Management Accounting Chapter 9

Chapter 09 - Financial Planning and Analysis: The Master Budget
CHAPTER 9
Financial Planning and Analysis:
The Master Budget
ANSWERS TO REVIEW QUESTIONS

9-1 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.
9-2 An example of using the budget to allocate resources in a university is found in the area of
research funds and grants. Universities typically have a limited amount of research-support
resources that must be allocated among the various colleges and divisions within the
university. This allocation process often takes place within the context of the budgeting
process.
9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an
organization's operations for a specified period of time. The master budget includes the
following parts: sales budget, operational budgets (including a production budget, inventory
budgets, a labor budget, an overhead budget, a selling and administrative expense budget,
and a cash budget), and budgeted financial statements (including a budgeted income
statement, budgeted balance sheet, and budgeted statement of cash flows).
9-4 The flowchart on the following page depicts the components of the master budget for a
service station.
9-5 General economic trends are important in forecasting sales in the airline industry. The
overall health of the economy is an important factor affecting the extent of business travel.
In addition, the health of the economy, inflation, and income levels affect the extent to
which the general public travels by air. For example, with inflation and rising price levels,
consumer confidence falls and spending decreases. Airlines may therefore budget lower
sales in future quarters of the year.
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.
9-1
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Education.
Flowchart for Review Question 9-4
Sales Budget:
Sales Gasoline, Related
Budget Products, and Services
Ending Inventory Materials Budget: Selling and

Budget: Gasoline Gasoline and Labor Overhead Administrative
Related Products Budget Budget Expense
Operational Budget
Budgets
Cash
Budget
Budgeted
Income
Statement
Budgeted Budgeted
Financial Balance Sheet
Statements
Budgeted
Statement of
Cash Flows
9-2
Education.
9.7 Application of activity-based costing to the budgeting process yields activity-based budgeting
(ABB). In the logic of activity-based costing, the company engages in a certain mix and
quantity of activities and this enables it to produce the products or services that it markets.
ABB follows this logic: the planned production tells us how much of various activities will be
needed, and if we can then project the cost per unit of the activity (much as we project the
cost per hour for direct labor) we can then extend the calculation to tell us how much will
have to be spent.
9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this
approach the information needed to construct a budget is gathered via the Internet from
individuals and subunits located throughout the enterprise. The Internet also is used to
disseminate the resulting budget schedules and information to authorized users throughout
the enterprise.
9-9 The city of Boston could use budgeting for planning purposes in many ways. For example,
the city's personnel budget would be important in planning for required employees in the
police and fire departments. The city's capital budget would be used in planning for the
replacement of the city's vehicles, computers, administrative buildings, and traffic control
equipment. The city's cash budget would be important in planning for cash receipts and
disbursements. It is important for any organization, including a municipal government, to
make sure that it has enough cash on hand to meet its cash needs at all times.
9.10The budget director, or chief budget officer, specifies the process by which budget data will be
gathered, collects the information, and prepares the master budget. To communicate
budget procedures and deadlines to employees throughout the organization, the budget
director often develops and disseminates a budget manual.
9-11 The budget manual says who is responsible for providing various types of information,
when the information is required, and what form the information is to take. The budget
manual also states who should receive each schedule when the master budget is complete.
9-12 A company's board of directors generally has final approval over the master budget. By
exercising its authority to make changes in the budget and grant final approval, the board of
directors can wield considerable influence on the overall direction the organization takes.
Since the budget is used as a resource-allocation mechanism, the board of directors can
emphasize some programs and curtail or eliminate others by allocating funds through the
budgeting process.
9-3
Education.
9-13 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.
9-14 The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary slack.
Building budgetary slack into the budget is called padding the budget. A significant problem
caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely
future events. Cost estimates are often inflated, and revenue estimates are often
understated. In this situation, the budget loses its effectiveness as a planning tool.
9-15 An organization can reduce the problem of budgetary slack in several ways. First, it can
avoid relying on the budget as a negative, evaluative tool. Second, managers can be given
incentives not only to achieve budgetary projections but also to provide accurate
projections.
9-16 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.
9-17 This comment is occasionally heard from people who have started and run their own small
business for a long period of time. These individuals have great knowledge in their minds
about running their business. They feel that they do not need to spend a great deal of time
on the budgeting process, because they can essentially run the business by feel. This
approach can result in several problems. First, if the person who is running the business is
sick or traveling, he or she is not available to make decisions and implement plans that
could have been clarified by a budget. Second, the purposes of budgeting are important to
the effective running of an organization. Budgets facilitate communication and coordination,
are useful in resource allocation, and help in evaluating performance and providing
incentives to employees. It is difficult to achieve these benefits without a budgeting
process.
9-4
Education.
9-18 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.
9-19 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.
9-20 Most of the differences in budgeting between manufacturing and non-manufacturing firms
derive from the need for inventories in manufacturing. Because of this, additional budget
schedules are generally required in manufacturing firms. These often include:
(a) Production budget
(b) Direct-materials budget
(c) Budgeted schedule of cost of goods manufactured and sold
In addition, other budgets are often more complex because of the large number of suppliers
needed for manufacturing.
9-5
Education.
SOLUTIONS TO EXERCISES
EXERCISE 9-21 (20 MINUTES)
1. The total required production is 131,144 units, computed as follows:
Budgeted Sales Planned Ending Inventory

(in units) (in units)
June 32,000 (40,000  80%)
July 40,000 (given)
August 42,000 (40,000  1.05)
September 44,100 (42,000  1.05) 37,044 (46,305  80%)
October 46,305 (44,100  1.05)
Sales in units:
July................................................................................................................. 40,000
August............................................................................................................ 42,000
September...................................................................................................... 44,100
Total for third quarter...................................................................................... 126,100
Add: Desired ending inventory, September 30............................................... 37,044
Subtotal.......................................................................................................... 163,144
Deduct: Desired ending inventory, June 30.................................................... 32,000
Total required production............................................................................... 131,144
2. Assumed production during third quarter (in units)......................................... 120,000

Raw-material requirements per unit of product (in pounds)............................  4
Raw material required for production in third quarter (in pounds)................... 480,000
Add: Desired ending raw-material inventory, September 30
(480,000  25%).................................................................................... 120,000
Subtotal.......................................................................................................... 600,000
Deduct: Ending raw-material inventory, June 30............................................ 140,000
Raw material to be purchased during third quarter (in pounds)...................... 460,000
Cost per pound of raw material......................................................................  $1.40
Total raw-material purchases during third quarter.......................................... $ 644,000
9-6
Education.
1. Cash collections in October:
Month of Sale Amount Collected in October

July............................................................... $150,000  4% $ 6,000
August........................................................... 175,000  10% 17,500
September.................................................... 200,000  15% 30,000
October......................................................... 225,000  70% 157,500
Total.............................................................. $211,000
Notice that the amount of sales on account in June, $122,500 was not needed to solve the
exercise.
2. Cash collections in fourth quarter from credit sales in fourth quarter.
Amount Collected
Credit
Month of Sale Sales October November December
October............................................. $225,000 $157,500 $ 33,750 $ 22,500
November......................................... 250,000 – 175,000 37,500
December......................................... 212,500 – – 148,750
Total.................................................. $157,500 208,750 $208,750
Total collections in fourth quarter
from credit sales in fourth quarter.
$575,000
3. In the electronic version of the solutions manual, press the CTRL key and click on the following
link: 10E - BUILD A SPREADSHEET 09-22.XLS
9-7
Education.
1.
July August September
Sales........................................................... $240,000 $180,000 $270,000a
Cash receipts:
From cash sales...................................... $120,000b $ 90,000c $135,000
From sales on account............................ 108,000d 102,000 117,000e
Total cash receipts...................................... $ 228,000 $ 192,000 $252,000
a
$270,000 = $135,000  2
b
$120,000 = $240,000  .5
c
$ 90,000 = $180,000  .5
d
$108,000 = ($120,000  .6) + ($90,000  .4)
e
$117,000 = ($135,000  .6) + ($90,000  .4)
2. Accounts payable, 12/31/x0.................................................................. € 600,000

Purchases of goods and services on account during 20x1.................... 2,400,000
Payments of accounts payable during 20x1.......................................... (2,200,000)*
Accounts payable, 12/31/x1.................................................................. € 800,000
*€ 2,200,000 = € 600,000 + € 2,400,000 – € 800,000
3. Accounts receivable, 12/31/x0............................................................... ¥ 1,700,000

Sales on account during 20x1............................................................... 4,500,000
Collections of accounts receivable during 20x1..................................... (3,900,000)
Accounts receivable, 12/31/x1............................................................... ¥ 2,300,000

4. Accumulated depreciation, 12/31/x0..................................................... $ 405,000

Depreciation expense during 20x1........................................................ 75,000
Accumulated depreciation, 12/31/x1..................................................... $ 480,000
5. Retained earnings, 12/31/x0................................................................. $1,537,500

Net income for 20x1.............................................................................. 300,000
Dividends paid in 20x1.......................................................................... 0
Retained earnings, 12/31/x1................................................................. $1,837,500
9-8
Education.
1. Production (in units) required for the year:
Sales for the year............................................................................................. 3,360,000

Add: Desired ending finished-goods inventory on December 31..................... 350,000
Deduct: Beginning finished-goods inventory on January 1.............................. 560,000
Required production during the year................................................................ 3,150,000
2. Purchases of raw material (in units), assuming production of 3,500,000 finished units:
Raw material required for production (3,500,000  2)..................................... 7,000,000

Add: Desired ending inventory on December 31.............................................. 315,000
Deduct: Beginning inventory on January 1...................................................... 245,000
Required raw-material purchases during the year........................................... 7,070,000
9-9
Education.
1. WHITE MOUNTAIN FURNITURE SHOWROOM

EXPECTED CASH COLLECTIONS
NOVEMBER
Expected
Month Sales Percent Collections
September.......................................... $150,000 9% $ 13,500
October............................................... 195,000 20% 39,000
November........................................... 165,000 70% 115,500
Total............................................... $168,000

EXPECTED CASH DISBURSEMENTS
NOVEMBER
October purchases to be paid in November..................................................... $135,000
Less: 2% cash discount................................................................................... 2,700
Net............................................................................................................... $132,300
Cash disbursements for expenses................................................................... 36,000
Total............................................................................................................. $168,300

EXPECTED CASH BALANCE
NOVEMBER 30
Balance, November 1....................................................................................... $ 55,000
Add: Expected collections................................................................................ 168,000
Less: Expected disbursements........................................................................ 168,300
Expected balance........................................................................................ $ 54,700
9-10
Education.
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. Budgeted cash collections for December:
Month of Sale Collections in December

November.............................................................. $400,000  38% $152,000
December.............................................................. 440,000  60% 264,000
Total cash collections............................................. $416,000
2. Budgeted income (loss) for December:
Sales revenue........................................................................ $440,000

Less: Cost of goods sold (75% of sales)................................. 330,000
Gross margin (25% of sales).................................................. $110,000
Less: Operating expenses:....................................................
Bad debts expense (2% of sales)................................. $ 8,800
Depreciation ($432,000/12).......................................... 36,000
Other expenses............................................................ 45,200
Total operating expenses............................................. 90,000
Income before taxes............................................................... $ 20,000
9-11
Education.
EXERCISE 9-27 (CONTINUED)
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.
Cost of
Goods Sold
Month Sales Amount Purchased in December
December.................... $440,000 $330,000 $330,000  20% $ 66,000
January........................ 400,000 300,000 300,000  80% 240,000
Total December purchases
$306,000
Therefore, the December 31 balance in accounts payable will be $306,000.
9-12
Education.
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 20x5. Yet the new accounts manager's projection is only 800
new accounts. This projection will make it more likely that the actual number of new accounts
will exceed the budgeted number.
9-13
Education.
1.
Total Sales in January 20x5
$200,000 $260,000 $320,000
Cash receipts in January, 20x5
From December sales on account............... $ 14,250* $ 14,250 $ 14,250
From January cash sales............................. 150,000† 195,000 240,000
From January sales on account................... 40,000** 52,000 64,000
Total cash receipts....................................... $ 204,250 $261,250 $318,250
*$14,250 = $380,000  .25  .15

†
$150,000 = $200,000  .75
**$40,000 = $200,000  .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. 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..............................................  $ 90
Total direct professional labor cost........................................... $216,000
9-14
Education.
EXERCISE 9-30 (CONTINUED)
2. Cash collections during June:
May June
Half-hour visits (4,000  80%)................................................. 3,200 3,200
Billing rate................................................................................  $60  $60
Total billings for half-hour visits................................................ $192,000 $192,000
One-hour visits (4,000  20%)................................................. 800 800
Billing rate................................................................................  $105  $105
Total billings for one-hour visits................................................ $ 84,000 $ 84,000
Total billings during month....................................................... $276,000 $276,000
Percentage of month's billings collected
during June..........................................................................  10%  90%
Collections during June............................................................ $ 27,600 $248,400
Total collections in June ($27,600 + $248,400)........................ $276,000
3. Overhead and administrative expense budget for June:
Patient registration and records (4,000 visits ´ $3.00 per visit)........... $12,000
Other overhead and administrative expenses
(2,400 hours ´ $7.50 per hour)...................................................... 18,000
Total overhead and administrative expenses...................................... $30,000
4. IN THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL, PRESS THE CTRL

KEY AND CLICK ON THE FOLLOWING LINK: 10E - BUILD A SPREADSHEET 09-
30.XLS
9-15
Education.
SOLUTIONS TO PROBLEMS
PROBLEM 9-31 (30 MINUTES)
1. Schedule of cash collections:

January February March
Collection of accounts receivable:
$165,000 x 20% $ 33,000
........................................................................
Collection of January sales ($450,000):
60% in January; 35% in February 270,000 $157,500
........................................................................
Collection of February sales ($540,000):
60% in February; 35% in March 324,000 $189,000
........................................................................
Collection of March sales ($555,000):
60% in March 333,000
........................................................................
Sale of equipment............................................ 15,000
Total cash collections $303,000 $481,500 $537,000
........................................................................
2. Schedule of cash disbursements:

Payment of accounts payable.......................... $ 66,000

Payment of January purchases ($270,000):
70% in January; 30% in February.............. 189,000 $ 81,000
Payment of February purchases ($300,000):
70% in February; 30% in March................. 210,000 $ 90,000
Payment of March purchases ($420,000):
70% in March............................................. 294,000
Cash operating costs....................................... 93,000 72,000 135,000
Total cash disbursements........................... $348,000 $363,000 $519,000
9-16
Education.
PROBLEM 9-31 (CONTINUED)
3. Schedule of cash needs:

Beginning cash balance………………………. $ 60,000 $ 60,000 $132,900

Total receipts……………………………………. 303,000 481,500 537,000
Subtotal………………………………………. $363,000 $541,500 $669,900
Less: Total disbursements…………………… 348,000 363,000 519,000
Cash excess (deficiency) before financing… $ 15,000 $178,500 $150,900
Financing:
Borrowing to maintain $60,000 balance.. 45,000 -0-
Loan principal repaid……………………… (45,000) -0-
Loan interest paid………………………….. (600)* -0-
Ending cash balance…………………………… $ 60,000 $132,900 $150,900
* $45,000 x 8% x 2/12
9-17
Education.
1. Production and direct-labor budgets
SHADY SHADES, INC.

BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Month
January February March Quarter
Sales (units)....................................................... 20,000 24,000 16,000 60,000
Add: Ending inventory*...................................... 32,000 25,000 27,000 27,000
Total needs........................................................ 52,000 49,000 43,000 87,000
Deduct: Beginning inventory.............................. 32,000 32,000 25,000 32,000
Units to be produced.......................................... 20,000 17,000 18,000 55,000
Direct-labor hours per unit.................................  1  1  .75
Total hours of direct labor
time needed.................................................. 20,000 17,000 13,500 50,500
Direct-labor costs:
Wages ($16.00 per DLH)†............................. $320,000 $272,000 $216,000 $808,000
Pension contributions
($.50 per DLH).......................................... 10,000 8,500 6,750 25,250
Workers' compensation
insurance ($.20 per DLH).......................... 4,000 3,400 2,700 10,100
Employee medical insurance
($.80 per DLH).......................................... 16,000 13,600 10,800 40,400
Employer's social security
(at 7%)...................................................... 22,400 19,040 15,120 56,560
Total direct-labor cost........................................ $372,400 $316,540 $251,370 $940,310
*100 percent of the first following month's sales plus 50 percent of the second following month's
sales.
†
DLH denotes direct-labor hour.
9-18
Education.
2. Use of data throughout the master budget (excluding financial statement budgets):
Components of the master budget, other than the production budget and the direct-labor
budget, that would also directly or indirectly use the sales data include the following:
 Sales budget
 Cost-of-goods-sold budget
 Selling and administrative expense budget
budget, that would also directly or indirectly use the production data include the following:
 Direct-material budget
 Production-overhead budget
budget, that would also directly or indirectly use the direct-labor-hour data include the
following:
 Production-overhead budget (for determining the overhead application rate)

 Cash disbursements budget
 Cash budget
budget, that would also directly or indirectly use the direct-labor cost data include the
following:
 Production-overhead budget (for determining the overhead application rate)

 Cash disbursements budget
 Cash budget
9-19
Education.
3. Production overhead budget:
SHADY SHADES, INC.

PRODUCTION OVERHEAD BUDGET
Month
Shipping and handling.................. $ 60,000 $ 72,000 $48,000 $180,000

Purchasing, material handling,
and inspection............................... 90,000 76,500 81,000 247,500
Other overhead............................. 210,000 178,500 141,750 530,250
Total production overhead............ $360,000 $327,000 $270,750 $957,750
1. Niagra Chemical Company’s production budget (in gallons) for the three products for 20x2
is calculated as follows:
Yarex Darol Norex
Sales for 20x2.............................................. 120,000 80,000 50,000

Add: Inventory, 12/31/x2
(.08 × 20x3 sales).................................... _10,400 _5,600 _4,800
Total required............................................... 130,400 85,600 54,800
Deduct: Inventory, 12/31/x1
(.08 × 20x2 sales).................................. 9,600 6,400 4,000
Required production in 20x2........................ 120,800 79,200 50,800
2. The company’s conversion cost budget for 20x2 is shown in the following schedule:
Conversion hours required:

Yarex (120,800 × .07).................................. 8,456
Darol (79,200 × .10)..................................... 7,920
Norex (50,800 × .16).................................... _8,128
Total hours................................................... 24,504
Conversion cost budget (24,504 x $20)....... $490,080
9-20
Education.
3. Since the 20x1 usage of Islin is 200,000 gallons, the firm’s raw-material purchases budget
(in dollars) for Islin for 20x2 is as follows:
Quantity of Islin required for production in 20x2 (in gallons):

Yarex (120,800 × 1)................................................................... 120,800
Darol (79,200 × .7)..................................................................... 55,440
Norex (50,800 × .5).................................................................... 25,400
Subtotal………………………………………………………………….. 201,640
Add: Required inventory, 12/31/x2 (201,640 × .10).......................... 20,164
Subtotal........................................................................................... 221,804
Deduct: Inventory, 1/1/x2 (200,000 × .10)........................................ 20,000
Required purchases (gallons).......................................................... 201,804
Purchases budget (201,804 gallons × $5 per gallon)....................... $1,009,020
4. The company should continue using Islin, because the cost of using Philin is $152,632
greater than using Islin, calculated as follows:
Change in material cost from substituting Philin for Islin:

20x2 production requirements:
Philin (201,640 × $5 × 1.2)......................................................... $1,209,840
Islin (201,640 × $5).................................................................... 1,008,200
Increase in cost of raw material....................................................... $ 201,640
Change in conversion cost from substituting Philin for Islin:
Philin (24,504 × $20 × .9)........................................................... $ 441,072
Islin (24,504 × $20).................................................................... 490,080
Decrease in conversion cost............................................................ $ (49,008)
Net increase in production cost........................................................ $ 152,632
9-21
Education.
1. Tuition revenue budget:

Current student enrollment……………………. 12,000
Add: 5% increase in student body…………… 600
Total student body………………………………. 12,600
Less: Tuition-free scholarships………………. 180
Tuition-paying students………………………… 12,420
Credit hours per student per year……………. x 30
Total credit hours……………………………….. 372,600
Tuition rate per hour……………………………. x $75
Forecasted tuition revenue……………………. $27,945,000
2. Faculty needed to cover classes:

Total student body……………………………………. 12,600
Classes per student per year [(15 credit hours ÷ 3
credit hours) x 2 semesters]…………………. x 10
Total student class enrollments to be covered…. 126,000
Students per class……………………………………. ÷ 25
Classes to be taught…………………………………. 5,040
Classes taught per professor………………………. ÷ 5
Faculty needed………………………………………… 1,008
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 sales—
the starting point in the budgeting process.
9-22
Education.
1. Sales budget

Sales (in sets)............................................... 5,000 6,000 7,500
Sales price per set........................................  $60  $60  $60
Sales revenue............................................... $300,000 $360,000 $450,000
2. Production budget (in sets)

Sales............................................................. 5,000 6,000 7,500
Add: Desired ending inventory...................... 1,200 1,500 1,500
Total requirements........................................ 6,200 7,500 9,000
Less: Projected beginning inventory............. 1,000 1,200 1,500
Planned production....................................... 5,200 6,300 7,500
3. Raw-material purchases

Planned production (sets)................................ 5,200 6,300 7,500
Raw material required per set
(board feet)..................................................  10  10  10
Raw material required for production
(board feet).................................................. 52,000 63,000 75,000
Add: Desired ending inventory of raw
material (board feet)..................................... 6,300 7,500 8,000
Total requirements........................................... 58,300 70,500 83,000
Less: Projected beginning inventory of
raw material (board feet).............................. 5,200 6,300 7,500
Planned purchases of raw material
(board feet).................................................. 53,100 64,200 75,500
Cost per board foot..........................................  $.60  $.60  $.60
Planned purchases of raw material
(dollars)........................................................ $ 31,860 $ 38,520 $ 45,300
9-23
Education.
4. Direct-labor budget

Planned production (sets)................................ 5,200 6,300 7,500
Direct-labor hours per set.................................  1.5  1.5  1.5
Direct-labor hours required.............................. 7,800 9,450 11,250
Cost per hour...................................................  $21  $21  $21
Planned direct-labor cost................................. $163,800 $198,450 $236,250
5. In the electronic version of the solutions manual, press the CTRL key and click on the following
link: 10E - Build a Spreadsheet 09-35.xls
9-24
Education.
1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $108,000 equal 60% of December’s sales; thus,
December sales total $180,000 ($108,000 ÷ .6). Since the selling price is $20 per unit,
Dakota Fan sold 9,000 units ($180,000 ÷ $20).
2. Since the company expects to sell 10,000 units, sales revenue will total $200,000 (10,000
units x $20).
3. Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus,
February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000 +
$114,000), February sales ($196,000), and March sales ($200,000), the company will
report revenue of $586,000.
4. Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).
5. Finished-goods inventories are maintained at 20% of the following month’s sales. January
sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20). Thus, the
December 31 inventory is 1,900 units (9,500 x 20%).
6. February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January 31 inventory
of 1,960 units (9,800 x 20%). Letting X denote production, then:
12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory

1,900 + X - 9,500 = 1,960
X – 7,600 = 1,960
X = 9,560
7. Financing required is $3,500 ($15,000 minimum balance less ending cash balance of
$11,500):
Cash balance, January 1………………………… $ 22,500

Add: January receipts ($108,000 + $76,000).. 184,000
Subtotal………………………………………… $206,500
Less: January payments………………………… 195,000
Cash balance before financing…………………. $ 11,500
9-25
Education.
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.
9-26
Education.
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
Production-Overhead Budget
Direct-Material Budget Cost-of-Goods-Manufactured Budget

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

Budgeted Balance Sheet
Cash Receipts and Disbursements Budgeted Balance Sheet

Budget Budgeted Statement of Cash Flows
Budgeted Balance Sheet Budgeted Statement of Cash Flows
9-27
Education.
1. Sales budget for 20x3:
Units Price Total

Light coils.................................................................. 60,000 $240 $ 14,400,000
Heavy coils................................................................ 40,000 $340 13,600,000
Projected sales.......................................................... $28,000,000
2. Production budget (in units) for 20x3:
Light Heavy
Coils Coils
Projected sales................................................................................ 60,000 40,000
Add: Desired inventories,
December 31, 20x3..................................................................... 25,000 9,000
Total requirements........................................................................... 85,000 49,000
Deduct: Expected inventories, January 1, 20x3............................... 20,000 8,000
Production required (units)............................................................... 65,000 41,000
3. Raw-material purchases budget (in quantities) for 20x3:
Raw Material
Sheet Copper
Metal Wire Platforms
Light coils (65,000 units projected
to be produced)................................................... 260,000 130,000 __
Heavy coils (41,000 units projected
to be produced)................................................... 205,000 123,000 41,000
Production requirements........................................... 465,000 253,000 41,000
Add: Desired inventories, December 31, 20x3.......... 36,000 32,000 7,000
Total requirements.................................................... 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x3................................................... 32,000 29,000 6,000
Purchase requirements (units).................................. 469,000 256,000 42,000
9-28
Education.
4. Raw-material purchases budget for 20x3:
Raw Material Anticipated

Required Purchase
Raw Material (units) Price Total
Sheet metal.............................................................. 469,000 $16 $ 7,504,000
Copper wire............................................................. 256,000 10 2,560,000
Platforms................................................................. 42,000 6 ___252,000
Total……………………………………………………. $10,316,000
5. Direct-labor budget for 20x3:
Projected Hours
Production per Total Total
(units) Unit Hours Rate Cost
Light coils....................................... 65,000 4 260,000 $15 $3,900,000
Heavy coils..................................... 41,000 6 246,000 20 4,920,000
Total............................................... $8,820,000
6. Production overhead budget for 20x3:
Cost
Cost Driver Driver Budgeted
Quantity Rate Cost
Purchasing and material handling............................ 725,000 lb.a $.50 $362,500

Depreciation, utilities, and inspection....................... 106,000 coils b $8.00 848,000
Shipping................................................................... 100,000c $2.00 200,000
General production overhead.................................. 506,000 hr. d $6.00 3,036,000
TOTAL PRODUCTION OVERHEAD $4,446,500
a
725,000 = 469,000 + 256,000 (from req. 3)
b
106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
506,000 = 260,000 + 246,000 (from req. 5)
9-29
Education.
1. Sales budget:
Box C Box P Total

Sales (in units) 500,000 500,000
Sales price per unit  $1.35  $1.95
Sales revenue $675,000 $975,000 $1,650,000
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:
CORRUGATING MEDIUM
Box C Box P Total
Production requirements (number of boxes).............. 495,000 495,000
Raw material required per box (pounds)....................  .2  .3
Raw material required for
production (pounds)............................................... 99,000 148,500 247,500
Add: Desired ending
raw-material inventory............................................ 10,000
Total raw-material needs............................................ 257,500
Deduct: Beginning raw-material inventory.................. 5,000
Raw material to be purchased.................................... 252,500
Price (per pound).......................................................  $.15
Cost of purchases (corrugating medium).................... $ 37,875
Total cost of raw-material purchases
($145,500 + $37,875)............................................. $183,375
9-30
Education.
PAPERBOARD
Box C Box P Total
Production requirement (number of boxes)................ 495,000 495,000
Raw material required per box (pounds)....................  .3  .7
Raw material required for
production (pounds)............................................... 148,500 346,500 495,000
Add: Desired ending
raw-material inventory............................................ 5,000
Total raw-material needs............................................ 500,000
Deduct: Beginning raw-material inventory.................. 15,000
Raw material to be purchased.................................... 485,000
Price (per pound).......................................................  $.30
Cost of purchases (paperboard)................................. $145,500
4. Direct-labor budget:
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.........................................................  $18
Total direct-labor cost................................................. $66,825
5. Production-overhead budget:
Indirect material.............................................................................................. $ 15,750

Indirect labor.................................................................................................. 75,000
Utilities........................................................................................................... 37,500
Property taxes................................................................................................ 27,000
Insurance....................................................................................................... 24,000
Depreciation................................................................................................... 43,500
Total overhead............................................................................................... $222,750
9-31
Education.
6. Selling and administrative expense budget:
Salaries and fringe benefits of sales personnel.............................................. $112,500

Advertising..................................................................................................... 22,500
Management salaries and fringe benefits....................................................... 135,000
Clerical wages and fringe benefits.................................................................. 39,000
Miscellaneous administrative expenses......................................................... 6,000
Total selling and administrative expenses...................................................... $315,000
7. Budgeted income statement:
Sales revenue [from sales budget, req. (1)].................................................... $1,650,000

Less: Cost of goods sold:
Box C: 500,000  $.315*.............................................................. $157,500
Box P: 500,000  $.645* ............................................................. 322,500 480,000
Gross margin.................................................................................................. $1,170,000
Selling and administrative expenses.............................................................. 315,000
Income before taxes....................................................................................... $ 855,000
Income tax expense (35%)............................................................................. 299,250
Net income..................................................................................................... $ 555,750
*Calculation of production cost per unit:
budgeted manufactur ing overhead

(a) Predetermined overhead rate = volume of direct -labor hours
$222,750
= (495,000)(.0025)  (495,000)(.005)
$222,750
= 3,712.5 hours  $60 per hour
9-32
Education.
(b) Calculation of production cost per unit:
Box C Box P
Direct material:
Paperboard
.3 lb.  $.30 per lb........................................... $.090
.7 lb.  $.30 per lb........................................... $.210
Corrugating medium
.2 lb.  $.15 per lb........................................... .030
.3 lb.  $.15 per lb........................................... .045
Direct labor:
.0025 hr.  $18 per hr..................................... .045
.005 hr.  $18 per hr....................................... .090
Applied production overhead:
.0025 hr.  $60 per hr..................................... .150
.005 hr.  $60 per hr....................................... ___ .300
Production cost per unit.............................................. $.315 $.645
9-33
Education.
1. The revised operating budget for Vancouver Consulting Associates for the
fourth quarter is presented below. Supporting calculations follow:
VANCOUVER CONSULTING ASSOCIATES

REVISED OPERATING BUDGET
FOR THE FOURTH QUARTER OF 20X4
Revenue:
Consulting fees:
Computer system consulting............................................................. $ 956,250
Management consulting.................................................................... 936,000
Total consulting fees.................................................................. $1,892,250
Other revenue........................................................................................... 20,000
Total revenue.................................................................................... $1,912,250
Expenses:
Consultant salary expenses*.................................................................... $1,021,300
Travel and related expenses..................................................................... 115,750
General and administrative expenses....................................................... 186,000
Depreciation expense............................................................................... 80,000
Corporate expense allocation................................................................... 150,000
Total expenses.................................................................................. $1,553,050
Operating income............................................................................................ $ 359,200
*$1,021,300 = $490,000 + $531,300. (See supporting calculations.)
9-34
Education.
Supporting calculations:
 Schedule of projected revenues for the fourth quarter of 20x4:
Computer
System Management
Consulting Consulting
Third Quarter:
Revenue............................................................................. $843,750 $630,000
Hourly billing rate................................................................ ÷ $150 ÷ $180
Billable hours...................................................................... 5,625 3,500
Number of consultants....................................................... ÷ 15 ÷ 10
Hours per consultant.......................................................... 375 350
Fourth-quarter planned increase.............................................. 50 50
Billable hours per consultant.................................................... 425 400
Number of consultants.............................................................  15  13
Billable hours........................................................................... 6,375 5,200
Billing rate................................................................................  $150  $180
Projected revenue.................................................................... $956,250 $936,000
9-35
Education.
 Schedules of projected salaries, travel, general and administrative, and allocated

corporate expenses:
Computer
System Management
Consulting Consulting
Compensation:
Existing consultants:
Annual salary............................................................ $ 92,000 $100,000
Quarterly salary......................................................... $ 23,000 $ 25,000
Planned increase (10%)............................................ 2,300 2,500
Total fourth-quarter salary per consultant.................. $ 25,300 $27,500
Number of consultants..............................................  15  10
Total.................................................................................. $379,500 $275,000
New consultants at old salary (3  $25,000)..................... -0- 75,000
Total salary....................................................................... $379,500 $350,000
Benefits (40%).................................................................. 151,800 140,000
Total compensation................................................... $531,300 $490,000
Travel expenses:
Computer system consultants (425 hrs.  15).................. 6,375
Management consultants (400 hrs.  13)......................... 5,200
Total hours................................................................ 11,575
Rate per hour*.................................................................  $10
Total travel expense.................................................. $115,750
General and administrative ($200,000  93%)....................... $186,000
Corporate expense allocation ($100,000  150%)................. $150,000
*Third-quarter travel expense ÷ hours = rate

$91,250 ÷ 9,125† = $10.00
†
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.
9-36
Education.
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
Fit-for-Life Foods, Inc., the calculations to determine whether John Winslow’s budget
attains these objectives are presented in the following table.
CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE FOODS, INC.
Attained/
Objective Not Attained Calculations
Increase sales by 12% Not attained ($1,895,500 - $1,700,000)/$1,700,000 = 11.5%
($1,700,000 × 1.12 = $1,904,000)
Increase before-tax income by 15% Attained ($241,500 - $210,000)/$210,000 = 15%

($210,000 × 1.15 = $241,500)
Maintain long-term debt at or below Attained $616,000/$4,100,000 = 15% (rounded)

16% of assets
($4,100,000 × .16 = $656,000)
Maintain cost of goods sold at or below Not attained $1,339,000*/$1,895,500 = 70.6% (rounded)
70% of sales
($1,895,500 × .70 = $1,326,850)
*Variable cost of goods sold + fixed production cost = $1,149,450 + $189,550 = $1,339,000
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:
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.
9-37
Education.
Competence. By making the accounting adjustments, Winslow violated the competency

standard by not preparing financial statements in accordance with technical standards.
Credibility. 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
First
December January February March Quarter
Total sales......................... $800,000 $880,000 $968,000 $1,064,800 $2,912,800
Cash sales*....................... 200,000 220,000 242,000 266,200 728,200
Sales on account†.............. 600,000 660,000 726,000 798,600 2,184,600
*25% of total sales.

†
75% of total sales.
2. Cash receipts budget:
20x1
First Quarter
Cash sales.............................................. $220,000 $242,000 $266,200 $ 728,200
Cash collections from credit
sales made during current
month*................................................ 66,000 72,600 79,860 218,460
sales made during preceding
month†................................................ 540,000 594,000 653,400 1,787,400
Total cash receipts.................................. $826,000 $908,600 $999,460 $2,734,060
*10% of current month's credit sales.

†
90% of previous month's credit sales.
9-38
Education.
3. Purchases budget:
20x0 20x1
First
December January February March Quarter
Budgeted cost of
goods sold.................... $560,000 $616,000 $677,600 $745,360 $2,038,960
Add: Desired
ending inventory........... 308,000 338,800 372,680 372,680* 372,680†
Total goods
needed......................... $868,000 $954,800 $1,050,280 $1,118,040 $2,411,640

Less: Expected
beginning
inventory....................... ††280,000 308,000 338,800 372,680 308,000**
Purchases.......................... $588,000 $646,800 $711,480 $745,360 $2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections for
March, the desired ending inventory for March is the same as that for February.
†
The desired ending inventory for the quarter is equal to the desired ending inventory on
March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
††
50% x $560,000 (where $560,000 = December cost of goods sold = December sales of
$800,000 x 70%)
9-39
Education.
4. Cash disbursements budget:
20x1
First Quarter
Inventory purchases:
Cash payments for purchases
during the current month*............ $258,720 $284,592 $298,144 $ 841,456
Cash payments for purchases
during the preceding
month†......................................... 352,800 388,080 426,888 1,167,768
Total cash payments for
inventory purchases.......................... $611,520 $672,672 $725,032 $2,009,224
Other expenses:
Sales salaries.................................... $ 42,000 $ 42,000 $ 42,000 $ 126,000
Advertising and promotion................. 32,000 32,000 32,000 96,000
Administrative salaries...................... 42,000 42,000 42,000 126,000
Interest on bonds**............................ 30,000 -0- -0- 30,000
Property taxes**................................ -0- 10,800 -0- 10,800
Sales commissions............................ 8,800 9,680 10,648 29,128
Total cash payments for other expenses

$154,800 $136,480 $126,648 $ 417,928
Total cash disbursements....................... $766,320 $809,152 $851,680 $2,427,152
*40% of current month's 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.
9-40
Education.
5. Summary cash budget:
20x1
First
Cash receipts [from req. (2)]................... $ 826,000 $ 908,600 $ 999,460 $2,734,060
Cash disbursements
[from req. (4)].................................... (766,320) (809,152) (851,680) (2,427,152)
Change in cash balance
during period due to operations......... $ 59,680 $ 99,448 $147,780 $ 306,908
Sale of marketable securities
(1/2/x1).............................................. 30,000 30,000
Proceeds from bank loan
(1/2/x1).............................................. 200,000 200,000
Purchase of equipment........................... (250,000) (250,000)
Repayment of bank loan
(3/31/x1)............................................ (200,000) (200,000)
Interest on bank loan*............................. (5,000) (5,000)
Payment of dividends............................. (100,000) (100,000)
Change in cash balance during

first quarter........................................ $ (18,092)
Cash balance, 1/1/x1.............................. 70,000
Cash balance, 3/31/x1............................ $ 51,908
*$200,000  10% per year  1/4 year = $5,000
6. Analysis of short-term financing needs:
Projected cash balance as of December 31, 20x0........................................... $ 70,000

Less: Minimum cash balance........................................................................... 50,000
Cash available for equipment purchases......................................................... $ 20,000
Projected proceeds from sale of marketable securities.................................... 30,000
Cash available................................................................................................. $ 50,000
Less: Cost of investment in equipment............................................................ 250,000
Required short-term borrowing........................................................................ $(200,000)
9-41
Education.
7. GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
Sales revenue.......................................................................... $2,912,800

Less: Cost of goods sold......................................................... 2,038,960
Gross margin........................................................................... $ 873,840
Selling and administrative expenses:
Sales salaries..................................................................... $126,000
Sales commissions............................................................. 29,128
Advertising and promotion.................................................. 96,000
Administrative salaries....................................................... 126,000
Depreciation....................................................................... 150,000
Interest on bonds................................................................ 15,000
Interest on short-term bank loan......................................... 5,000
Property taxes.................................................................... 5,400
Total selling and administrative expenses............................... 552,528
Net income.............................................................................. $ 321,312

BUDGETED STATEMENT OF RETAINED EARNINGS
Retained earnings, 12/31/x0.......................................................................... $ 215,000

Add: Net income............................................................................................. 321,312
Deduct: Dividends.......................................................................................... 100,000
Retained earnings, 3/31/x1............................................................................ $ 436,312
9-42
Education.

BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash................................................................................................................ $ 51,908

Accounts receivable*....................................................................................... 718,740
Inventory.......................................................................................................... 372,680
Buildings and equipment (net of accumulated depreciation)†........................... 1,352,000
Total assets..................................................................................................... $2,495,328
Accounts payable**.......................................................................................... $ 447,216

Bond interest payable...................................................................................... 10,000
Property taxes payable.................................................................................... 1,800
Bonds payable (10%; due in 20x6).................................................................. 600,000
Common Stock................................................................................................ 1,000,000
Retained earnings............................................................................................ 436,312
Total liabilities and stockholders' equity........................................................... $2,495,328
*Accounts receivable, 12/31/x0........................................................................ $ 540,000

Sales on account [req. (1)]............................................................................... 2,184,600
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400).............................................................. (2,005,860)
Accounts receivable, 3/31/x1........................................................................... $ 718,740
†
Buildings and equipment (net), 12/31/x0........................................................ $1,252,000
Cost of equipment acquired............................................................................. 250,000
Depreciation expense for first quarter.............................................................. (150,000)
Buildings and equipment (net), 3/31/x1............................................................ $1,352,000
**Accounts payable, 12/31/x0.......................................................................... $ 352,800

Purchases [req. (3)]......................................................................................... 2,103,640
Cash payments for purchases [req. (4)]........................................................... (2,009,224)
Accounts payable, 3/31/x1............................................................................... $ 447,216
9-43
Education.
SOLUTIONS TO CASES
CASE 9-43 (35 MINUTES)
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 Jack Riley’s 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 Rewards should be based on meeting budget
includes uncontrollable fixed costs, thereby and/or organizational goals or objectives.
mitigating the positive effects of participatory
budgeting.
The arbitrary revision of approved budgets The contingency budget should be separate,
defeats the participatory process. over and above each department’s original
submission.
The division manager holds back a percentage Managers should be involved in the revision of
of each budget for discretionary use. budgets. Managers could submit a budget with
programs at different levels of funding.
Evaluation based on budget performance must Divisional constraints could be communicated at
be accompanied with intrinsic rewards. a budget “kick-off” meeting; however, individual
limits of controllable expenses should be set by
each manager.
9-44
Education.
1. Yes, Triple-F Health Club should be better able to plan its cash receipts with the new
membership plan and fee structure. The cash flows should be more predictable and certain
because the large, prepaid membership fee becomes the only factor affecting cash receipts.
The hourly court fees, which were dependent upon a variable that could fluctuate daily, are
eliminated.
2. a. Factors that management should consider before adopting the new membership plan
and fee structure include:
 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 Triple F’s management 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 Triple-F'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.
9-45
Education.
1. Sales budget:
20x4 20x5
4th Quarter 1st 2nd 3rd Quarter 4th Quarter Entire
Quarter Quarter Year
S frame unit
sales..................... 50,000 55,000 60,000 65,000 70,000 250,000
 S sales price.......  $10  $10  $10  $10 x $10  $10
S frame sales
revenue................. $ 500,000 $ 550,000 $ 600,000 $ 650,000 $ 700,000 $2,500,000
L frame unit
sales..................... 40,000 45,000 50,000 55,000 60,000 210,000
 L sales price........  $15  $15  $15  $15  $15  $15
L frame sales
revenue................. $ 600,000 $ 675,000 $ 750,000 $ 825,000 $ 900,000 $3,150,000
Total sales
revenue................. $1,100,000 $1,225,000 $1,350,000 $1,475,000 $1,600,000 $5,650,000
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.
9-46
Education.
CASE 9-45 (CONTINUED)
2. Cash receipts budget:
20x5
1st 2nd 3rd 4th Quarter Entire
Quarter Quarter Quarter 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.
9-47
Education.
3. Production budget:
20x4 20x5
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
S frames:
Sales (in units)................... 50,000 55,000 60,000 65,000 70,000 250,000
Add: Desired ending
inventory......................... 11,000 12,000 13,000 14,000 15,000 15,000
Total units needed................ 61,000 67,000 73,000 79,000 85,000 265,000
Less: Expected
beginning inventory............ 10,000 11,000 12,000 13,000 14,000 11,000
Units to be produced............. 51,000 56,000 61,000 66,000 71,000 254,000
L frames:
Sales (in units)................... 40,000 45,000 50,000 55,000 60,000 210,000
Add: Desired ending
inventory......................... 9,000 10,000 11,000 12,000 13,000 13,000
Total units needed................ 49,000 55,000 61,000 67,000 73,000 223,000
Less: Expected
beginning inventory............ 8,000 9,000 10,000 11,000 12,000 9,000
Units to be produced............. 41,000 46,000 51,000 56,000 61,000 214,000
9-48
Education.
4. Direct-material budget:*
20x4 20x5
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
*Direct-material budget continued on next page.
9-49
Education.
20x4 20x5
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
9-50
Education.
5. Cash disbursements budget:*
205
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 quarter’s purchases
**20% of previous quarter’s purchases
9-51
Education.

Production 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
production
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
9-52
Education.
6. Summary cash budget:
20x5
1st 2nd 3nd 4th Entire
Quarter Quarter Quarter Quarter Year
Cash receipts [from req. (2)]............. $1,210,000 $1,335,000 $1,460,000 $1,585,000 $5,590,000
Less: Cash disbursements
[from req. (5)]................................ 927,000 1,012,000 1,097,000 1,182,000 4,218,000
Change in cash balance due to
operations..................................... $ 283,000 $ 323,000 $ 363,000 $ 403,000 $1,372,000
Payment of dividends........................ (50,000) (50,000) (50,000) (50,000) (200,000)
Proceeds from bank loan (1/2/x5)..... 1,000,000 1,000,000
Purchase of equipment..................... (1,000,000) (1,000,000)
Quarterly installment on loan
principal........................................ (250,000) (250,000) (250,000) (250,000) (1,000,000)
Quarterly interest payment*.............. (25,000) (18,750) (12,500) (6,250) (62,500)
Change in cash balance during
the period..................................... $ (42,000) $ 4,250 $ 50,500 $ 96,750 $ 109,500
Cash balance, beginning of period 95,000 53,000 57,250 107,750 95,000
Cash balance, end of period............. $ 53,000 $ 57,250 $ 107,750 $ 204,500 $ 204,500
*$1,000,000  10%  ¼ = $25,000

$750,000  10%  ¼ = $18,750
$500,000  10%  ¼ = $12,500
$250,000  10%  ¼ = $6,250
9-53
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. PHOTO ARTISTRY COMPANY

BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X5
Direct material:
Raw-material inventory, 1/1/x5.................................................... $ 59,200
Add: Purchases of raw material [req. (4)].................................... 2,538,000
Raw material available for use.................................................... $2,597,200
Deduct: Raw-material inventory, 12/31/x5
([req. (4)] 10,400  $8)............................................................ 83,200
Raw material used $2,514,000
Direct labor [req. (5)]......................................................................... 936,000
Production overhead:
Indirect material........................................................................... $ 46,800
Indirect labor............................................................................... 187,200
Other overhead........................................................................... 154,000
Depreciation................................................................................ 80,000
Total production overhead........................................................... __ 468,000 *
Cost of goods manufactured............................................................. $3,918,000 †
Add: Finished-goods inventory, 1/1/x5.............................................. 167,000
Cost of goods available for sale........................................................ $4,085,000
Deduct: Finished-goods inventory, 12/31/x5..................................... 235,000 **
Cost of goods sold............................................................................. $3,850,000 ††
*In the budget, budgeted and applied production overhead are equal. The applied production
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 production overhead applied..............................................$468,000
†
See next page.
**See next page.
††
See next page.
9-54
Education.

†
The cost of goods manufactured may be verified independently as follows:
S Frames L Frames
Frames produced..................................................................... 254,000 214,000
 Production cost per unit........................................................  $7  $10
Total production cost............................................................... $1,778,000 $2,140,000
Grand total (S frames and L frames)....................................... $3,918,000
**The finished-goods inventory on 12/31/x5 may be verified independently as follows:
S Frames L Frames
Projected inventory on 12/31/x5.............................................. 15,000 13,000
Production 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
Production 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

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
9-55
Education.

BUDGETED STATEMENT OF RETAINED EARNINGS
Retained earnings, 12/31/x4.......................................................................... $3,353,800

Add: Net income............................................................................................. 1,337,500
Deduct: Dividends.......................................................................................... 200,000
Retained earnings, 12/31/x5.......................................................................... $4,491,300

BUDGETED BALANCE SHEET
DECEMBER 31, 20X5
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%
9-56
Education.
FOCUS ON ETHICS (See page 382 in the text.)

Is padding the budget unethical? Some accountants argue that budget padding is a vicious
cycle: budgets are padded by lower-level managers because they believe top management
will cut the budget, and budgets are cut by top management because they believe the
submitted budget has been padded by lower-level managers. This situation contains an
unfortunate array of elements, which raise serious obstacles to effective cost management. It
is regrettable that the budget process is intermingled with the employee incentive scheme via
the bonus system in this way, since it is hindering transparent cost management. However,
given the situation, there are several possible scenarios for the division controller to deal with.
In cutting expenses, top corporate managers may be revealing one of two things. They may be
more focused on the use of the budget data to drive incentives than as accurate cost control
tools, and thus may cut budgeted expenses specifically to provide a ‘stretch’ goal for the
division. Alternatively, top management may believe that the budget has been padded by the
division, possibly based on previous budget submissions, and thus believe they are handing
back a more accurate expense budget than was submitted to them.
No matter what the situation, the controller should make every effort to provide accurate cost
forecasts for the budgeting purpose. To do otherwise would be to compromise his or her own
integrity and authority within the organization. Further, inaccurate information creates a poor
basis for cost management. If greater ‘stretch’ goals are required by top management, then the
divisional team could establish these for themselves. If there is doubt at corporate level about
the accuracy of the forecasts, then it should be dispelled. For example, the controller could
provide supporting documentation with the budget to validate the estimates and to discourage
top corporate managers from cutting the expense budget.
Guidance on resolving the issue can be found in the final section of the IMA Code of
Professional Ethics (reproduced in Chapter One).
9-57
Education.

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What are the components of a master budget?

What are the components of a master budget?

What factors affect budgeting in the airline industry?

What factors affect budgeting in the airline industry?

Chapter 09 - Financial Planning and Analysis: The Master Budget

ANSWERS TO REVIEW QUESTIONS

Flowchart for Review Question 9-4

Ending Inventory Materials Budget: Selling and

9-16 The idea of participative budgeting is to involve employees throughout an organization in

 It is difficult to prepare budgets when inflation is high or unpredictable. Some foreign

 The economies of all countries fluctuate in terms of consumer demand, availability of

(a) Production budget

(b) Direct-materials budget

(c) Budgeted schedule of cost of goods manufactured and sold

1. The total required production is 131,144 units, computed as follows:

Budgeted Sales Planned Ending Inventory

2. Assumed production during third quarter (in units)......................................... 120,000

EXERCISE 9-22 (25 MINUTES)

1. Cash collections in October:

Month of Sale Amount Collected in October

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

EXERCISE 9-23 (20 MINUTES)

2. Accounts payable, 12/31/x0.................................................................. € 600,000

*€ 2,200,000 = € 600,000 + € 2,400,000 – € 800,000

3. Accounts receivable, 12/31/x0............................................................... ¥ 1,700,000

4. Accumulated depreciation, 12/31/x0..................................................... $ 405,000

5. Retained earnings, 12/31/x0................................................................. $1,537,500

EXERCISE 9-24 (15 MINUTES)

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

Sales for the year............................................................................................. 3,360,000

Raw material required for production (3,500,000  2)..................................... 7,000,000

EXERCISE 9-25 (20 MINUTES)

1. WHITE MOUNTAIN FURNITURE SHOWROOM

2. WHITE MOUNTAIN FURNITURE SHOWROOM

3. WHITE MOUNTAIN FURNITURE SHOWROOM

EXERCISE 9-26 (30 MINUTES)

EXERCISE 9-27 (30 MINUTES)

1. Budgeted cash collections for December:

Month of Sale Collections in December

2. Budgeted income (loss) for December:

Sales revenue........................................................................ $440,000

EXERCISE 9-27 (CONTINUED)

3. Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's purchases of

Therefore, the December 31 balance in accounts payable will be $306,000.

EXERCISE 9-28 (20 MINUTES)

To: President, East Bank of Mississippi

From: I.M. Student and Associates

Subject: Budgetary slack

EXERCISE 9-29 (20 MINUTES)

*$14,250 = $380,000  .25  .15

EXERCISE 9-30 (25 MINUTES)

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

EXERCISE 9-30 (CONTINUED)

2. Cash collections during June:

3. Overhead and administrative expense budget for June: