9-2 An example of using the budget to allocate resources in a university is found in the
area of research funds and grants. Universities typically have a limited amount of
research-support resources that must be allocated among the various colleges and
divisions within the university. This allocation process often takes place within the
context of the budgeting process.
9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all
phases of an organization's operations for a specified period of time. The master
budget includes the following parts: sales budget, operational budgets (including a
production budget, inventory budgets, a labor budget, an overhead budget, a selling
and administrative expense budget, and a cash budget), and budgeted financial
statements (including a budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-4 The flowchart on the following page depicts the components of the master budget
for a service station.
9-5 General economic trends are important in forecasting sales in the airline industry.
The overall health of the economy is an important factor affecting the extent of
business travel. In addition, the health of the economy, inflation, and income levels
affect the extent to which the general public travels by air.
9-6 Operational budgets specify how an organization's operations will be carried out to
meet the demand for its goods and services. The operational budgets prepared in a
hospital would include a labor budget showing the number of professional personnel
of various types required to carry out the hospital's mission, an overhead budget
listing planned expenditures for such costs as utilities and maintenance, and a cash
budget showing planned cash receipts and disbursements.
Sales Budget:
Sales Gasoline, Related
Budget Products, and
Services
Cash
Budget
Budgeted
Income
Statement
Budgeted Budgeted
Financial Balance Sheet
Statements
Budgeted
Statement of
Cash Flows
9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this
approach the information needed to construct a budget is gathered via the Internet
from individuals and subunits located throughout the enterprise. The Internet also is
used to disseminate the resulting budget schedules and information to authorized
users throughout the enterprise.
9-9 The city of Boston could use budgeting for planning purposes in many ways. For
example, the city's personnel budget would be important in planning for required
employees in the police and fire departments. The city's capital budget would be
used in planning for the replacement of the city's vehicles, computers,
administrative buildings, and traffic control equipment. The city's cash budget would
be important in planning for cash receipts and disbursements. It is important for any
organization, including a municipal government, to make sure that it has enough
cash on hand to meet its cash needs at all times.
9.10The budget director, or chief budget officer, specifies the process by which budget data
will be gathered, collects the information, and prepares the master budget. To
communicate budget procedures and deadlines to employees throughout the
organization, the budget director often develops and disseminates a budget manual.
9-11 The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to
take. The budget manual also states who should receive each schedule when the
master budget is complete.
9-12 A company's board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval,
the board of directors can wield considerable influence on the overall direction the
organization takes. Since the budget is used as a resource-allocation mechanism,
the board of directors can emphasize some programs and curtail or eliminate others
by allocating funds through the budgeting process.
9-14 The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
slack. Building budgetary slack into the budget is called padding the budget. A
significant problem caused by budgetary slack is that the budget ceases to be an
accurate portrayal of likely future events. Cost estimates are often inflated, and
revenue estimates are often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-15 An organization can reduce the problem of budgetary slack in several ways. First, it
can avoid relying on the budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary projections but also to
provide accurate projections.
9-17 This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge in
their minds about running their business. They feel that they do not need to spend a
great deal of time on the budgeting process, because they can essentially run the
business by feel. This approach can result in several problems. First, if the person
who is running the business is sick or traveling, he or she is not available to make
decisions and implement plans that could have been clarified by a budget. Second,
the purposes of budgeting are important to the effective running of an organization.
Budgets facilitate communication and coordination, are useful in resource
allocation, and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process.
(d) Production
It is important to budget these costs as early as possible in order to ensure that the
revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well before
they are actually incurred.
Sales in units:
July................................................................................................................ 40,000
August........................................................................................................... 42,000
September..................................................................................................... 44,100
Total for third quarter................................................................................... 126,100
Add: Desired ending inventory, September 30.......................................... 37,044
Subtotal......................................................................................................... 163,144
Deduct: Desired ending inventory, June 30............................................... 32,000
Total required production............................................................................ 131,144
Notice that the amount of sales on account in June, $122,500 was not needed to
solve the exercise.
Amount Collected
Credit
Month of Sale Sales October November December
October............................................ $225,000 $157,500 $ 33,750 $ 22,500
November........................................ 250,000 175,000 37,500
December......................................... 212,500 148,750
Total................................................. $157,500 208,750 $208,750
Total collections in fourth quarter
from credit sales in fourth
quarter......................................... $575,000
1.
July August September
Sales........................................................... $240,000 $180,000 $270,000a
Cash receipts:
From cash sales.................................... $120,000b $ 90,000c $135,000
From sales on account......................... 108,000d 102,000 117,000e
Total cash receipts.................................... $ 228,000 $ 192,000 $252,000
a
$270,000 = $135,000 2
b
$120,000 = $240,000 .5
c
$ 90,000 = $180,000 .5
d
$108,000 = ($120,000 .6) + ($90,000 .4)
e
$117,000 = ($135,000 .6) + ($90,000 .4)
*2,200,000 euros
= 600,000 euros + 2,400,000 euros 800,000 euros
2. Purchases of raw material (in units), assuming production of 3,500,000 finished units:
Answers will vary widely, depending on the governmental unit selected and the budgetary
items on which the student focuses. In the past, students have expressed surprise at the
proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social
Security and Medicare), interest expense, and the military.
Cost of
Goods
Month Sales Sold Amount Purchased in December
December.................... $440,000 $330,000 $330,000 20% $ 66,000
January....................... 400,000 300,000 300,000 80% 240,000
Total December
purchases................ $306,000
Memorandum
Date: Today
Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x5. Yet the new accounts manager's projection is only 800 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
1.
Total Sales in January 20x5
$200,000 $260,000 $320,000
Cash receipts in January, 20x5
From December sales on account............ $ 14,250* $14,250 $14,250
From January cash sales.......................... 150,000 195,000 240,000
From January sales on account............... 40,000** 52,000 64,000
Total cash receipts..................................... $ 204,250 $261,250 $318,250
May June
Half-hour visits (4,000 80%)............................................... 3,200 3,200
Billing rate.............................................................................. $60 $60
Total billings for half-hour visits........................................... $192,000 $192,000
One-hour visits (4,000 20%)............................................... 800 800
Billing rate.............................................................................. $105 $105
Total billings for one-hour visits........................................... $ 84,000 $ 84,000
Total billings during month................................................... $276,000 $276,000
Percentage of month's billings collected
during June........................................................................ 10% 90%
Collections during June........................................................ $ 27,600 $248,400
Total collections in June ($27,600 + $248,400).................... $276,000
Patient registration and records (4,000 visits $3.00 per visit). . . $12,000
Other overhead and administrative expenses
(2,400 hours $7.50 per hour)................................................... 18,000
Total overhead and administrative expenses................................. $30,000
* $45,000 x 8% x 2/12
Direct-labor costs:
Wages ($16.00 per DLH)............................. $320,000 $272,000 $216,000 $808,000
Pension contributions
($.50 per DLH)......................................... 10,000 8,500 6,750 25,250
Workers' compensation
insurance ($.20 per DLH)........................ 4,000 3,400 2,700 10,100
Employee medical insurance
($.80 per DLH)......................................... 16,000 13,600 10,800 40,400
Employer's social security
(at 7%)...................................................... 22,400 19,040 15,120 56,560
Total direct-labor cost..................................... $372,400 $316,540 $251,370 $940,310
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the sales data include the following:
Sales budget
Cost-of-goods-sold budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the production data include the following:
Direct-material budget
Manufacturing-overhead budget
Cost-of-goods-sold budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the direct-labor-hour data include the following:
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the direct-labor cost data include the following:
Cost-of-goods-sold budget
Cash budget
Month
1. Niagra Chemical Companys production budget (in gallons) for the three products for
20x2 is calculated as follows:
2. The companys conversion cost budget for 20x2 is shown in the following schedule:
3. Since the 20x1 usage of Islin is 200,000 gallons, the firms raw-material purchases
budget (in dollars) for Islin for 20x2 is as follows:
4. The company should continue using Islin, because the cost of using Philin is
$152,632 greater than using Islin, calculated as follows:
4. No. While the number of faculty may be a key driver, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.
1. Sales budget
3. Raw-material purchases
4. Direct-labor budget
1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $108,000 equal 60% of Decembers sales;
thus, December sales total $180,000 ($108,000 .6). Since the selling price is $20
per unit, Dakota Fan sold 9,000 units ($180,000 $20).
2. Since the company expects to sell 10,000 units, sales revenue will total $200,000
(10,000 units x $20).
3. Dakota Fan collected 40% of Februarys sales during February, or $78,400. Thus,
Februarys sales total $196,000 ($78,400 .4). Combining January sales ($76,000 +
$114,000), February sales ($196,000), and March sales ($200,000), the company will
report revenue of $586,000.
6. February sales will total 9,800 units ($196,000 $20), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
7. Financing required is $3,500 ($15,000 minimum balance less ending cash balance of
$11,500):
1. The benefits that can be derived from implementing a budgeting system include the
following:
2.
a. Schedule b. Subsequent Schedule
Sales Budget Production Budget
Selling Expense Budget
Budgeted Income Statement
Light Heavy
Coils Coils
Projected sales.............................................................................. 60,000 40,000
Add: Desired inventories,
December 31, 20x3.................................................................... 25,000 9,000
Total requirements......................................................................... 85,000 49,000
Deduct: Expected inventories, January 1, 20x3.......................... 20,000 8,000
Production required (units)........................................................... 65,000 41,000
Raw Material
Sheet Copper
Metal Wire Platforms
Light coils (65,000 units projected
to be produced)................................................. 260,000 130,000 __
Heavy coils (41,000 units projected
to be produced)................................................. 205,000 123,000 41,000
Production requirements........................................ 465,000 253,000 41,000
Add: Desired inventories, December 31, 20x3...... 36,000 32,000 7,000
Total requirements.................................................. 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x3.................................................. 32,000 29,000 6,000
Purchase requirements (units)............................... 469,000 256,000 42,000
Projected Hours
Production per Total Total
(units) Unit Hours Rate Cost
Light coils..................................... 65,000 4 260,000 $15 $3,900,000
Heavy coils................................... 41,000 6 246,000 20 4,920,000
Total.............................................. $8,820,000
Cost
Cost Driver Driver Budgeted
Quantity Rate Cost
a
725,000 = 469,000 + 256,000 (from req. 3)
b
106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
506,000 = 260,000 + 246,000 (from req. 5)
1. Sales budget:
Box C Box P
Sales...................................................................................... 500,000 500,000
Add: Desired ending inventory........................................... 5,000 15,000
Total units needed................................................................ 505,000 515,000
Deduct: Beginning Inventory.............................................. 10,000 20,000
Production requirements..................................................... 495,000 495,000
3. Raw-material budget:
CORRUGATING MEDIUM
Box C Box P Total
Production requirements (number of boxes)......... 495,000 495,000
Raw material required per box (pounds)................ .2 .3
Raw material required for
production (pounds)............................................ 99,000 148,500 247,500
Add: Desired ending
raw-material inventory......................................... 10,000
Total raw-material needs......................................... 257,500
Deduct: Beginning raw-material inventory............ 5,000
Raw material to be purchased................................. 252,500
Price (per pound)..................................................... $.15
Cost of purchases (corrugating medium).............. $ 37,875
Total cost of raw-material purchases
($145,500 + $37,875)............................................. $183,375
PAPERBOARD
Box C Box P Total
Production requirement (number of boxes)........... 495,000 495,000
Raw material required per box (pounds)................ .3 .7
Raw material required for
production (pounds)............................................ 148,500 346,500 495,000
Add: Desired ending
raw-material inventory......................................... 5,000
Total raw-material needs......................................... 500,000
Deduct: Beginning raw-material inventory............ 15,000
Raw material to be purchased................................. 485,000
Price (per pound)..................................................... $.30
Cost of purchases (paperboard)............................. $145,500
4. Direct-labor budget:
5. Manufacturing-overhead budget:
Box C Box P
Direct material:
Paperboard
.3 lb. $.30 per lb......................................... $.090
.7 lb. $.30 per lb......................................... $.210
Corrugating medium
.2 lb. $.15 per lb......................................... .030
.3 lb. $.15 per lb......................................... .045
Direct labor:
.0025 hr. $18 per hr.................................... .045
.005 hr. $18 per hr...................................... .090
Applied manufacturing overhead:
.0025 hr. $60 per hr.................................... .150
.005 hr. $60 per hr...................................... ___ .300
Manufacturing cost per unit..................................... $.315 $.645
Revenue:
Consulting fees:
Computer system consulting......................................................... $ 956,250
Management consulting................................................................. 936,000
Total consulting fees............................................................... $1,892,250
Other revenue......................................................................................... 20,000
Total revenue................................................................................... $1,912,250
Expenses:
Consultant salary expenses*................................................................. $1,021,300
Travel and related expenses.................................................................. 115,750
General and administrative expenses................................................... 186,000
Depreciation expense............................................................................. 80,000
Corporate expense allocation................................................................ 150,000
Total expenses................................................................................. $1,553,050
Operating income.......................................................................................... $ 359,200
Supporting calculations:
Computer
System Management
Consulting Consulting
Third Quarter:
Revenue............................................................................ $843,750 $630,000
Hourly billing rate............................................................. $150 $180
Billable hours.................................................................... 5,625 3,500
Number of consultants.................................................... 15 10
Hours per consultant....................................................... 375 350
Fourth-quarter planned increase.......................................... 50 50
Billable hours per consultant............................................... 425 400
Number of consultants.......................................................... 15 13
Billable hours......................................................................... 6,375 5,200
Billing rate.............................................................................. $150 $180
Projected revenue.................................................................. $956,250 $936,000
Computer
System Management
Consulting Consulting
Compensation:
Existing consultants:
Annual salary........................................................... $ 92,000 $100,000
Quarterly salary....................................................... $ 23,000 $ 25,000
Planned increase (10%).......................................... 2,300 2,500
Total fourth-quarter salary per consultant............ $ 25,300 $27,500
Number of consultants........................................... 15 10
Total................................................................................. $379,500 $275,000
New consultants at old salary (3 $25,000)................. -0- 75,000
Total salary...................................................................... $379,500 $350,000
Benefits (40%)................................................................. 151,800 140,000
Total compensation................................................. $531,300 $490,000
Travel expenses:
Computer system consultants (425 hrs. 15)............. 6,375
Management consultants (400 hrs. 13)...................... 5,200
Total hours............................................................... 11,575
Rate per hour*................................................................ $10
Total travel expense................................................ $115,750
General and administrative ($200,000 93%)................... $186,000
Corporate expense allocation ($100,000 150%)............. $150,000
2. For each of the financial objectives established by the board of directors and
president of Fit-for-Life, Inc., the calculations to determine whether John Winslows
budget attains these objectives are presented in the following table.
Attained/
Objective Not Attained Calculations
Increase sales by 12% Not attained ($1,895,500$1,700,000)/$1,700,000 = 11.5%
($1,700,000 1.12 = $1,904,000)
*Variable cost of goods sold + fixed manufacturing cost = $1,149,450 + $189,550 = $1,339,000
1. Sales budget:
20x0 20x1
First
December January February March Quarter
Total sales........................ $800,000 $880,000 $968,000 $1,064,800 $2,912,800
Cash sales*...................... 200,000 220,000 242,000 266,200 728,200
Sales on account............ 600,000 660,000 726,000 798,600 2,184,600
20x1
First
January February March Quarter
Cash sales............................................. $220,000 $242,000 $266,200 $ 728,200
Cash collections from credit
sales made during current
month*............................................... 66,000 72,600 79,860 218,460
Cash collections from credit
sales made during preceding
month................................................ 540,000 594,000 653,400 1,787,400
Total cash receipts............................... $826,000 $908,600 $999,460 $2,734,060
3. Purchases budget:
20x0 20x1
First
December January February March Quarter
Budgeted cost of
goods sold.................. $560,000 $616,000 $677,600 $745,360 $2,038,960
Add: Desired
ending inventory........ 308,000 338,800 372,680 372,680* 372,680
Total goods
needed......................... $868,000 $954,800 $1,050,280 $1,118,040 $2,411,640
Less: Expected
beginning
inventory..................... 280,000 308,000 338,800 372,680 308,000**
Purchases........................ $588,000 $646,800 $711,480 $745,360 $2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
The desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
50% x $560,000 (where $560,000 = December cost of goods sold = December sales of
$800,000 x 70%)
20x1
First
January February March Quarter
Inventory purchases:
Cash payments for purchases
during the current month*........ $258,720 $284,592 $298,144 $ 841,456
Cash payments for purchases
during the preceding
month........................................ 352,800 388,080 426,888 1,167,768
Total cash payments for
inventory purchases....................... $611,520 $672,672 $725,032 $2,009,224
Other expenses:
Sales salaries................................... $ 42,000 $ 42,000 $ 42,000 $ 126,000
Advertising and promotion............. 32,000 32,000 32,000 96,000
Administrative salaries................... 42,000 42,000 42,000 126,000
Interest on bonds**......................... 30,000 -0- -0- 30,000
Property taxes**............................... -0- 10,800 -0- 10,800
Sales commissions......................... 8,800 9,680 10,648 29,128
**Bond interest is paid every six months, on January 31 and July 31. Property taxes also
are paid every six months, on February 28 and August 31.
20x1
First
January February March Quarter
Cash receipts [from req. (2)]................ $ 826,000 $ 908,600 $ 999,460 $2,734,060
Cash disbursements
[from req. (4)]................................... (766,320) (809,152) (851,680) (2,427,152)
Change in cash balance
during period due to operations.... $ 59,680 $ 99,448 $147,780 $ 306,908
Sale of marketable securities
(1/2/x1).............................................. 30,000 30,000
Proceeds from bank loan
(1/2/x1).............................................. 200,000 200,000
Purchase of equipment........................ (250,000) (250,000)
Repayment of bank loan
(3/31/x1)............................................ (200,000) (200,000)
Interest on bank loan*.......................... (5,000) (5,000)
Payment of dividends........................... (100,000) (100,000)
Cash................................................................................................................ $ 51,908
Accounts receivable*.................................................................................... 718,740
Inventory........................................................................................................ 372,680
Buildings and equipment (net of accumulated depreciation)................... 1,352,000
Total assets.................................................................................................... $2,495,328
1. Some of the operational and behavioral benefits that are generally attributed to a
participatory budgeting process are as follows:
2. Four deficiencies in Jack Rileys participatory policy for planning and performance
evaluation, along with recommendations of how the deficiencies can be corrected:
Deficiencies Recommendations
The setting of constraints on fixed Rewards should be based on meeting
expenditures includes uncontrollable fixed budget and/or organizational goals or
costs, thereby mitigating the positive effects objectives.
of participatory budgeting.
The arbitrary revision of approved budgets The contingency budget should be separate,
defeats the participatory process. over and above each departments original
submission.
The division manager holds back a Managers should be involved in the revision
percentage of each budget for discretionary of budgets. Managers could submit a
use. budget with programs at different levels of
funding.
Evaluation based on budget performance Divisional constraints could be
must be accompanied with intrinsic rewards. communicated at a budget kick-off
meeting; however, individual limits of
controllable expenses should be set by each
manager.
1. Yes, Triple-F Health Club should be better able to plan its cash receipts with the new
membership plan and fee structure. The cash flows should be more predictable and
certain because the large, prepaid membership fee becomes the only factor affecting
cash receipts. The hourly court fees, which were dependent upon a variable that could
fluctuate daily, are eliminated.
2. a. Factors that management should consider before adopting the new membership
plan and fee structure include:
The expected number of memberships by classes that can be sold for each
plan at the specified rates
The anticipated rate of return for excess cash or cost of borrowing funds in
periods of cash shortages
The collection and billing function is also simplified with the new membership
plan and fee structure. There would be only a one-time cash receipt rather than
multiple transactions.
1. Sales budget:
20x4 20x5
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
S frame unit
sales..................... 50,000 55,000 60,000 65,000 70,000 250,000
S sales price...... $10 $10 $10 $10 x $10 $10
S frame sales
revenue................ $ 500,000 $ 550,000 $ 600,000 $ 650,000 $ 700,000 $2,500,000
L frame unit
sales..................... 40,000 45,000 50,000 55,000 60,000 210,000
L sales price...... $15 $15 $15 $15 $15 $15
L frame sales
revenue................ $ 600,000 $ 675,000 $ 750,000 $ 825,000 $ 900,000 $3,150,000
Total sales
revenue................ $1,100,000 $1,225,000 $1,350,000 $1,475,000 $1,600,000 $5,650,000
20x5
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Year
$ 490,000
Cash sales.......................................... $ 540,000 $ 590,000 $ 640,000 $2,260,000
Cash collections from credit
sales made during current
quarter*............................................588,000 648,000 708,000 768,000 2,712,000
Cash collections from credit
sales made during previous
132,000
quarter............................................ 147,000 162,000 177,000 618,000
Total cash receipts............................. $1,210,000 $1,335,000 $1,460,000 $1,585,000 $5,590,000
3. Production budget:
20x4 20x5
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
S frames:
Sales (in units)................. 50,000 55,000 60,000 65,000 70,000 250,000
Add: Desired ending
inventory........................ 11,000 12,000 13,000 14,000 15,000 15,000
Total units needed............... 61,000 67,000 73,000 79,000 85,000 265,000
Less: Expected
beginning inventory......... 10,000 11,000 12,000 13,000 14,000 11,000
Units to be produced.......... 51,000 56,000 61,000 66,000 71,000 254,000
L frames:
Sales (in units)................. 40,000 45,000 50,000 55,000 60,000 210,000
Add: Desired ending
inventory........................ 9,000 10,000 11,000 12,000 13,000 13,000
Total units needed............... 49,000 55,000 61,000 67,000 73,000 223,000
Less: Expected
beginning inventory......... 8,000 9,000 10,000 11,000 12,000 9,000
Units to be produced.......... 41,000 46,000 51,000 56,000 61,000 214,000
4. Direct-material budget:*
20x4 20x5
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
Metal strips:
S frames to be
produced........................ 51,000 56,000 61,000 66,000 71,000 254,000
Metal quantity per
unit (ft.)........................... 2 2 2 2 2 2
Needed for S frame
production.....................102,000 112,000 122,000 132,000 142,000 508,000
L frames to be
produced........................ 41,000 46,000 51,000 56,000 61,000 214,000
Metal quantity per
unit (ft.)........................... 3 3 3 3 3 3
Needed for L frame
production.....................123,000 138,000 153,000 168,000 183,000 642,000
Total metal needed
for production; to
be purchased (ft.).......... 225,000 250,000 275,000 300,000 325,000 1,150,000
Price per foot................. $1 $1 $1 $1 $1 $1
Cost of metal strips to
be purchased:................$225,000 $250,000 $275,000 $300,000 $325,000 $1,150,000
20x4 20x5
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
Glass sheets:
S frames to be
produced........................ 51,000 56,000 61,000 66,000 71,000 254,000
Glass quantity per
unit (sheets)................... .25 .25 .25 .25 .25 .25
Needed for S frame
production.....................12,750 14,000 15,250 16,500 17,750 63,500
L frames to be
produced........................ 41,000 46,000 51,000 56,000 61,000 214,000
Glass quantity per
unit (sheets)................... .5 .5 .5 .5 .5 .5
Needed for L frame
production.....................20,500 23,000 25,500 28,000 30,500 107,000
Total glass needed
for production
(sheets).......................... 33,250 37,000 40,750 44,500 48,250 170,500
Add: Desired ending
inventory........................ 7,400 8,150 8,900 9,650 10,400 10,400
Total glass needs............. 40,650 45,150 49,650 54,150 58,650 180,900
Less: Expected
beginning inventory......6,650 7,400 8,150 8,900 9,650 7,400
Glass to be
purchased...................... 34,000 37,750 41,500 45,250 49,000 173,500
Price per glass
sheet............................... $8 $8 $8 $8 $8 $8
Cost of glass to be
purchased......................$272,000 $302,000 $332,000 $362,000 $392,000 $1,388,000
Total raw-material
purchases (metal
and glass)......................$497,000 $552,000 $607,000 $662,000 $717,000 $2,538,000
205
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Year
Raw-material purchases:
Cash payments for
purchases during
the current quarter.......... $441,600 $ 485,600 $ 529,600 $ 573,600 $2,030,400
Cash payments for
purchases during the
preceding quarter**.......... 99,400 110,400 121,400 132,400 463,600
Total cash payments for
raw-material purchases... $541,000 $ 596,000 $ 651,000 $ 706,000 $2,494,000
Direct labor:
Frames produced
(S and L)............................ 102,000 112,000 122,000 132,000 468,000
Direct-labor hours per
frame................................. .1 .1 .1 .1 .1
Direct-labor hours to be
used.................................. 10,200 11,200 12,200 13,200 46,800
Rate per direct-labor
hour................................... $20 $20 $20 $20 $20
Total cash payments for
direct labor....................... $204,000 $ 224,000 $ 244,000 $ 264,000 $ 936,000
20x5
1st 2nd 3nd 4th Entire
Quarter Quarter Quarter Quarter Year
Cash receipts [from req. (2)].......... $1,210,000 $1,335,000 $1,460,000 $1,585,000 $5,590,000
Less: Cash disbursements
[from req. (5)].............................. 927,000 1,012,000 1,097,000 1,182,000 4,218,000
Change in cash balance due to
operations................................... $ 283,000 $ 323,000 $ 363,000 $ 403,000 $1,372,000
Payment of dividends..................... (50,000) (50,000) (50,000) (50,000) (200,000)
Proceeds from bank loan (1/2/x5). . 1,000,000 1,000,000
Purchase of equipment.................. (1,000,000) (1,000,000)
Quarterly installment on loan
principal...................................... (250,000) (250,000) (250,000) (250,000) (1,000,000)
Quarterly interest payment*........... (25,000) (18,750) (12,500) (6,250) (62,500)
Change in cash balance during
the period.................................... $ (42,000) $ 4,250 $ 50,500 $ 96,750 $ 109,500
Cash balance, beginning of period 95,000 53,000 57,250 107,750 95,000
Cash balance, end of period.......... $ 53,000 $ 57,250 $ 107,750 $ 204,500 $ 204,500
Direct material:
Raw-material inventory, 1/1/x5................................................. $ 59,200
Add: Purchases of raw material [req. (4)]................................ 2,538,000
Raw material available for use................................................. $2,597,200
Deduct: Raw-material inventory, 12/31/x5
([req. (4)] 10,400 $8)........................................................... 83,200
Raw material used $2,514,000
Direct labor [req. (5)]....................................................................... 936,000
Manufacturing overhead:
Indirect material......................................................................... $ 46,800
Indirect labor............................................................................. 187,200
Other overhead.......................................................................... 154,000
Depreciation..............................................................................80,000
Total manufacturing overhead................................................. __ 468,000 *
Cost of goods manufactured.......................................................... $3,918,000
Add: Finished-goods inventory, 1/1/x5.......................................... 167,000
Cost of goods available for sale.................................................... $4,085,000
Deduct: Finished-goods inventory, 12/31/x5................................. 235,000 **
Cost of goods sold.......................................................................... $3,850,000
*In the budget, budgeted and applied manufacturing overhead are equal. The applied
manufacturing overhead may be verified independently as follows:
S Frames L Frames
Frames produced................................................................... 254,000 214,000
Manufacturing cost per unit.............................................. $7 $10
Total manufacturing cost...................................................... $1,778,000 $2,140,000
Grand total (S frames and L frames)................................... $3,918,000
S Frames L Frames
Projected inventory on 12/31/x5........................................... 15,000 13,000
Manufacturing cost per unit.................................................. $7 $10
Cost of ending inventory....................................................... $ 105,000 $ 130,000
Total cost of ending inventory (S and L).............................. $235,000
S Frames L Frames
Frames sold........................................................................... 250,000 210,000
Manufacturing cost per unit.................................................. $7 $10
Cost of goods sold................................................................ $1,750,000 $2,100,000
Total cost of goods sold (S and L)....................................... $3,850,000
Cash.............................................................................................................. $ 204,500
Accounts receivable*................................................................................... 192,000
Inventory:
Raw material......................................................................................... 83,200
Finished goods...................................................................................... 235,000
Plant and equipment (net of accumulated depreciation)**....................... 8,920,000
Total assets................................................................................................... $9,634,700
In cutting expenses, top corporate managers may be revealing one of two things. They
may be more focused on the use of the budget data to drive incentives than as accurate
cost control tools, and thus may cut budgeted expenses specifically to provide a
stretch goal for the division. Alternatively, top management may believe that the
budget has been padded by the division, possibly based on previous budget
submissions, and thus believe they are handing back a more accurate expense budget
than was submitted to them.
No matter what the situation, the controller should make every effort to provide accurate
cost forecasts for the budgeting purpose. To do otherwise would be to compromise his
or her own integrity and authority within the organization. Further, inaccurate
information creates a poor basis for cost management. If greater stretch goals are
required by top management, then the divisional team could establish these for
themselves. If there is doubt at corporate level about the accuracy of the forecasts, then
it should be dispelled. For example, the controller could provide supporting
documentation with the budget to validate the estimates and to discourage top
corporate managers from cutting the expense budget.