MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 22

BUSINESS PLANNING

I. Questions

1. Strategy, plans, and budgets are interrelated and affect one another. Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. Strategy analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans.

2. Budgeted performance is better than past performance for judging managers. Why? Mainly because the inefficiencies included in past results can be detected and eliminated in budgeting. Also, new opportunities in the future, which did not exist in the past, may be ignored if past performance is used.

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

4. The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.

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

6. Factors reducing the effectiveness of budgeting of companies include:

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Chapter 22 Business Planning

1. Lack of a well-defined strategy,2. Lack of a clear linkage of strategy to operational plans,3. Lack of individual accountability for results, and4. Lack of meaningful performance measures.

II. Problems

Problem 1 (Budgeted Income Statement)

Globalcom CompanyBudgeted Income Statement for 2006

(in thousands)

Net sales P6,996Equipment (P6,000 x 1.06 x 1.10) 1,908Maintenance contracts (P1,800 x 1.06)

Total net sales P8,904Cost of goods sold (P4,600 x 1.03 x 1.06) 5,022Gross margin 3,882Operating costs:

Marketing costs (P600 + P250) 850Distribution costs (P150 x 1.06) 159Customer maintenance costs (P1,000 + P130) 1,130Administrative costs 900

Total operating costs 3,039Operating income P 843

Problem 2 (Comprehensive Operating Budget)

Requirement 1

Schedule 1: Revenue BudgetFor the Year Ended December 31, 2006

Units Selling Price Total RevenuesSkateboards 1,000 P450 P450,000Total

Requirement 2

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Business Planning Chapter 22

Schedule 2: Production Budget (in Units)for the Year Ended December 31, 2006

SkateboardsBudgeted unit sales (Schedule 1) 1,000Add target ending finished goods inventory 200Total requirements 1,200Deduct beginning finished goods inventory 100Units to be produced 1,100

Requirement 3

Schedule 3A: Direct Materials Usage BudgetFor the Year Ended December 31, 2006

Wood Fiberglass TotalPhysical BudgetTo be used in production 5,500 (Wood: 1,100 x 5.00 b.f. Fiberglass: 1,100 x 6.00 yards) 6,600

5,500 6,600Cost BudgetAvailable from beginning inventory (Wood: 2,000 b.f. x P28.00 56,000 Fiberglass: 1,000 b.f. x 4.80) 4,800To be used from purchases this period (Wood: (5,500 – 2,000) x P30.00 105,000 Fiberglass: (6,600 – 1,000) x P5.00) 28,000

Total cost of direct materials to be used P161,000 P32,800 P193,800

Schedule 3B: Direct Materials Purchases BudgetFor the Year Ended December 31, 2006

Wood Fiberglass TotalPhysical BudgetProduction usage (from Schedule 3A) 5,500 6,600Add target ending inventory 1,500 2,000Total requirements 7,000 8,600Deduct beginning inventory 2,000 1,000Purchases 5,000 7,600Cost Budget (Wood: 5,000 x P30.00 P150,000 Fiberglass: 7,600 x P5.00) P38,000

P150,000 P38,000 P188,000

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Chapter 22 Business Planning

Requirement 4

Schedule 4: Direct Manufacturing Labor BudgetFor the Year Ended December 31, 2006

Labor CategoryCost Driver

UnitsDML Hours per

Driver UnitTotal Hours

Wage Rate Total

Manufacturing labor 1,100 5.00 5,500 P25.00 P137,500

Requirement 5

Schedule 5: Manufacturing Overhead BudgetFor the Year Ended December 31, 2006

At Budgeted Levels of 5,500Direct Manufacturing Labor-Hours

Variable manufacturing overhead costs (P7.00 x 5,500) P 38,500

Fixed manufacturing overhead costs 66,000Total manufacturing overhead costs P104,500

Requirement 6

Budgeted manufacturing overhead rate: = P19.00 per hour

Requirement 7

Budgeted manufacturing overhead cost per output unit:

=

= P95.00 per output unit

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P104,5005,500

P104,5001,100

Business Planning Chapter 22

Requirement 8

Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2006

Cost per Unit of Inputa Inputsb Total

Direct materialsWood P30.00 5.00 P150.00Fiberglass 5.00 6.00 30.00

Direct manufacturing labor 25.00 5.00 125.00Total manufacturing overhead 95.00

P400.00a cost is per board foot, yard or per hourb inputs is the amount of input per board

Requirement 9

Schedule 6B: Ending Inventory BudgetDecember 31, 2006

Units Cost per Unit TotalDirect materials

Wood 1,500 P 30.00 P 45,000Fiberglass 2,000 5.00 10,000

Finished goodsSkateboards 200 400.00 80,000

Total Ending Inventory P135,000

Requirement 10

Schedule 7: Cost of Goods Sold Budgetfor the year Ended December 31, 2006

From Schedule Total

Beginning finished goods inventory, January 1, 2006 Given P 37,480

Direct materials used 3A P193,800Direct manufacturing labor 4 137,500Manufacturing overhead 5 104,500

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Chapter 22 Business Planning

Cost of goods manufactured

435,800

Cost of goods available for sale 473,280

Deduct ending finished goods inventory, December 31, 2006 6B 80,000

Cost of goods sold P393,280

Requirement 11

Budgeted Income Statement for Pacificfor the Year Ended December 31, 2006Revenues Schedule 1 P450,000Costs

Cost of goods sold Schedule 7 393,280Gross margin 56,720Operating costs

Marketing costs (P250 x 30) P 7,500

Other costs 30,000 37,500Operating income P 19,220

III. Multiple Choice Questions

1. A 6. A 11. D2. B 7. B 12. D3. C 8. D 13. B4. D 9. A 14. C5. D 10. C 15. A

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