,000 37,500 $ 19,220 $193,800 137,500 104,500 435,800 473,280 80,000 $393,280 Total $ 37,480

Current liabilities Long-term liabilities Stockholders equity Total liabilities and stockholders equity

6-26

6.35 (30 min.) Cash budgeting (Chapter Appendix)

1. Projected Sales

Sales in Units Revenues Collections of Receivables

May 80 $36,000 May

June 120 $54,000 June

July 200 $90,000 July $10,800 27,000 18,000 $55,800

August 100 $45,000 August

September 60 $27,000 September

October 40

October

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 Calculation of Payables May Material and Labor Use, Units Budgeted production Direct materials Wood (board feet) Fiberglass (yards) Direct manuf. labor (hours) 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 OHD Calculation Variable OHD rate OHD driver Variable OHD expense June 200 1,000 1,200 1,000

16,200 45,000 9,000 $70,200 August 60 300 360 300

27,000 22,500 5,400 $54,900 September 40 200 240 200 October

July 100 500 600 500

$30,000 6,000 12,500 150

$15,000 3,000 7,500 150

$9,000 1,800 5,000 150

$7 500 $3,500

$7 300 $2,100

$7 200 $1,400

6-27

6-35 (Contd.) Cash Budget for the months of July, August, September 2004 Beginning cash balance Add receipts: Collection of receivables Total receipts Total cash available Deduct disbursements: Material purchases Direct manufacturing labor Variable costs Fixed costs Interest payments Total disbursements Ending cash balance July $10,000 55,800 55,800 $65,800 36,000 12,500 3,500 8,000 150 60,150 $ 5,650 August $ 5,650 70,200 70,200 $75,850 18,000 7,500 2,100 8,000 150 35,750 $40,100 September $40,100 54,900 54,900 $95,000 10,800 5,000 1,400 8,000 150 25,350 $69,650

2. Yes, Slopes has a budgeted cash balance of $69,650 on 10/1/2004 and so will be in a position to pay off the $30,000 1-year note on October 1, 2004. 3. No. Slopes does not maintain a $10,000 minimum cash balance in July. It could encourage its customers to pay earlier by offering a discount. Alternatively, slopes could seek shortterm credit from a bank.

6-28

6-36 (30 min.) Cash budget, fill in the blanks, chapter appendix.
Quarters II III
$ 32,000 315,000 347,000 125,000 110,000 45,000 3,000 85,000 14,000 382,000 15,000 397,000 (50,000) 50,000 0 0 50,000 $ 15,000 $ 15,000 295,000 310,000 110,000 95,000 40,000 3,000 0 12,000 260,000 15,000 275,000 35,000 0 0 0 0 $ 50,000

I
Cash balance, beginning Add receipts Collections from customers Total cash available for needs Deduct disbursements Direct materials Payroll Other costs Interest costs (bond) Machinery purchase Income taxes Total disbursements Minimum cash balance desired Total cash needed Cash excess (deficiency) Financing Borrowing (at beginning) Repayment (at end) Interest (at 12% per annum) Total effects of financing Cash balance, ending $ 15,000 385,000 400,000 175,000 125,000 50,000 3,000 0 15,000 368,000 15,000 383,000 17,000 0 0 0 0 $ 32,000

IV
$ 50,000 365,000 415,000 155,000 118,000 49,000 3,000 0 20,000 345,000 15,000 360,000 55,000 0 (50,000) (4,500) (54,500) $ 15,500

Year as a Whole
$ 15,000 1,360,000 1,375,000 565,000 448,000 184,000 12,000 85,000 61,000 1,355,000 15,000 1,370,000 5,000 50,000 (50,000) (4,500) (4,500) $ 15,500

Note that the short-term loan is only repaid when it can be paid in full and after maintaining the minimum balance. The interest on the loan is only paid at the time the loan is repaid.

6-29

6-30

6-31

6-38
1.

(60-75 min.)

Comprehensive budget; fill in schedules.

November $60,000* 15,000 $45,000 $45,000 12,000 $57,000 December $80,000* 20,000 $60,000 $60,000 15,000 $75,000

Schedule A: Budgeted Monthly Cash Receipts Item September October Total sales $40,000* $48,000* Credit sales (25%) 10,000* 12,000* Cash sales (75%) $30,000 $36,000 Receipts: Cash sales $36,000* Collections on accounts receivable 10,000* Total $46,000* *Given.

2.

Schedule B: Budgeted Monthly Cash Disbursements for Purchases Item Purchases Deduct 2% cash discount Disbursements *Given. Note that purchases are 30%. October November December 4th Quarter $42,000* $56,000 $25,200 $123,200 840* 1,120 504 2,464 $41,160* $54,880 $24,696 $120,736 70.0% of next months sales given a gross margin of

3.

Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs Item October November December 4th Quarter Salaries and wages (15% of sales) $ 7,200* $ 9,000 $12,000 $28,200 Rent (5% of sales) 2,400* 3,000 4,000 9,400 Other cash operating costs (4% of sales) 1,920* 2,400 3,200 7,520 Total $11,520* $14,400 $19,200 $45,120 *Given. Schedule D: Budgeted Total Monthly Cash Disbursements Item October November December Purchases $41,160* $54,880 $24,696 Cash operating costs 11,520* 14,400 19,200 Light fixtures 600* 400 -Total $53,280* $69,680 $43,896 *Given. Schedule E: Budgeted Cash Receipts and Disbursements Item October November December Receipts $46,000* $57,000 $75,000 Disbursements 53,280* 69,680 43,896 Net cash increase $31,104 Net cash decrease $ 7,280* $12,680 *Given 6-32 4th Quarter $120,736 45,120 1,000 $166,856

4.

5.

4th Quarter $178,000 166,856 $ 11,144

6-38 (Contd.) 6. Schedule F: Financing Required Item Beginning cash balance Net cash increase Net cash decrease Cash position before borrowing (a) Minimum cash balance required Excess (Deficiency) Borrowing required (b) Interest payments (c) Borrowing repaid (d) Ending cash balance (a+bcd) *Given. October $12,000* 7,280* 4,720* 8,000* (3,280)* 4,000* November $ 8,720* 12,680 (3,960) 8,000 (11,960) 12,000 39,144 8,000 31,144 540 16,000 $ 8,720* $ 8,040 $22,604 $180 360 $540 23,144 8,000 15,144 16,000 540 16,000 $22,604 December $ 8,040 31,104 4th Quarter $12,000 11,144

Interest computation: $ 4,000 @ 18% for 3 months = $12,000 @ 18% for 2 months = Total interest expense

7. Short-term, self-liquidating financing is best. The schedules clearly demonstrate the mechanics of a self-liquidating loan. The need for such a loan arises because of the seasonal nature of many businesses. When sales soar, the payroll and suppliers must be paid in cash. The basic source of cash is proceeds from sales. However, the credit extended to customers creates a lag between the sale and the collection of cash. When the cash is collected, it in turn may be used to repay the loan. The amount of the loan and the timing of the repayment are heavily dependent on the credit terms that pertain to both the purchasing and selling functions of the business. Somewhat strangely, in seasonal businesses, the squeeze on cash is often heaviest in the months of peak sales and is lightest in the months of low sales.

6-33

6-38 (Contd.) 8. Newport Stationery Store Budgeted Income Statement For the Quarter Ending December 31, 2004 RevenuesSchedule A Cost of goods sold (70% of sales) Gross margin Operating costs Salaries and wagesSchedule C $28,200 RentSchedule C 9,400 Other cash operating costsSchedule C 7,520 Depreciation ($1,000 3 months) 3,000 Operating income Deduct interest expense Schedule F Add purchase discounts Schedule B Net income (before taxes) *Note: Ending inventory and proof of cost of goods sold: Inventory, September 30 $ 63,600 Add purchasesSchedule B 123,200 Deduct inventory, December 31: Basic inventory 30,000 December purchasesSchedule B 25,200 Cost of goods sold $188,000 131,600* 56,400

48,120 8,280 540 2,464 $ 10,204 $186,800 55,200 $131,600

6-34

6-38 (Contd.) Newport Stationery Store Budgeted Balance Sheet December 31, 2004 Assets: Current assets: CashSchedule F Accounts receivable December credit salesSchedule A Inventory (see Note above) Total current assets Equipment and fixtures: Equipmentnet ($100,000 $3,000 depreciation) FixturesSchedule D Total Liabilities and Owners' Equity: Liabilities Owners equity Total *Owners equity, September 30: $12,000 + $63,600 + $10,000 + $100,000 (Given) Net income, quarter ended December 31 Owners equity, December 31 $ 22,604 20,000 55,200 97,804 $97,000 1,000 98,000 $195,804 None $195,804* $195,804 $185,600 10,204 $195,804

9. All of the transactions have been simplifiedfor example, no bad debts are considered. Also, many businesses face wide fluctuation of cash flows within a month. For example, perhaps customer receipts lag and are bunched together near the end of a month, and disbursements are due evenly throughout the month, or are bunched near the beginning of the month. Cash needs would then need to be evaluated on a weekly and, perhaps, daily basis rather than on a monthly basis.

6-35

6.40 a.

(60 min.) Comprehensive review of budgeting, cash budgeting, chapter

appendix.
Schedule 1: Revenues Budget For the Year Ended December 31, 2005 Units (Lots) Lemonade 1,080 Diet Lemonade 540 Total Schedule 2: Production Budget in Units For the Year Ended December 31, 2005 Budgeted unit sales (Schedule 1) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Products Lemonade Diet Lemonade 1,080 540 20 10 1,100 550 100 50 1,000 500 Selling Price $9,000 8,500 Total Sales $ 9,720,000 4,590,000 $14,310,000

b.

6-36

6-40 (Contd.) c. Schedule 3A: Direct Materials Usage Budget in Units and Dollars For the Year Ended December 31, 2005 SyrupSyrupLemon. Diet Lem. Containers Packaging Total Units of direct materials to be used for production of Lemonade (1,000 lots 1) 1,000 1,000 1,000 Units of direct materials to be used for production of Diet Lemonade (500 lots 1) 500 500 500 Total direct materials to be used (in units) 1,000 500 1,500 1,500 Units of direct materials to be used from beginning inventory (under FIFO) 80 70 200 400 Multiply by cost per unit of beginning inventory $ 1,100 $ 1,000 $ 950 $ 900 Cost of direct materials to be used from beginning inventory (a) $ 88,000 $ 70,000 $ 190,000 $ 360,000 $ 708,000 Units of direct materials to be used from purchases (1,000 80; 500 70; 1,500 200; 1,500 400) 920 430 1,300 1,100 Multiply by cost per unit of purchased materials $ 1,200 $ 1,100 $ 1,000 $ 800 Cost of direct materials to be used from purchases (b) $1,104,000 $473,000 $1,300,000 $ 880,000 3,757,000 Total cost of direct materials to be used (a + b) $1,192,000 $543,000 $1,490,000 $1,240,000 $4,465,000 d. Schedule 3B: Direct Materials Purchases Budget in Units and Dollars For the Year Ended December 31, 2005 SyrupSyrupLemon. Diet Lem. Containers Packaging Total Direct materials to be used in production (in units) from Schedule 3A 1,000 500 1,500 1,500 Add target ending direct materials inventory in units 30 20 100 200 Total requirements in units 1,030 520 1,600 1,700 Deduct beginning direct materials inventory in units 80 70 200 400 Units of direct materials to be purchased 950 450 1,400 1,300 Multiply by cost/unit of purchased materials $ 1,200 $ 1,100 $ 1,000 $ 800 Direct materials purchase costs $1,140,000 $495,000 $1,400,000 $1,040,000 $4,075,000 6-37

6-40 (Contd.) e. Schedule 4: Direct Manufacturing Labor Budget For the Year Ended December 31, 2005 Output Direct Units Manufacturing Produced Labor Hours Total (Schedule 2) per Unit Hours Lemonade 1,000 20 20,000 Diet Lemonade 500 20 10,000 Total 30,000 f.

Hourly Rate Total $25 $500,000 25 250,000 $750,000

Schedule 5: Manufacturing Overhead Costs Budget for the Year Ended December 31, 2005 Variable manufacturing overhead costs: Lemonade [$600 2 hours per lot 1,000 lots (Schedule 2)] $1,200,000 Diet Lemonade [$600 2 hours per lot 500 lots (Schedule 2)] 600,000 Variable manufacturing overhead costs 1,800,000 Fixed manufacturing overhead costs 1,200,000 Total manufacturing overhead costs $3,000,000 Fixed manufacturing overhead per bottling hour = $1,200,000 3,000 = $400. Note that the total number of bottling hours is 3,000 hours: 2,000 hours for Lemonade (2 hours per lot 1,000 lots) plus 1,000 hours for Diet Lemonade (2 hours per lot 500 lots). g. Schedule 6A: Ending Finished Goods Inventory Budget as of December 31, 2005 Cost per Units (Lots) Unit (Lot) Direct materials: Syrup for Lemonade 30 $1,200 $ 36,000 Syrup for Diet Lemonade 20 1,100 22,000 Containers 100 1,000 100,000 Packaging 200 800 160,000 Units Finished goods: Lemonade 20 Diet Lemonade Total ending inventory *From Schedule 6B $5,500* 10 Cost per Unit 5,400* $110,000 54,000 164,000 $482,000

Total

$318,000

6-38

6-40 (Contd.) Schedule 6B: Computation of Unit Costs of Manufacturing Finished Goods For the Year Ended December 31, 2005
Cost per Unit (Lot) or Hour of Input Lemonade Inputs in Units (Lots) or Hours Amount Diet Lemonade Inputs in Units (Lots) or Hours Amount

Syrup Containers Packaging Direct manufacturing labor Variable manufacturing overhead* Fixed manufacturing overhead* Total

$1,200 $ 25 600 400 20 2 2

$1,100 1,000 800 500 20 1,200 800 $5,500 2

1,000 800 500 1,200 800 $5,400

*Variable manufacturing overhead varies with bottling hours (2 hours per lot for both Lemonade and Diet Lemonade). Fixed manufacturing overhead is allocated on the basis of bottling hours at the rate of $400 per bottling hour calculated in Schedule 5.

h. Schedule 7: Cost of Goods Sold Budget For the Year Ended December 31, 2005 From Schedule Beginning finished goods inventory, January 1, 2005 Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, December 31, 2005 Cost of goods sold Given* 3A 4 5 $ $4,465,000 750,000 3,000,000 8,215,000 9,005,000 6 164,000 $8,841,000 Total 790,000

*Given in description of basic data and requirements (Lemonade, $5,300 100; diet Lemonade, $5,200 50)

i. Schedule 8: Marketing Costs Budget For the Year Ended December 31, 2005 Marketing costs, 12% Revenues, $14,310,000 j. Schedule 9: Distribution Costs Budget For the Year Ended December 31, 2005 Distribution costs, 8% Revenues, $14,310,000

$1,717,200

$1,144,800

6-39

6-40 (Contd.) k. Schedule 10: Administration Costs Budget For the Year Ended December 31, 2005 Administration costs, 10% Cost of goods manufactured, $8,215,000 Budgeted Income Statement For the Year Ended December 31, 2005 Sales Cost of goods sold Gross margin Operating costs: Marketing costs Distribution costs Administration costs Total operating costs Operating income Income tax expense Net income Schedule 1 Schedule 7 Schedule 8 Schedule 9 Schedule 10 $1,717,200 1,144,800 821,500 3,683,500 $ 1,785,500 625,000 $ 1,160,500 $14,310,000 550,000 14,860,000 600,000 $14,260,000 $14,310,000 8,841,000 5,469,000

$ 821,500

l.

Schedule 11: Collections from Customers Budgeted Revenue for 2005 Schedule 1 Add collections from beginning accounts receivable balance Given Deduct ending accounts receivable balance Collections from customers Given

Schedule 12: Direct Materials Disbursements Budgeted direct material purchase costs for 2005 Schedule 3B Add payment for beginning accounts payable balance Given Deduct ending accounts payable balance Disbursements for direct materials Given

$ 4,075,000 300,000 4,375,000 400,000 $ 3,975,000

Schedule 13: Variable Manufacturing Overhead Disbursements Variable Manufacturing Overhead: Lemonade (1,000 $600 2) Schedule 5 Diet Lemonade (500 $600 2) Schedule 5 Total

$ 1,200,000 600,000 $ 1,800,000

6-40

6-40 (Contd.) Schedule 14: Fixed Manufacturing Overhead Disbursements Budgeted fixed manufacturing overhead Schedule 5 Deduct depreciation Given Cash disbursements for fixed overhead m. December 31, 2005 Cash balance, beginning Add receipts Collections from customers Total cash available for needs Deduct disbursements Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Equipment purchase Marketing costs Distribution costs Administration costs Income tax expense Total disbursements Cash excess (deficiency) Financing Borrowing Repayment Interest Total effects of financing Cash balance ending Given Schedule 11 Cash Budget

$ 1,200,000 400,000 $ 800,000

100,000

14,260,000 $14,360,000 $ 3,975,000 750,000 1,800,000 800,000 1,350,000 1,717,200 1,144,800 821,500 625,000 $12,983,500 $ 1,376,500 0 0 0 0 $ 1,376,500

Schedule 12 Schedule 4 Schedule 13 Schedule 14 Given Schedule 8 Schedule 9 Schedule 10 Given

6-41

Chapter 6 Internet Exercise

The Internet exercise is available to students only on the Prentice Hall Companion Website www.prenhall.com/horngren. Students can click on Cost Accounting, 11 th ed., and access the Internet Exercise for the chapter, which links to the Web site of a company or organization. The Internet Exercise on the Web will be updated periodically so that it is current with the latest information available on the subject organization's Web site. A printout copy of the Internet exercise for this chapter as of early 2002 appears below. The solution to the Internet exercise, which will also be updated periodically, is available to instructors from the Companion Website's faculty view. To access the solution, click on Cost Accounting, 11th ed., Faculty link, and then register once to obtain your password through the online form. After the initial registration, you will have a personal login ID and password to use to log in. A printout of the solution to the Internet exercise for this chapter as of early 2002 follows. The exercise and solution provide instructors with an idea of the content of the Internet exercise for this chapter. Internet Exercise Mark's Work Warehouse Ltd. provides a rare glimpse at budgeting and responsibility accounting in action. Its award-winning annual report publishes corporate goals, forecasts, and senior management objectives for the upcoming year. It also provides a "post-mortem" on whether it achieved prior year's goals, forecasts, and objectives. To access Mark's Work Warehouse's (MWW's) 2001 annual report go to http://www.marks.com and click on the "Corporate" link, followed by "Investor Information." 1. Primary advantages of budgets are that they compel planning, promote communication within an organization, and provide criteria for evaluating performance. Provide examples of how the budgetary disclosures in MWW's annual report help accomplish these goals. Provide specific examples. Which forecasts are part of MWW's operating budget, and which are part of its financial budget? In terms of responsibility and control, are the FY 2001 performance objectives for the following senior managers appropriate? a. President b. Chief Financial Officer, c. Vice President, Store Design d. Vice President, Controller Refer to MWW's operational goals. According to MWW, why are operational goals important? What were MWW's goals for sales per average retail square foot in its Mark's Division, Work World Division, and Dockers Stores Divisions corporate stores in fiscal year 2001? Did they meet their goals? Refer to MWW's financial goals. What is MWW's stated objective in preparing and publishing financial goals?

2. 3.

4a. 4b.

5a.

6-42

Internet Exercise (Contd.) 5b. What were MWW's fiscal year 2001 goals for after-tax profit margin and return on equity? Did they meet their goals?

Solution to Internet Exercise 1. MWW's annual report includes a broad range of one to five-year budgets and performance objectives. MWW provides fiscal year 2002 performance objectives for twelve top senior managers, and offers a "postmortem" on fiscal year 2001. Publishing performance objectives in the annual report clearly communicates expectations and provide a measure for evaluating results. Presumably these published objectives are the outgrowth of communication and planning. In addition, MWW provides one and five-year operating and financial forecasts. Operational goals include various turnover ratios, customer satisfaction measures, sales and profit goals, as well as human resource goals. MWW assigns responsibility for meeting most operational goals to specific individuals within the organization. MWW's financial budgets include a broad range of profit, liquidity, solvency, and cash flow goals. MWW also provides pro forma financial statements for fiscal year 2002. 2. Part of the operating budget: The senior management performance forecast Operational goals Other indicators Master targets The table of key assumptions Part of the financial budget: 3a. 3b. Financial goals Pro forma financial statements A pre-tax profit of $16.5 million is an appropriate performance goal for the president. A 30% increase in the company's share price is not an appropriate goal for the CFO. A company's share price is dependent upon many factors outside the direct control of the CFO. These include such factors as interest rates, inflation, economic growth, and competition. Planning, relocating, and refurbishing stores at targeted costs is an appropriate goal for the Vice President of Store Design. Timely and accurate financial reporting, tax compliance, and budgeting are appropriate goals for the Controller. "Operational goals are key items that the Company monitors to gauge its progress towards the achievement of its Strategic Plan and Mission. Operational goals and other indicators also provide data that can be benchmarked against our competitors in the industry." 6-43

3c. 3d.

4a.

Internet Exercise (Contd.) 4b. They met their goal in the Marks division but not in the other two divisions. Goal Marks Division Work World Division Dockers Stores Divisions 5a. $258 $235 $446 Actual $259 $221 $333

Financial goals are set and monitored to ensure that while the company is aggressively pursuing its Strategic Plan and its Mission, it is still being financed conservatively and is providing a superior return to its investors." They did not meet either goal. After-tax profit margin Return on equity Goal 2% 15% Actual 1.7% 13.2%

5b.

6-44

6-45