Solution Manual09

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.
Managerial Accounting, 5/e 9-1

CHAPTER 9
Profit Planning, Activity-Based Budgeting, and
e-Budgeting
ANSWERS TO REVIEW QUESTIONS
9-1 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).
9-2 A budget facilitates communication and coordination by making each manager
throughout the organization aware of the plans made by other managers. The
budgeting process pulls together the plans of each manager in the organization.
9-3 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.
9-4 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.

9-2 Solutions Manual
Flowchart for Review Question 9-4

Sales
Budget
Operational
Budgets
Budgeted
Financial
Statements
Budgeted
Balance Sheet
Budgeted
Statement of
Cash Flows
Budgeted
Income
Statement
Cash
Budget
Ending
Inventory
Budget:
Gasoline
Materials Budget:
Gasoline and
Related Products
Labor
Budget
Overhead
Budget
Selling and
Administrative
Expense
Budget
Sales Budget:
Gasoline, Related
Products, and
Services
9-7 Application of activity-based costing to the budgeting process yields activity-based
budgeting (ABB). Under ABB, the first step is to specify the products or services to
be produced and the customers to be served. Then the activities necessary to
produce these products and services are determined. Finally the resources needed
to perform the specified activities are determined. ABB differs from traditional
budgeting in the emphasis that it places on activities and its use of activity-based
costing data in the budgeting process.
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 New York 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.
9-10 The 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.
9-13 Under zero-base budgeting, the budget for virtually every activity in the organization
is initially set to zero. To receive funding during the budgeting process, each activity
must be justified in terms of its continued usefulness. The zero-base budgeting
approach forces management to rethink each phase of an organization's operations
before allocating resources.
9-14 A master budget is based on many assumptions and predictions of unknown
parameters. For example, the sales budget is built on an assumption about the
nature of demand for goods or services. The direct-material budget requires an
estimate of the direct-material price and the quantity of material required per unit of
production. Many other assumptions are used throughout the rest of the budgeting
process.
9-15 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.
9-16 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 The idea of participative budgeting is to involve employees throughout an
organization in the budgetary process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling that "this is the budget you
imposed on us." When employees feel that they were part of the budgeting process,
they are more likely to strive to achieve the budget.
9-18 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.
9-19 In developing a budget to meet your college expenses, the primary steps would be to
project your cash receipts and your cash disbursements. Your cash receipts could
come from such sources as summer jobs, jobs held during the academic year,
college funds saved by relatives or friends for your benefit, scholarships, and
financial aid from your college or university. You would also need to carefully project
your college expenses. Your expenses would include tuition, room and board, books
and other academic supplies, transportation, clothing and other personal needs, and
money for entertainment and miscellaneous expenses.
9-20 Firms with international operations face a variety of additional challenges in
preparing their budgets.
- A multinational firm's budget must reflect the translation of foreign currencies
into U.S. dollars. Almost all the world's currencies fluctuate in their values
relative to the dollar, and this fluctuation makes budgeting for those translations
difficult.
- It is difficult to prepare budgets when inflation is high or unpredictable. Some
foreign countries have experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such high inflation rates is
difficult and complicates a multinational's budgeting process.
- The economies of all countries fluctuate in terms of consumer demand,
availability of skilled labor, laws affecting commerce, and so forth. Companies
with foreign operations face the task of anticipating such changing conditions in
their budgeting processes.
9-21 The five phases in a product's life cycle are as follows:
(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) Distribution and customer service
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.
9-22 (a) Ordering costs: The cost of preparing, placing, and receiving a purchase order.
(Examples include the clerical costs of preparing purchase orders, time spent
finding suppliers and expediting orders, transportation, and receiving costs,
such as unloading and inspection.)
(b) Holding costs: The cost incurred in keeping inventory on hand for some period
of time. (Examples include the costs of storage space such as a warehouse,
depreciation, security, insurance, forgone interest on working capital tied up in
inventory, and the costs of deterioration and theft.)
(c) Shortage costs: The cost incurred by the organization when it does not have
materials or finished goods on hand when needed. (Examples include the costs
caused by disrupted production when raw materials are unavailable, lost sales,
dissatisfied customers, and the loss of quantity discounts on purchases.)
9-23 The EOQ approach assumes that some inventory must be held. The objective of the
model is to balance the cost of ordering against the cost of holding inventory. In
contrast, the JIT philosophy is to reduce all inventories to the absolute minimum,
eliminating them completely if possible. The JIT viewpoint asserts that inventory
holding costs tend to be higher than may be apparent because of the inefficiency
and waste involved in storing inventory. This view, coupled with the JIT goal of
reducing ordering costs to very low amounts, results in the desirability of more
frequent and smaller order quantities.
In addition, under JIT inventory management, order quantities typically will vary
depending on requirements. In contrast, under the EOQ model, the order quantity
remains constant.

SOLUTIONS TO EXERCISES
EXERCISE 9-24 (20 MINUTES)
1.
April May June
Sales ........................................................... $80,000 $60,000 $90,000
a

Cash receipts:
From cash sales .................................... $ 40,000
b
$ 30,000
c
$ 45,000
From sales on account ......................... 36,000
d
34,000 39,000
e

Total cash receipts .................................... $ 76,000 $ 64,000 $ 84,000

a
$90,000 = $45,000 2
b
$40,000 = $80,000 .5
c
$30,000 = $60,000 .5
d
$36,000 = ($40,000 .6) + ($30,000 .4)
e
$39,000 = ($45,000 .6) + ($30,000 .4)

2. Accounts payable, 12/31/x0 ......................................................................... 300,000DM

Purchases of goods and services on account during 20x1 ...................... 1,200,000DM

Payments of accounts payable during 20x1 .............................................. (1,100,000DM)*
Accounts payable, 12/31/x1 ......................................................................... 400,000DM

*1,100,000DM = 300,000DM + 1,200,000DM 400,000DM

3. Accounts receivable, 12/31/x0 ..................................................................... 340,000y

Sales on account during 20x1 ..................................................................... 900,000y

Collections of accounts receivable during 20x1........................................ (780,000y)

Accounts receivable, 12/31/x1 ..................................................................... 460,000y

4. Accumulated depreciation, 12/31/x0 ........................................................... $ 810,000

Depreciation expense during 20x1 ............................................................. 150,000

Accumulated depreciation, 12/31/x1 ........................................................... $ 960,000

5. Retained earnings, 12/31/x0 ........................................................................ $ 2,050,000

Net income for 20x1 ..................................................................................... 400,000

Dividends paid in 20x1 ................................................................................. -0-_
Retained earnings, 12/31/x1 ........................................................................ $ 2,450,000

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.
1. Production (in units) required for the year:

Sales for the year .......................................................................................... 480,000
Add: Desired ending finished-goods inventory on December 31 ............. 50,000
Deduct: Beginning finished-goods inventory on January 1 ...................... 80,000
Required production during the year .......................................................... 450,000

2. Purchases of raw material (in units), assuming production of 500,000 finished units:

Raw material required for production (500,000 2) ................................... 1,000,000
Add: Desired ending inventory on December 31 ........................................ 45,000
Deduct: Beginning inventory on January 1 ................................................ 35,000
Required raw-material purchases during the year ..................................... 1,010,000

1. Cash collections in October:

Month of Sale Amount Collected in October
July .............................................................. $ 60,000 4% $ 2,400
August ......................................................... 70,000 10% 7,000
September ................................................... 80,000 15% 12,000
October ........................................................ 90,000 70% 63,000
Total ............................................................. $84,400

Notice that the amount of sales on account in June, $49,000 was not needed to solve
the exercise.

EXERCISE 9-27 (CONTINUED)

2. Cash collections in fourth quarter from credit sales in fourth quarter.

Amount Collected

Month of Sale
Credit
Sales

October

November

December
October ............................................ $ 90,000 $ 63,000 $13,500 $ 9,000
November ........................................ 100,000 70,000 15,000
December ........................................ 85,000 0 59,500
Total ................................................. $ 63,000 $83,500 $ 83,500
Total collections in fourth quarter
from credit sales in fourth
quarter .........................................

$230,000

1. The total required production is 655,720 units, computed as follows:

Budgeted Sales
(in units)
Planned Ending Inventory
(in units)
June 160,000 (200,000 80%)
July 200,000 (given)
August 210,000 (200,000 1.05)
September 220,500 (210,000 1.05) 185,220 (231,525 80%)
October 231,525 (220,500 1.05)

Sales in units:

July ................................................................................................................ 200,000
August ........................................................................................................... 210,000
September ..................................................................................................... 220,500
Total for third quarter ................................................................................... 630,500
Add: Desired ending inventory, September 30 .......................................... 185,220
Subtotal ......................................................................................................... 815,720
Deduct: Desired ending inventory, June 30 ............................................... 160,000
Total required production ............................................................................ 655,720

2. Assumed production during third quarter (in units) ................................. 600,000
Raw-material requirements per unit of product (in pounds) .................... 4
Raw material required for production in third quarter (in pounds) .......... 2,400,000
Add: Desired ending raw-material inventory, September 30
(2,400,000 25%) .................................................................................

600,000
Subtotal ......................................................................................................... 3,000,000
Deduct: Ending raw-material inventory, June 30....................................... 700,000
Raw material to be purchased during third quarter (in pounds) .............. 2,300,000
Cost per pound of raw material ................................................................... $1.15
Total raw-material purchases during third quarter .................................... $2,645,000

1. BINGHAMTON FILM CORPORATION
EXPECTED CASH COLLECTIONS
AUGUST

Month

Sales

Percent
Expected
Collections
June .................................................. $60,000 9% $ 5,400
July .................................................... 78,000 20% 15,600
August .............................................. 66,000 70% 46,200
Total .............................................. $67,200

2. BINGHAMTON FILM CORPORATION
EXPECTED CASH DISBURSEMENTS
AUGUST

July purchases to be paid in August ............................................................ $ 54,000
Less: 2% cash discount ................................................................................ 1,080
Net ............................................................................................................... $ 52,920
Cash disbursements for expenses ............................................................... 14,400
Total ............................................................................................................ $ 67,320

3. BINGHAMTON CORPORATION
EXPECTED CASH BALANCE
AUGUST 31

Balance, August 1 .......................................................................................... $ 22,000
Add: Expected collections ............................................................................ 67,200
Less: Expected disbursements .................................................................... 67,320
Expected balance ...................................................................................... $ 21,880

Memorandum

Date: Today
To: President, East Bank of Mississippi
From: I.M. Student and Associates
Subject: Budgetary slack
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
20x2. Yet the new accounts manager's projection is only 700 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 20x2
$100,000 $130,000 $160,000
Cash receipts in January, 20x2
From December sales on account ............ $ 7,125* $ 7,125 $ 7,125
From January cash sales .......................... 75,000
97,500 120,000
From January sales on account ............... 20,000** 26,000 32,000
Total cash receipts .................................... $ 102,125 $130,625 $159,125

*$7,125 = $190,000 .25 .15

$75,000 = $100,000 .75

**$20,000 = $100,000 .25 .80

2. Operational plans depend on various assumptions. Usually there is uncertainty about
these assumptions, such as sales demand or inflation rates. Financial planning helps
management answer "what if" questions about how the budget will look under various
sets of assumptions.

1. Budgeted cash collections for December:

Month of Sale Collections in December
November ............................................................. $200,000 38% $ 76,000
December.............................................................. 220,000 60% 132,000
Total cash collections .......................................... $208,000

2. Budgeted income (loss) for December:

Sales revenue ....................................................................... $220,000
Less: Cost of goods sold (75% of sales) ............................ 165,000
Gross margin (25% of sales) ............................................... $ 55,000
Less: Operating expenses: .................................................
Bad debts expense (2% of sales) ............................. $ 4,400
Depreciation ($216,000/12) ........................................ 18,000
Other expenses .......................................................... 22,600
Total operating expenses .......................................... 45,000
Income before taxes ............................................................ $ 10,000

3. Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.

Month

Sales
Cost of
Goods
Sold

Amount Purchased in December
December.................... $220,000 $165,000 $165,000 20% $ 33,000
January ....................... 200,000 150,000 150,000 80% 120,000
Total December
purchases ................

$153,000

Therefore, the December 31 balance in accounts payable will be $153,000.

1. Direct professional labor budget for the month of June:

Office visits per month = 48,000/12 = 4,000

Professional services in June:

One-hour visits (20% 4,000 1 hr.) ................................... 800 hours
Half-hour visits (80% 4,000 1/2 hr.) ................................ 1,600 hours
Total direct professional labor .............................................. 2,400 hours
Hourly rate for dental associates .......................................... $ 60
Total direct professional labor cost ..................................... $144,000


2. Cash collections during June:

May June
Half-hour visits (4,000 80%) ............................................... 3,200 3,200
Billing rate .............................................................................. $40 $40
Total billings for half-hour visits ........................................... $128,000 $128,000
One-hour visits (4,000 20%) ............................................... 800 800
Billing rate .............................................................................. $70 $70
Total billings for one-hour visits ........................................... $ 56,000 $ 56,000
Total billings during month ................................................... $184,000 $184,000
Percentage of month's billings collected
during June ........................................................................

10%

90%
Collections during June ........................................................ $ 18,400 $165,600
Total collections in June ($18,400 + $165,600) .................... $184,000

3. Overhead and administrative expense budget for June:

Patient registration and records (4,000 visits $2.00 per visit) .... $ 8,000
Other overhead and administrative expenses
(2,400 hours $5.00 per hour) ................................................... 12,000
Total overhead and administrative expenses ................................. $20,000

40 1,600
$7
10) (2)(560)($
EOQ : C Case
82 6,724
$20
($40) (2)(1,681)
EOQ : B Case
1,050 1,102,500
$6
)($250) (2)(13,230
EOQ : A Case
unit per cost holding annual
order) per t)(cost requiremen (2)(annual
EOQ
= = =
= = =
= = =
=

1. Safety stock:

The lead time is one month, so the safety stock is equal to the difference between
average monthly usage and the maximum usage in a month. Average monthly usage is
65 tons (780/12), and the maximum usage is 80 tons. Therefore, the safety stock is 15
tons (80 65).

2. Reorder point:

The reorder point is 80 tons. This is the maximum amount of the bonding agent that
would be used in a month, which is the time required to receive an order after it is
placed.

SOLUTIONS TO PROBLEMS
PROBLEM 9-36 (40 MINUTES)
1. Production and direct-labor budgets

SPIFFY SHADES CORPORATION
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1

Month
January February March Quarter
Sales (units) ..................................................... 10,000 12,000 8,000 30,000
Add: Ending inventory* ................................... 16,000 12,500 13,500 13,500
Total needs ....................................................... 26,000 24,500 21,500 43,500
Deduct: Beginning inventory .......................... 16,000 16,000 12,500 16,000
Units to be produced ....................................... 10,000 8,500 9,000 27,500
Direct-labor hours per unit .............................. 1 1 .75
Total hours of direct labor
time needed .................................................

10,000

8,500

6,750

25,250

Direct-labor costs:
Wages ($16.00 per DLH)
............................ $160,000 $136,000 $108,000 $404,000

Pension contributions
($.50 per DLH) .........................................

5,000

4,250

3,375

12,625
Workers' compensation
insurance ($.20 per DLH) ........................

2,000

1,700

1,350

5,050
Employee medical insurance
($.80 per DLH) .........................................

8,000

6,800

5,400

20,200
Employer's social security
(at 7%) ......................................................

11,200

9,520

7,560

28,280
Total direct-labor cost ..................................... $186,200 $158,270 $125,685 $470,155

*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
DLH denotes direct-labor hour.

PROBLEM 9-36 (CONTINUED)
2. Use of data throughout the master budget:

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

- Selling and administrative expense budget
labor budget, that would also use the production data include the following:

- Direct-material budget

- Manufacturing-overhead budget

labor budget, that would also use the direct-labor-hour data include the following:

- Manufacturing-overhead budget (for determining the overhead application rate)

labor budget, that would also use the direct-labor cost data include the following:

- Manufacturing-overhead budget (for determining the overhead application rate)


- Cash budget

- Budgeted income statement


3. Manufacturing overhead budget:

SPIFFY SHADES CORPORATION
MANUFACTURING OVERHEAD BUDGET

Month

January February March Quarter

Shipping and handling ............... $ 20,000 $ 24,000 $16,000 $ 60,000
Purchasing, material handling,
and inspection ............................

30,000

25,500

27,000

82,500
Other overhead ........................... 70,000 59,500 47,250 176,750
Total manufacturing overhead ... $120,000 $109,000 $90,250 $319,250


1. Tuition revenue budget:
Current student enrollment. 8,000
Add: 5% increase in student body 400
Total student body. 8,400
Less: Tuition-free scholarships. 120
Tuition-paying students 8,280
Credit hours per student per year. x 30
Total credit hours.. 248,400
Tuition rate per hour. x $75
Forecasted tuition revenue. $18,630,000

2. Faculty needed to cover classes:
Total student body. 8,400
Classes per student per year [(15 credit hours 3
credit hours) x 2 semesters].

x 10
Total student class enrollments to be covered. 84,000
Students per class. 25
Classes to be taught. 3,360
Classes taught per professor. 5
Faculty needed 672


3. Possible actions might include:
- Hire part-time instructors
- Use graduate teaching assistants
- Increase the teaching load for each professor
- Increase class size and reduce the number of sections to be offered
- Have students take an Internet-based course offered by another university
- Shift courses to a summer session

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. Schedule of cash collections:
January February March
Collection of accounts receivable:
$55,000 x 20%... $ 11,000
Collection of January sales ($150,000):
60% in January; 35% in February .. 90,000 $ 52,500
Collection of February sales ($180,000):
60% in February; 35% in March.. 108,000 $ 63,000
Collection of March sales ($185,000):
60% in March; 35% in April.. 111,000
Sale of equipment. 5,000
Total cash collections $101,000 $160,500 $179,000

2. Schedule of cash disbursements:

Payment of accounts payable... $ 22,000
Payment of January purchases ($90,000):
70% in January; 30% in February.. 63,000 $ 27,000
Payment of February purchases ($100,000):
70% in February; 30% in March.. 70,000 $ 30,000
Payment of March purchases ($140,000):
70% in March; 30% in April.. 98,000
Cash operating costs.. 31,000 24,000 45,000
Total cash disbursements... $116,000 $121,000 $173,000


3. Schedule of cash needs:

Beginning cash balance. $ 20,000 $ 20,000 $ 44,300
Total receipts. 101,000 160,500 179,000
Subtotal. $121,000 $180,500 $223,300
Less: Total disbursements 116,000 121,000 173,000
Cash excess (deficiency) before financing $ 5,000 $ 59,500 $ 50,300
Financing:
Borrowing to maintain $20,000 balance.. 15,000
Loan principal repaid (15,000)
Loan interest paid.. (200)*
Ending cash balance $ 20,000 $ 44,300 $ 50,300

* $15,000 x 8% x 2/12


1. Income statement for the two months ended March 31, 20x1:

Sales revenue ($250,000 + $260,000) $510,000
Cost of goods sold ($510,000 x 70%)... 357,000
Gross margin.. $153,000
Operating expenses:
Cash operating expenses ($50,000 x 2) $100,000
Depreciation ($12,000 x 2). 24,000 124,000
Net income... $ 29,000


2. Balance sheet as of March 31, 20x1:

Assets:
Cash $114,000
Accounts receivable... 91,000
Merchandise inventory.. 14,000
Land 62,000
Plant & equipment (net). 56,000
Total assets $337,000

Liabilities & stockholders equity:
Accounts payable $180,000
Loan payable 57,000
Common stock. 140,000
Retained earnings... (40,000)
Total liabilities & stockholders equity... $337,000

Supporting calculations:

Cash: $22,000
a
+ $84,000
b
+ ($250,000 x 65%)
c
+ ($250,000 x 35%)
d
+
($260,000 x 65%)
e
- $150,000
f
($260,000 x 60%)
g
- $50,000
h
-
$50,000
h
- $5,000
i
= $114,000

a
1/31/01 Cash balance
b
1/31/01 Accounts Receivable balance
c
65% of February sales
d
35% of February sales
e
65% of March sales
f
1/31/01 Accounts Payable balance
g
60% of March sales
h
Monthly operating expenses
i
Down payment on land purchase

Accounts receivable: 35% of March sales, or $260,000 x .35 = $91,000

Alternatively, a more detailed approach follows:
Accounts receivable: $84,000 - $84,000 + $250,000 ($250,000 x 65%) +
$260,000 ($250,000 x 35%) ($260,000 x 65%) = $91,000

Merchandise inventory: $35,000 + ($260,000 x 60%)
a
($250,000 x
70%)
b
+ ($300,000 x 60%)
c
($260,000 x 70%)
d
= $14,000

a
February purchases = 60% of March sales

b
February cost of goods sold = 70% of February sales

c
March purchases = 60% of April sales

d
March cost of goods sold = 70% of March sales

Land: $0 + $62,000 = $62,000
Plant & equipment: $80,000 - $12,000 - $12,000 = $56,000
Accounts payable: $150,000 - $150,000 + ($260,000 x 60%) ($260,000
x 60%) + ($300,000 x 60%) = $180,000
Loan payable: $0 + ($62,000 - $5,000) = $57,000
Common stock: $140,000
Retained earnings: $(69,000) + $250,000 + $260,000 ($250,000 x 70%)
($260,000 x 70%) - $50,000 - $50,000 - $12,000 - $12,000 =
$(40,000)

3. Metroplex began February with a debit balance in Retained Earnings (i.e., a deficit),
presumably because of cumulative losses. By the end of March, the deficit had been
trimmed from $69,000 to $40,000 courtesy of profitable operations during the two-
month period.

Despite this turnaround, Metroplex may soon find itself in a cash bind. Cash
and near-cash projected for 3/31/01 total $219,000 ($114,000 + $91,000 + $14,000),
while short-term debt amounts to $237,000 ($180,000 + $57,000). The situation would
be somewhat more favorable without the land acquisition, with cash and near-cash
assets totaling $224,000 ($219,000 + $5,000) and Accounts Payable of $180,000 being
the only liability outstanding. From a liquidity perspective, the acquisition will not
help the firm.


1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $216,000 equal 60% of Decembers sales;
thus, December sales total $360,000 ($216,000 .6). Since the selling price is $40
per unit, Badlands sold 9,000 units ($360,000 $40).

2. Since the company expects to sell 10,000 units, sales revenue will total $400,000
(10,000 units x $40).

3. Badlands collected 40% of Februarys sales in February, or $156,800. Thus,
Februarys sales total $392,000 ($156,800 .4). Combining January sales ($152,000 +
$228,000), February sales ($392,000), and March sales ($400,000), the company will
report revenue of $1,172,000.

4. Sixty percent of Marchs sales will be outstanding, or $240,000 ($400,000 x 60%).

5. Finished-goods inventories are maintained at 20% of the following months sales.
January sales total $380,000 ($152,000 + $228,000), or 9,500 units ($380,000 $40).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).

6. February sales will total 9,800 units ($392,000 $40), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:

12/31/x0 inventory + X January x1 sales = 1/31/x1 inventory
1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560

7. Financing required is $7,000 ($30,000 minimum balance - $23,000 ending balance):
Cash balance, January 1 $ 45,000
Add: January receipts ($216,000 + $152,000).. 368,000
Subtotal $413,000
Less: January payments 390,000
Cash balance before financing. $ 23,000

1. Sales budget

April May June
Sales (in sets) ............................................. 10,000 12,000 15,000
Sales price per set ...................................... $50 $50 $50
Sales revenue ............................................. $500,000 $600,000 $750,000

2. Production budget (in sets)

April May June
Sales ............................................................ 10,000 12,000 15,000
Add: Desired ending inventory.................. 2,400 3,000 3,000
Total requirements ..................................... 12,400 15,000 18,000
Less: Projected beginning inventory ........ 2,000 2,400 3,000
Planned production .................................... 10,400 12,600 15,000

3. Raw-material purchases

April May June
Planned production (sets) ............................ 10,400 12,600 15,000
Raw material required per set
(board feet) ................................................

10

10

10
Raw material required for production
(board feet) ................................................

104,000

126,000

150,000
Add: Desired ending inventory of raw
material (board feet) ..................................

12,600

15,000

16,000
Total requirements ........................................ 116,600 141,000 166,000
Less: Projected beginning inventory of
raw material (board feet) ...........................

10,400

12,600

15,000
Planned purchases of raw material
(board feet) ................................................

106,200

128,400

151,000
Cost per board foot ....................................... $.50 $.50 $.50
Planned purchases of raw material
(dollars) ......................................................

$ 53,100

$ 64,200

$ 75,500

4. Direct-labor budget

April May June
Planned production (sets) ............................ 10,400 12,600 15,000
Direct-labor hours per set ............................. 1.5 1.5 1.5
Direct-labor hours required .......................... 15,600 18,900 22,500
Cost per hour ................................................. $20 $20 $20
Planned direct-labor cost .............................. $312,000 $378,000 $450,000


1. Empire Chemical Companys production budget (in gallons) for the three products
for 20x2 is calculated as follows:

Yarex Darol Norex
Inventory, 12/31/x2
(.08 20x3 sales) ..................................

5,200

2,800

2,400
Add: Sales for 20x2.................................... 60,000 40,000 25,000
Total required ............................................. 65,200 42,800 27,400
Deduct: Inventory, 12/31/x1
(.08 20x2 sales) ................................. 4,800 3,200 2,000
Required production in 20x2..................... 60,400 39,600 25,400

2. The companys conversion cost budget for 20x2 is shown in the following schedule:

Conversion hours required:
Yarex (60,400 .07) .................................... 4,228
Darol (39,600 .10) .................................... 3,960
Norex (25,400 .16) ................................... 4,064
Total hours ................................................. 12,252
Conversion cost budget (12,252 $20) .... $245,040


3. Since the 20x1 usage of Islin is 100,000 gallons, the firms raw-material purchases
budget (in dollars) for Islin for 20x2 is as follows:

Quantity of Islin required for production in 20x2 (in gallons):
Yarex (60,400 1) .....................................................................
Darol (39,600 .7) ....................................................................
Norex (25,400 .5) ...................................................................
60,400
27,720
12,700
Subtotal ...................................................... 100,820
Add: Required inventory, 12/31/x2 (100,820 .10) ...................... 10,082
Subtotal .......................................................................................... 110,902
Deduct: Inventory, 1/1/x2 (100,000 .10) ..................................... 10,000
Required purchases (gallons) ....................................................... 100,902
Purchases budget (100,902 gallons $5 per gallon) .................. $504,510

4. The company should continue using Islin, because the cost of using Philin is $76,316
greater than using Islin, calculated as follows:

Change in material cost from substituting Philin for Islin:
20x2 production requirements:
Philin (100,820 $5 1.2) ........................................................
Islin (100,820 $5) ...................................................................
$604,920
504,100
Increase in cost of raw material .................................................... $100,820
Change in conversion cost from substituting Philin for Islin:
Philin (12,252 $20 .9) .......................................................... $220,536
Islin (12,252 $20) ................................................................... 245,040
Decrease in conversion cost ........................................................ $(24,504)
Net increase in production cost ................................................... $ 76,316

1. Sales budget for 20x0:

Units Price Total
Light coils ................................................................ 60,000 $65 $3,900,000
Heavy coils .............................................................. 40,000 $95 3,800,000
Projected sales ....................................................... $7,700,000

2. Production budget (in units) for 20x0:

Light Coils Heavy Coils
Projected sales .............................................................................. 60,000 40,000
Add: Desired inventories,
December 31, 20x0 ....................................................................

25,000

9,000
Total requirements......................................................................... 85,000 49,000
Deduct: Expected inventories, January 1, 20x0 .......................... 20,000 8,000
Production required (units) ........................................................... 65,000 41,000

3. Raw-material purchases budget (in quantities) for 20x0:

Raw Material
Sheet
Metal
Copper
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, 20x0 ..... 36,000 32,000 7,000
Total requirements.................................................. 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x0 .................................................

32,000

29,000

6,000
Purchase requirements (units) .............................. 469,000 256,000 42,000

4. Raw-material purchases budget for 20x0:

Raw Material
Raw Material
Required
(units)
Anticipated
Purchase
Price

Total
Sheet metal ............................................................. 469,000 $8 $3,752,000
Copper wire ............................................................ 256,000 5 1,280,000
Platforms ................................................................ 42,000 3 126,000

5. Direct-labor budget for 20x0:

Projected
Production
(units)
Hours
per
Unit

Total
Hours

Rate

Total
Cost
Light coils ..................................... 65,000 2 130,000 $15 $1,950,000
Heavy coils ................................... 41,000 3 123,000 20 2,460,000
Total .............................................. $4,410,000

6. Manufacturing overhead budget for 20x0:

Cost Driver
Quantity
Cost
Driver
Rate
Budgeted
Cost

Purchasing and material handling ....................... 725,000 lb.
a
$.25 $181,250
Depreciation, utilities, and inspection.................. 106,000 coils
b
$4.00 424,000
Shipping ................................................................. 100,000
c
$1.00 100,000
General manufacturing overhead ......................... 253,000 hr.
d
$3.00 759,000
Total manufacturing overhead ..............................
$1,464,250

a
725,000 = 469,000 + 256,000 (from req. 4)
b
106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)
1. The benefits that can be derived from implementing a budgeting system include the
following:

- The preparation of budgets forces management to plan ahead and to establish
goals and objectives that can be quantified.

- Budgeting compels departmental managers to make plans that are in congruence
with the plans of other departments as well as the objectives of the entire firm.

- The budgeting process promotes internal communication and coordination.

- Budgets provide directions for day-to-day control of operations, clarify duties to
be performed, and assign responsibility for these duties.

- Budgets help in measuring performance and providing incentives.

- Budgets provide a vehicle for resource allocation.

2.
a. Schedule b. Subsequent Schedule
Sales Budget Production Budget
Selling Expense Budget
Budgeted Income Statement

Ending Inventory Budget (units) Production Budget
Production Budget (units) Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget

Direct-Material Budget Cost-of-Goods-Manufactured Budget
Direct-Labor Budget Cost-of-Goods-Manufactured Budget
Manufacturing-Overhead Budget Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Manufactured Budget Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget (includes
ending inventory in dollars)
Budgeted Income Statement
Budgeted Balance Sheet

Selling Expense Budget Budgeted Income Statement

Research and Development Budget Budgeted Income Statement
Administrative Expense Budget Budgeted Income Statement

Budgeted Income Statement Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Capital Expenditures Budget Cash Receipts and Disbursements Budget

Cash Receipts and Disbursements
Budget
Budgeted Balance Sheet Budgeted Statement of Cash Flows

1. The revised operating budget for Toronto Business Associates for the
fourth quarter is presented below. Supporting calculations follow:

TORONTO BUSINESS ASSOCIATES
REVISED OPERATING BUDGET
FOR THE FOURTH QUARTER OF 20X1

Revenue:
Consulting fees:
Computer system consulting ......................................................... $478,125
Management consulting ................................................................. 468,000
Total consulting fees .............................................................. $946,125
Other revenue ......................................................................................... 10,000
Total revenue .................................................................................. $956,125

Expenses:
Consultant salary expenses* ................................................................. $510,650
Travel and related expenses ................................................................. 57,875
General and administrative expenses .................................................. 93,000
Depreciation expense ............................................................................ 40,000
Corporate expense allocation ............................................................... 75,000
Total expenses ................................................................................ $776,525
Operating income .......................................................................................... $179,600

*$510,650 = $245,000 + $265,650. (See supporting calculations.)

Supporting calculations:

- Schedule of projected revenues for the fourth quarter of 20x1:

Computer
System
Consulting

Management
Consulting
Third Quarter:
Revenue ............................................................................ $421,875 $315,000
Hourly billing rate ............................................................ $75 $90
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 .............................................................................. $75 $90
Projected revenue ................................................................. $478,125 $468,000


- Schedules of projected salaries, travel, general and administrative, and allocated
corporate expenses:
Computer
System
Consulting

Management
Consulting
Compensation:
Existing consultants:
Annual salary ........................................................... $ 46,000 $ 50,000
Quarterly salary ....................................................... $ 11,500 $ 12,500
Planned increase (10%) .......................................... 1,150 1,250
Total fourth-quarter salary per consultant ............ $ 12,650 $ 13,750
Number of consultants ........................................... 15 10
Total ................................................................................. $ 189,750 $137,500
New consultants at old salary (3 $12,500) ................. -0- 37,500
Total salary ...................................................................... $ 189,750 $175,000
Benefits (40%) ................................................................. 75,900 70,000
Total compensation ................................................ $ 265,650 $245,000

Travel expenses:
Computer system consultants (425 hr 15) ................ 6,375
Management consultants (400 hr. 13) ........................ 5,200
Total hours ............................................................... 11,575
Rate per hour* ................................................................ $5
Total travel expense ................................................ $ 57,875
General and administrative ($100,000 93%) .................... $ 93,000
Corporate expense allocation ($50,000 150%) ............... $ 75,000

*Third-quarter travel expense hours = rate
$45,625 9,125
= $5.00

9,125 = (350 10) + (375 15)

2. An organization would prepare a revised operating budget when the assumptions
underlying the original budget are no longer valid. The assumptions may involve
factors outside or inside the company. Changes in assumptions involving external
factors may include changes in demand for the company's products or services,
changes in the cost of various inputs to the company, or changes in the economic or
political environment in which the company operates. Changes in assumptions
involving internal factors may include changes in company goals or objectives.

1. Sales budget:

Box C Box P Total
Sales (in units) 500,000 500,000
Sales price per unit $.90 $1.30
Sales revenue $450,000 $650,000 $1,100,000

2. Production budget (in units):

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:

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)...................................................... $.20
Cost of purchases (paperboard) ............................. $ 97,000
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)...................................................... $.10
Cost of purchases (corrugating medium) .............. $ 25,250
Total cost of raw-material purchases
($97,000 + $25,250) ...............................................

$122,250

4. Direct-labor budget:

Box C Box P Total
Production requirements (number of boxes) 495,000 495,000
Direct labor required per box (hours) ..................... .0025 .005
Direct labor required for production (hours) 1,237.5 2,475 3,712.5
Direct-labor rate ....................................................... $12
Total direct-labor cost .............................................. $44,550

5. Manufacturing-overhead budget:

Indirect material ........................................................................................... $ 10,500
Indirect labor ................................................................................................ 50,000
Utilities .......................................................................................................... 25,000
Property taxes .............................................................................................. 18,000
Insurance ...................................................................................................... 16,000
Depreciation ................................................................................................. 29,000
Total overhead .............................................................................................. $ 148,500

6. Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel ........................................ $ 75,000
Advertising ................................................................................................... 15,000
Management salaries and fringe benefits .................................................. 90,000
Clerical wages and fringe benefits ............................................................. 26,000
Miscellaneous administrative expenses .................................................... 4,000
Total selling and administrative expenses ................................................. $ 210,000

7. Budgeted income statement:

Sales revenue [from sales budget, req. (1)] ............................................... $1,100,000
Less: Cost of goods sold:*
Box C: 500,000 $.21 ................................................................ $105,000
Box P: 500,000 $.43 ............................................................... 215,000 320,000
Gross margin ................................................................................................ $ 780,000
Selling and administrative expenses .......................................................... 210,000
Income before taxes ..................................................................................... $ 570,000
Income tax expense (40%) ........................................................................... 228,000
Net income .................................................................................................... $ 342,000

*Calculation of cost of goods sold:

(a) Predetermined overhead rate =
hours labor - direct of volume
overhead ing manufactur budgeted

=
.005) (495,000)( .0025) (495,000)(
$148,500
+

= hour per $40
hours 3,712.5
$148,500
=

(b) Calculation of manufacturing cost per unit:

Box C Box P
Direct material:
Paperboard
.3 lb. $.20 per lb ......................................... $.06
.7 lb. $.20 per lb ......................................... $.14
Corrugating medium
.2 lb. $.10 per lb ......................................... .02
.3 lb. $.10 per lb ......................................... .03
Direct labor:
.0025 hr. $12 per hr ................................... .03
.005 hr. $12 per hr ..................................... .06
Applied manufacturing overhead:
.0025 hr. $40 per hr ................................... .10
.005 hr. $40 per hr ..................................... ___ .20
Manufacturing cost per unit..................................... $.21 $.43


1. Strategic planning identifies the overall objective of an organization and generally
considers the impact of external factors such as competitive forces, market demand,
and technological changes when identifying overall objectives. Budgeting is the
quantitative expression of plans evolving from strategic planning. The time horizon
for budgeting is generally a year, or an operating cycle, and greater attention is
focused on internal factors than on external factors.

2. For each of the financial objectives established by the board of directors and
president of Healthful Foods, Inc., the calculations to determine whether John
Winslows budget attains these objectives are presented in the following table.

CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS, INC.

Objective
Attained/
Not Attained Calculations
Increase sales by 12%
($850,000 1.12 = $952,000)
Not attained ($947,750$850,000)/$850,000 = 11.5%
Increase before-tax income by 15%
($105,000 1.15 = $120,750)
Attained ($120,750$105,000)/$105,000 = 15%
Maintain long-term debt at or below
16% of assets
($2,050,000 .16 = $328,000)
Attained $308,000/$2,050,000 = 15% (rounded)
Maintain cost of goods sold at or below
70% of sales
($947,750 .70 = $663,425)
Attained $574,725/$947,750 = 60.6% (rounded)

3. The accounting adjustments contemplated by John Winslow are unethical because
they will result in intentionally overstating income by understating the cost of goods
sold. The specific standards of ethical conduct for management accountants
violated by Winslow are as follows:

Competence. By making the accounting adjustments, Winslow violated the
competency standard by not preparing financial statements in accordance with
technical standards.

Integrity. Winslow violated the integrity standard by engaging in an activity that
prejudiced his ability to carry out his duties ethically, by not communicating
unfavorable as well as favorable information, and by engaging in an activity that
appears to be a conflict of interest.

Objectivity. By overstating the inventory and reclassifying certain costs, Winslow
has violated the objectivity standard. He has failed to communicate information
fairly and objectively and has failed to disclose all relevant information that would
influence the users understanding of the report.
1. Sales budget:

20x0 20x1

December

January

February

March
First
Quarter
Total sales ........................ $400,000 $440,000 $484,000 $532,400 $1,456,400
Cash sales* ...................... 100,000 110,000 121,000 133,100 364,100
Sales on account
........... 300,000 330,000 363,000 399,300 1,092,300

*25% of total sales.

75% of total sales.

2. Cash receipts budget:

20x1

January

February

March
First
Quarter
Cash sales ............................................ $110,000 $121,000 $133,100 $ 364,100
Cash collections from credit
sales made during current
month* ...............................................

33,000

36,300

39,930

109,230
sales made during preceding
month
...............................................

270,000

297,000

326,700

893,700
Total cash receipts ............................... $413,000 $454,300 $499,730 $1,367,030

*10% of current month's credit sales.

90% of previous month's credit sales.

3. Purchases budget:

20x0 20x1

December

January

February

March
First
Quarter
Budgeted cost of
goods sold ..................

$280,000

$308,000

$338,800

$372,680

$1,019,480

Add: Desired
ending inventory ........

154,000

169,400

186,340

186,340*

186,340

Total goods
needed ........................

$434,000

$477,400

$525,140

$559,020

$1,205,820

Less: Expected
beginning
inventory.....................

140,000

154,000

169,400

186,340

154,000**
Purchases ........................ $294,000 $323,400 $355,740 $372,680

$1,051,820

*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.
4. Cash disbursements budget:

20x1

January

February

March
First
Quarter

Inventory purchases:
Cash payments for purchases
during the current month* ........

$129,360

$142,296

$149,072

$ 420,728

Cash payments for purchases
during the preceding
month
.......................................

176,400

194,040

213,444

583,884

Total cash payments for
inventory purchases .......................

$305,760

$336,336

$362,516

$1,004,612

Other expenses:
Sales salaries .................................. $ 21,000 $ 21,000 $ 21,000 $ 63,000
Advertising and promotion ............ 16,000 16,000 16,000 48,000
Administrative salaries ................... 21,000 21,000 21,000 63,000
Interest on bonds** ......................... 15,000 -0- -0- 15,000
Property taxes** .............................. -0- 5,400 -0- 5,400
Sales commissions......................... 4,400 4,840 5,324 14,564

Total cash payments for other
expenses .........................................

$ 77,400

$ 68,240

$ 63,324

$ 208,964

Total cash disbursements ................... $383,160 $404,576 $425,840 $ 1,213,576

*40% of current months' purchases [see requirement (3)].

60% of the prior month's purchases [see requirement (3)].

**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.

5. Summary cash budget:

20x1

January

February

March
First
Quarter
Cash receipts [from req. (2)]................ $ 413,000 $ 454,300 $ 499,730 $1,367,030
Cash disbursements
[from req. (4)] ..................................

(383,160)

(404,576)

(425,840)

(1,213,576)
Change in cash balance
during period due to operations ....

$ 29,840

$ 49,724

$ 73,890

$ 153,454
Sale of marketable securities
(1/2/x1) .............................................

15,000

15,000
Proceeds from bank loan
(1/2/x1) .............................................

100,000

100,000
Purchase of equipment ........................ (125,000) (125,000)
Repayment of bank loan
(3/31/x1) ...........................................

(100,000)

(100,000)
Interest on bank loan* .......................... (2,500) (2,500)
Payment of dividends .......................... (50,000) (50,000)

Change in cash balance during
first quarter ......................................

$ (9,046)
Cash balance, 1/1/x1 ............................ 35,000
Cash balance, 3/31/x1 .......................... $ 25,954

*$100,000 10% per year 1/4 year = $2,500

6. Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0 ...................................... $ 35,000

Less: Minimum cash balance ....................................................................... 25,000

Cash available for equipment purchases .................................................... $ 10,000

Projected proceeds from sale of marketable securities ............................ 15,000

Cash available ............................................................................................... $ 25,000

Less: Cost of investment in equipment ....................................................... 125,000

Required short-term borrowing ................................................................... $(100,000)
7. INTERCOASTAL ELECTRONICS COMPANY
BUDGETED INCOME STATEMENT

Sales revenue ........................................................................ $1,456,400
Less: Cost of goods sold ..................................................... 1,019,480
Gross margin ......................................................................... $ 436,920
Selling and administrative expenses:
Sales salaries ................................................................... $63,000
Sales commissions.......................................................... 14,564
Advertising and promotion ............................................. 48,000
Administrative salaries .................................................... 63,000
Depreciation ..................................................................... 75,000
Interest on bonds ............................................................. 7,500
Interest on short-term bank loan .................................... 2,500
Property taxes .................................................................. 2,700
Total selling and administrative expenses .......................... 276,264
Net income ............................................................................. $ 160,656

BUDGETED STATEMENT OF RETAINED EARNINGS

Retained earnings, 12/31/x0 ........................................................................ $ 107,500
Add: Net income ........................................................................................... 160,656
Deduct: Dividends ........................................................................................ 50,000
Retained earnings, 3/31/x1 .......................................................................... $ 218,156
BUDGETED BALANCE SHEET
MARCH 31, 20X1

Cash ............................................................................................................... $ 25,954
Accounts receivable* .................................................................................... 359,370
Inventory ........................................................................................................ 186,340
Buildings and equipment (net of accumulated depreciation)
.................. 676,000
Total assets ................................................................................................... $1,247,664

Accounts payable** ....................................................................................... $ 223,608
Bond interest payable ................................................................................... 5,000
Property taxes payable ................................................................................. 900
Bonds payable (10%; due in 20x6) ............................................................... 300,000
Common Stock .............................................................................................. 500,000
Retained earnings ......................................................................................... 218,156
Total liabilities and stockholders' equity ..................................................... $ 1,247,664

*Accounts receivable, 12/31/x0 .................................................................... $ 270,000
Sales on account [see req. (1)] ..................................................................... 1,092,300
Total cash collections from credit sales
($109,230 + $893,700) ................................................................................

(1,002,930 )
Accounts receivable, 3/31/x1 ........................................................................ $ 359,370

Buildings and equipment (net), 12/31/x0 .................................................... $ 626,000

Cost of equipment acquired ......................................................................... 125,000
Depreciation expense for first quarter ......................................................... (75,000 )
Buildings and equipment (net), 3/31/x1 ....................................................... $ 676,000

**Accounts payable, 12/31/x0 ....................................................................... $ 176,400
Purchases [req. (3)] ....................................................................................... 1,051,820
Cash payments for purchases [req. (4)] ...................................................... (1,004,612 )
Accounts payable, 3/31/x1 ............................................................................ $ 223,608

1.
Annual cost of ordering
and storing XL-20
=
|
|
|
|
|
.
|
\
|
|
.
|
\
|
+
|
|
.
|
\
|
|
|
|
|
|
.
|
\
|
unit
per cost
holding
annual

2
quantity order

order
per cost

quanity
order
t requiremen
annual

2. Economic order quantity =
order) per t)(cost requiremen (2)(annual

=
$4
($150) (2)(4,800)

=
360,000 = 600

3. Using the formula given for requirement (1):

Total annual cost of ordering
and storing XL-20
= ( ) ( ) $4
2
600
$150
600
4,800
|
.
|
\
|
+
|
.
|
\
|

= $2,400

Note that this cost does not include the actual cost of XL-20 purchases (i.e., the
quantity puchased multiplied by the price).

4. Orders per year:

Number of orders per year = 8
600
4,800
quantity order
t requiremen annual
= =

5. Using the new cost data:

a. EOQ =
order) per (cost t) requiremen (annual (2)

=
$19.20
($20) (2)(4,800)

= 10,000 = 100

b. Number of orders per year =
100
4,800

quantity order
t requiremen annual
=

= 48

1. Tabulation of inventory ordering and holding costs:

Order size
400 600 800
Number of orders
(4,800 order size) .................................

12

8

6
Ordering cost
($150 number of orders) .....................

$1,800

$1,200

$900
Average inventory
(order size 2) ........................................

200

300

400
Holding costs
($4 average inventory) ........................

$800

$1,200

$1,600
Total annual costs (ordering
costs + holding costs) ............................

$2,600

$2,400

$2,500

minimum

2. The tabular method is cumbersome and does not necessarily identify the optimal
order quantity. If the optimal order quantity does not happen to be selected as one of
the order quantities for the tabular analysis, an order quantity other than those
included in the table will be the least-cost order quantity.
Graphical analysis of economic order quantity:

Total annual cost
Holding costs
Ordering costs
Order quantity
200 400 600 800 1,000
Economic order quantity (EOQ)
Total annual cost
$3,500
$3,000
$2,500
$2,000
$1,500
$1000
$500
Minimum
cost
-
-
-
-
-
-
-
-
1. Reorder point:

Monthly usage =
12
usage annual

=
canisters 400
12
4,800
=

Usage during
1-month
lead time
= 400 canisters

Reorder point = 400 canisters

The chemical XL-20 should be ordered in the economic order quantity of 600 canisters
when the inventory level falls to 400 canisters. In the one month it takes to receive the
order, those 400 canisters will be used in production.

2. Graph of usage, lead time and reorder point:

Quantity (canisters)
of XL-20
Usage of
XL-20
Time
Denotes
1 month
Order
received
1 month
lead time
Reorder point, when
inventory equals 400
canisters. Order EOQ
of 600 canisters.
200
400
600
3. Safety stock and new reorder point:

Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average
monthly usage still is 400 canisters, there is the potential for an excess range of 100
canisters in any particular month. The safety stock of XL-20 is equal to the potential
excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the
reorder point is 500 canisters (400 + 100). The materials and parts manager should
order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters.
During the one-month lead time, another 300 to 500 canisters of XL-20 will be used in
production.

1. The ordering cost per order is composed of the following costs:

Inspection fee ............................................................................................... $ 75.00
Direct labor: receiving clerk (8 hours $9.00) ........................................... 72.00
Variable overhead (8 hours $2.50) ........................................................... 20.00
Processing cost* .......................................................................................... 5.80
Total ordering cost per order ...................................................................... $172.80

*Processing cost per order =
orders of number in change
cost ordering in change

=
15 95
$11,900 $12,300

=
80
$400

= $5.00

Recognition of 16% cost increase = $5.00 1.16
= $5.80


2. The storage cost per windshield is composed of the following costs:

Variable warehouse rent (fixed fee not relevant) ....................................... $ 5.35
Breakage cost ............................................................................................... 3.00
Taxes and fire insurance ............................................................................. 1.15
Other storage costs ..................................................................................... 10.50
Total storage cost per windshield .............................................................. $ 20.00

3. The economic order quantity (EOQ) is calculated as follows:

EOQ =
$20.00
)($172.80) (2)(10,800

EOQ = 432 windshields per order

4. The minimum annual relevant cost at the economic order quantity is calculated as
follows:

Minimum cost = ordering cost + storage cost

=
2
$20.00 432
432
$172.80 10,800
+

= $4,320 + $4,320
= $8,640

5. The reorder point in units is calculated as follows:

Usage per day lead time in days = 36* units 6 days
= 216 windshields
*10,800 50 weeks 6 days


6. Using the new cost estimates:

a. EOQ =
$60.00
)($32.40) (2)(10,800

= 11,664 = 108 windshields per order

b. Number of orders per year =
108
10,800
quantity order
t requiremen annual
=
= 100 orders

c. Minimum cost = ordering cost + storage cost

=
2
$60.00 108
108
$32.40 10,800
+

= $3,240 + $3,240
= $6,480

SOLUTIONS TO CASES
CASE 9-54 (60 MINUTES)
1. Yes, City Raquetball Club (CRC) 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 CRCs management should consider before adopting the new
membership plan and fee structure include:

- Costs associated with the plan changeover

- Public acceptance of the new proposal

- 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
b. Financial analyses conducted by CRC could include a forecast of projected cash
inflows and outflows by months, an income statement including interest revenue
and expense, a cost-volume-profit analysis, and a cash management plan for
excess cash or cash shortages.
3. Because CRC's cash flows should be more predictable, management should be better
able to plan for and control cash disbursements. In addition, management should be
better able to plan for short-term investments when excess cash occurs or to arrange
for short-term financing when there are 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. Some of the operational and behavioral benefits that are generally attributed to a
participatory budgeting process are as follows:

Utilization of the best knowledge of activities in a specific area, because the participants
are close to daily operations.
Goals that are more realistic and acceptable.
Improved communication and group cohesiveness.
A sense of commitment and willingness to be held accountable for the budget.

2. Four deficiencies in Patricia Eklunds 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
expenditures includes uncontrollable fixed
costs, thereby mitigating the positive effects
of participatory budgeting.
Rewards should be based on meeting
budget and/or organizational goals or
objectives.
The arbitrary revision of approved budgets
defeats the participatory process.
The contingency budget should be separate,
over and above each departments original
submission.
The division manager holds back a
percentage of each budget for discretionary
use.
Managers should be involved in the revision
of budgets. Managers could submit a
budget with programs at different levels of
funding.
Evaluation based on budget performance
must be accompanied with intrinsic rewards.
Divisional constraints could be
communicated at a budget kick-off
meeting; however, individual limits of
controllable expenses should be set by each
manager.

1. Sales budget:

20x0 20x1
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
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

Cash sales* ........... $ 440,000 $ 490,000 $ 540,000 $590,000 $640,000 $2,260,000
Sales on
account
..............

660,000

735,000

810,000

885,000

960,000

3,390,000

*40% of total sales.
60% of total sales.

CASE 9-56 (CONTINUED)
2. Cash receipts budget:

20x1
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
Year
Cash sales .......................................... $ 490,000 $ 540,000 $ 590,000 $ 640,000 $2,260,000
sales made during current
quarter* ............................................

588,000

648,000

708,000

768,000

2,712,000
sales made during previous
quarter
............................................

132,000

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

*80% of current quarter's credit sales.
20% of previous quarter's credit sales.

3. Production budget

20x0 20x1
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
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. Raw-material budget:*
20x0 20x1
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
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

*Raw-material budget continued on next page.
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
5. Cash disbursements budget:*

201
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
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
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
direct labor .......................

$204,000

$ 224,000

$ 244,000

$ 264,000

$ 936,000

*Cash disbursements budget continued on next page.

80% of current quarters purchases
**20% of previous quarters purchases


Manufacturing overhead:
Indirect material .................... $ 10,200 $ 11,200 $ 12,200 $ 13,200 $ 46,800
Indirect labor ........................ 40,800 44,800 48,800 52,800 187,200
Other...................................... 31,000 36,000 41,000 46,000 154,000
manufacturing
overhead ...........................

$ 82,000

$ 92,000

$ 102,000

$ 112,000

$ 388,000

Cash payments for selling
and administrative
expenses ..........................

$100,000

$ 100,000

$ 100,000

$ 100,000

$ 400,000
Total cash disbursements ........ $927,000 $1,012,000 $1,097,000 $1,182,000 $4,218,000

6. Summary cash budget:

20x1
1st
Quarter
2nd
Quarter
3nd
Quarter
4th
Quarter
Entire
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/x1) .. 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

*$1,000,000 10% = $25,000
$750,000 10% = $18,750
$500,000 10% = $12,500
$250,000 10% = $6,250

7. FRAME-IT COMPANY
BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material:
Raw-material inventory, 1/1/x1 ................................................. $ 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/x1
([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/x1 ......................................... 167,000

Cost of goods available for sale .................................................... $4,085,000

Deduct: Finished-goods inventory, 12/31/x1 ................................ 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:

Total number of frames produced ........................................... 468,000
Direct-labor hours per frame ................................................ .1
Total direct-labor hours ............................................................ 46,800
Predetermined overhead rate per hour ................................ $10
Total manufacturing overhead applied ................................... $468,000

See next page.

**See next page.
See next page.

The cost of goods manufactured 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 ............................................................................. $3,918,000

**The finished-goods inventory on 12/31/x1 may be verified independently as follows:

S Frames L Frames
Projected inventory on 12/31/x1 ........................................... 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

The cost of goods sold may be verified independently as follows:

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

8. FRAME-IT COMPANY
BUDGETED INCOME STATEMENT

Sales revenue ....................................................................... $5,650,000
Less: Cost of goods sold .................................................... 3,850,000
Gross margin ........................................................................ $1,800,000
Selling and administrative expenses .................................. $400,000
Interest expense ................................................................... 62,500 462,500
Net income ............................................................................ $1,337,500

9. FRAME-IT COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS

Retained earnings, 12/31/x0 ........................................................................ $3,353,800
Add: Net income ........................................................................................... 1,337,500
Deduct: Dividends ........................................................................................ 200,000
Retained earnings, 12/31/x1 ........................................................................ $4,491,300

10. FRAME-IT COMPANY
BUDGETED BALANCE SHEET
DECEMBER 31, 20X1

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

Accounts payable
...................................................................................... $ 143,400
Common stock ............................................................................................. 5,000,000
Retained earnings ........................................................................................ 4,491,300
Total liabilities and stockholders' equity.................................................... $9,634,700

*Fourth-quarter sales on account 20% = $960,000 20%

10,400 units $8
**$8,000,000 + $1,000,000 $80,000

Fourth-quarter purchases on account 20% = $717,000 20%

CURRENT ISSUES IN MANAGERIAL ACCOUNTING
ISSUE 9-57

"U.S. AIRLINES CONSIDER IMPACT OF HIGHER FUEL BILL," THE WALL STREET
JOURNAL, OCTOBER 13, 2000. "AMERICAN'S NET SOARS, BUT HIGH OIL PRICES STING
U.S. AIRWAYS," THE WALL STREET JOURNAL, OCTOBER 19, 2000, MELANIE TRUTTMAN
AND SUSAN CAREY.
1. Higher fuel costs mean that airlines may have to raise airfares so that costs are met.
2. Higher fuel costs result in many expenses increasing throughout society. Since
airlines have to purchase many different kinds of supplies, many of which could be
affected by rising prices, increased fuel prices could affect the airlines budgets in
many places in addition to their actual fuel costs.

ISSUE 9-58

"BUDGET PLANNING: THE NEXT GENERATION," INFORMATIONWEEK.COM, SEPTEMBER
25, 2000, RICK WHITING.
1. Budgeting has moved to a combination of top-down and bottom-up processes. The
idea is that managers will be able to measure results more accurately. Strategic
planning begins with the organization's objectives and then builds a budget designed
to achieve those goals. Input from all levels is needed to make strategic planning
successful.
2. New technology via computer software allows employees from different levels of an
organization to provide integrated input into budget formation. This has allowed a
faster and more accurate process on a national as well as an international scale that
is updated on a continuous basis.
3. Amway Corporation incorporated Adaytum Software to project reducing travel
expenses by 5% for its executives. Next year Amway will use the software to
eventually link several hundred managers into the budgeting process.
ISSUE 9-59

"INEFFICIENT BUDGETING COSTS COMPANIES DEARLY," MANAGEMENT ACCOUNTING,
FEBRUARY 2000, JOHN FANNING.
The traditional budget and associated processes, such as strategic planning,
forecasting, monthly reviews and reward processes, consume an enormous amount of
management time. If these processes are linked, rather than operating in isolation, the
overall level of control over the business can be improved while eliminating, or
substantially streamlining, redundant or superfluous activities.

ISSUE 9-60
"THE REVOLUTION IN PLANNING," CFO, AUGUST 1999, RUSS BANHAM.
There are fewer best practices that are directly transferable from company to company
than exist with re-engineering. This article discusses re-engineering the planning
process. Planning pervades every corner of an organization and is steeped in a
tradition of negotiation. Planning is the most political of all processes. Success in this
area requires patience, communication with employees, investment in new data-
gathering tools and time. It also requires finance to evolve from being a reporter to
being a facilitator of the process. Companies that succeed in revamping this process
believe they can accurately assess strategic decisions based on metrics intrinsic to the
business. Since this is a continuous process that starts when senior management
defines business objectives and communicates them to the operating lines, benefits
begin immediately.

ISSUE 9-61

"SELLING THE BUDGET," STRATEGIC FINANCE, SEPTEMBER 1999, CATHERINE M.
STANKE.
Using too much detail can bog an audience down and make them miss the overall
message. The author of the article suggests choosing the view of a picture that is best
for the message the presenter is trying to convey. Use bar graphs, pie charts, line
graphs, and/or scatter graphs for the purpose they were intended. Present high-level
assumptions that don't give more detail than is needed to make an informed decision.
The presenter can always give more detail when answering a specific question. Value
an audience's time, and respect their intelligence level.
ISSUE 9-62

"MANAGEMENT ACCOUNTING IN CHINA CHANGES - PROBLEMS AND THE FUTURE,"
MANAGEMENT ACCOUNTING, JANUARY 1999, MIKE JONES AND JASON XIAO.
1. Economic Responsibility Contracts are designed to control and motivate enterprise
management. Internal Responsibility Contracts are used by many enterprises to
meet the ERC. While ERCs are becoming less popular, IRCs are still in operation in
many companies. The IRC has four principal components. First, responsibility
centers are established for appropriate internal departments, such as production, to
facilitate income monitoring and cost control. Second, top management uses the
company's overall financial targets to implement targets at the responsibility center
level. Third, an internal bank is established which settles transactions between
company divisions and lends funds raised from within or outside the company to
internal divisions. Finally, performance by the IRC is evaluated periodically against
pre-set targets.
2. ERCs involve management of a state-owned enterprise attaining an agreed level of
sales and profit upon which it is then taxed. In return, the enterprise has autonomy
to manage its business operations. A consequence of this system is that
enterprises develop management accounting techniques, such as budgeting and
standard costing, to help them meet targets.

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McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.

Managerial Accounting, 5/e 9-1

$75,000 = $100,000 .75

............................ $160,000 $136,000 $108,000 $404,000

DLH denotes direct-labor hour.

9,125 = (350 10) + (375 15)

........... 300,000 330,000 363,000 399,300 1,092,300

75% of total sales.

90% of previous month's credit sales.

60% of the prior month's purchases [see requirement (3)].

Buildings and equipment (net), 12/31/x0 .................................................... $ 626,000

60% of total sales.

20% of previous quarter's credit sales.

See next page.

See next page.

The cost of goods manufactured may be verified independently as follows:

The cost of goods sold may be verified independently as follows:

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