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CHAPTER 5

Planning and Forecasting

Learning Objectives

Summary of End of Chapter Material by Learning Objective and Bloom’s Taxonomy

Puzzle Clues Exercises Problems CasesItem L.O. Bloom Item L.O. Bloom Item L.O. Bloom Item L.O. Bloom

Unit 5.1 1 1 C 20 3 AP 25 2 E, AN1 1 C 2 2 AP 21 3 AP 26 3,4,5 AP2 1 K 3 2 AP 22 3,4 AP 27 3,4,5 AP, AN3 1 E 4 2 AP 23 4 AP, AN 28 3,4,5 AP4 1 C 5 2 AP 24 4 AP 29 1,3,4,5 E, AN5 1 K 6 2 AP6 1 K 7 3 AP

8 3 APUnit 5.2 9 3 AP, AN1 2 K,C 10 3 AP2 2 C 11 3 AP3 2 C 12 3 AP4 2 K 13 3 AP

14 4 APUnit 5.3 15 4 AP1 3 K 16 4 AP2 3 C 17 4 AP3 3 C 18 4 AN4 3 K 19 5 C, AN,

AP5 3 K

Unit 5.41 4 K2 4 K3 4 C

Unit 5.51 5 C2 5 K

Planning and Forecasting Chapter 5

SOLUTIONS TO PUZZLE CLUES

Unit 5.1

1. Budgets are tactical plans that guide employees as they strive to achieve an organization’s strategic objectives. Budgets communicate management’s intentions regarding resource allocation, and they help managers anticipate the financial results of various decisions before those decisions are implemented.

LO: 1, Bloom: C, Unit: 5-1, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

2. It is management’s responsibility to set the budget.LO: 1, Bloom: K, Unit: 5-1, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

3. No. Budgeting is important for organizations of all sizes. Small businesses are especially susceptible to cash flow problems, so budgeting will help those managers plan appropriately to avoid financial distress.

LO: 1, Bloom: E, Unit: 5-1, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

4. With top-down budgeting, upper management determines the budget and imposes the budget on lower level managers and employees. Top-down budgeting is more efficient because fewer people are involved in the budgeting process. Employees are less likely to buy in to the budget since their input has not been solicited.

With bottom-up, or participative, budgeting, expectations about sales and expenses are determined by lower- and middle-level managers. As those budgets are completed, they are reviewed by upper-level managers. If the upper-level managers make changes, then the reasons for those changes should be communicated to the lower-level managers. Bottom-up budgets are likely to be more realistic as they are prepared by the employees who are closer to operations. On the other hand, such budgets are subject to budgetary slack as the lower-level managers may be motivated to develop budgets that are easy to meet or beat. Bottom-up budgets are likely to be better received by employees since the employees were involved in their preparation.

Chapter 5 Planning and Forecasting

LO: 1, Bloom: C, Unit: 5-1, Difficulty: Moderate, Min: 5-7, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

5. Budgetary slack involves under-estimating revenues or over-estimating expenses to give managers a better chance of meeting or exceeding budget figures. It is an issue in budget preparation because when managers under-estimate income, they may prevent the company from taking advantage of profitable projects.

LO: 1, Bloom: K, Unit: 5-1, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

6. Zero-based budgeting requires managers to justify every budget line item instead of starting from a prior period’s balance. It is much more time-consuming than a budgeting process that simply estimates each line item from prior period results. However, it provides greater likelihood that non-strategic projects are not funded from year-to-year.


Unit 5.2

1. Standards are guides or rules that specify a particular level of performance or quality. Examples include: entrance standards to get into graduate school; a score of par in a game of golf; steel standards indicate the strength of a grade of steel; safety standards for automobiles.

LO: 2, Bloom: K,C, Unit: 5-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Measurement

2. Ideal standards specify results from perfect circumstances. Practical standards allow for normal interruptions in performance or normal material waste. Practical standards can be achieved with reasonable effort, whereas ideal standards cannot be achieved. Practical standards are often more appealing since they can be achieved.

LO: 2, Bloom: C, Unit: 5-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Measurement

3. A standard price is what a company pays per unit of input (e.g., price per pound of direct materials, rate per hour of direct labor, or overhead rate). A standard cost is the budgeted cost to produce one


unit of product. It is determined by multiplying the standard price of an input by the standard quantity of an input per product for each of direct materials, direct labor and overhead.

LO: 2, Bloom: C, Unit: 5-2, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement

4. Direct materials, direct labor and overheadLO: 2, Bloom: K, Unit: 5-2, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Performance Measurement

Unit 5.3

1. The operating budget is the first major component of the master budget. It provides a plan for operations, that is items that will affect the income statement.


2. The operating budget is made up of the following component budgets: sales, production, materials, labor, overhead, and selling and administrative expenses. The sales budget is used to determine the production budget, which in turn is used to determine the materials, labor and overhead budgets. The sales budget is also used to determine the selling and administrative expenses budget.

LO: 3, Bloom: C, Unit: 5-3, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

3. The sales budget impacts every other budget in one way or another. Inaccurate sales forecasts render all other budgets inaccurate.


4. Monthly and quarterly budgets will show seasonal trends that are not apparent in an annual budget. These interim budgets are more helpful to managers to ensure that plans are in place to borrow cash during periods of expected cash shortages, or hire temporary workers during periods of high production.

LO: 3, Bloom: K, Unit: 5-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

5. The master budget is a collection of smaller budgets that lead to pro-forma financial statements. The first budget prepared is the operating


budget, followed by the cash budget, income statement and then the balance sheet.


Unit 5.4

1. The cash budget has five components:Cash available to spend – made up of the beginning cash balance for the period plus cash collections from sales (determined via the cash receipts budget).

Cash disbursements – made up of the various cash outflows that will occur, such as payments for materials (determined via the cash payments for materials budget), payments for labor, overhead, selling and administrative expenses, etc.

Cash excess or cash needed – the difference between cash available to spend and cash disbursements, adjusted by the minimum cash balance required.

Short-term financing – made up of borrowings during periods of cash deficiency, repayments of borrowings and interest on borrowings.

Ending cash balance – cash available less cash disbursements plus short-term financing; this amount should be greater than or equal to the minimum cash balance.


2. Companies establish minimum cash balances to ensure that they are able to meet obligations as they come due and meet unexpected cash needs without having to borrow at high short-term interest rates.


3. It is better to prepare monthly or quarterly cash budgets so managers can identify expected periods of cash deficiencies before the company runs out of cash.


LO: 4, Bloom: C, Unit: 5-4, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Budget Preparation

Unit 5.5

1. Pro-forma financial statements are expectations of what financial results will occur in the future. The master budget provides the detail from which the financial statement accounts are determined.


2. The balance sheet is prepared last. The income statement has to be prepared before the balance sheet because net income is needed to determine retained earnings.



SOLUTIONS TO EXERCISES

Exercise 5-1

Budgeting is part of the planning process that all organizations should follow. With cash flow problems being one of the main reasons new businesses fail, it is important for Mark to understand when he expects to receive and disburse cash. Identifying expected cash shortfalls through a budget will allow him to be proactive in obtaining short-term financing before major problems arise.

Mark might not know what sales will be, but he should know his expenses: rent, utilities, insurance, salaries, inventory, etc. He could begin the budgeting process by calculating monthly costs and then determine the amount of sales necessary to cover these costs. As he gains a better understanding of the demand for gourmet coffee in Fountain, his budgeting will become more predictive rather than reactive.


Exercise 5-2

Item Price List price $6.50Volume discount (.65) ($6.50 × 10%)Shipping .08

Storage .55 Standard price per gallon $6 .48

LO: 2, Bloom: AP, Unit: 5-2, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement


Exercise 5-3

Item Rate Base hourly rate $20Benefits 6 ($20 × 30%)Employment taxes 2 ($20 × 10%) Standard rate per hour $28

LO: 2, Bloom: AP, Unit: 5-2, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement

Exercise 5-4

Item Quantity Completed unit 2.5 boardfeetScrap allowance 1 .5 boardfeet Standard quantity per stand 4 .0 boardfeet

LO: 2, Bloom: AP, Unit: 5-2, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement

Exercise 5-5

Activity Time Required Personalization 6.0 minutes

Break time 1.5 minutes

Setup 0 .5 minutes

Standard quantity of direct labor per quilt

8 .0 minutes

LO: 2, Bloom: AP, Unit: 5-2, Difficulty: Difficult, Min: 10, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement


Exercise 5-6

Item Standard CostCommercial cookie mix $0.50

Milk chocolate 1.25

Almonds .75

Mixing labor .24

Baking labor .60

Variable overhead 1.62

Fixed overhead 3 .00

Standard cost per pound $7 .96

LO: 2, Bloom: AP, Unit: 5-2, Difficulty: Difficult, Min: 10-15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Performance Measurement

Exercise 5-7

January February March Quarter Budgeted units sold 20,000 24,000 16,000 60,000Budgeted sales price × $ 80 × $ 80 × $ 80 × $ 80 Budgeted revenue $1,600,000 $1,920,000 $1,280,000 $4,800,000

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation

Exercise 5-8

April May June Quarter Budgeted unit sales 10,000 12,000 8,000 30,000

+ Budgeted ending inventory 6,000 4,000 4,500 4,500 = Total units required 16,000 16,000 12,500 34,500- Beginning inventory 5,000 6,000 4,000 5,000 = Budgeted production 11,000 10,000 8,500 29,500


LO: 3, Bloom: AP, Unit 5-3, Difficulty: Easy, Min: 10-15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-9a.

January February March Quarter Budgeted unit sales 20,000 35,000 30,000 85,000

+ Budgeted ending inventory1 8,750 7,500 3,000 3,000 = Total units required 28,750 42,500 33,000 88,000- Beginning inventory 2,000 8,750 7,500 2,000 = Budgeted production 26,750 33,750 25,500 86,000

1 2,400 = April production × 20%April production = 12,000 kites12,000 kites × 25% = 3,000 kites

b. direct materials purchases budget, cash payments budget, direct labor budget, manufacturing overhead budget, cash budget, balance sheet

LO: 3, Bloom: AP, AN, Unit 5-3, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-10

January February March Quarter April Budgeted production 10,000 8,000 9,000 27,000 12,000

× Standard pounds per unit × 3 × 3 × 3 × 3 × 3 = Production needs 30,000 24,000 27,000 81,000 36,000+ Budgeted ending inventorya 29,300 32,900 43,700 43,700 = Total DM required (lbs.) 59,300 56,900 70,700 124,700- Beginning inventorya 36,500 29,300 32,900 36,500 = Budgeted purchases (lbs.) 22,800 27,600 37,800 88,200

a Budgeted ending inventory is equal to 120% of the following month’s production needs, plus an additional 500 pounds. For January, this is calculated as (24,000 pounds × 1.20) + 500 pounds = 29,300 pounds.

b January beginning inventory = 120% of January production needs plus 500 pounds: (1.2 × 30,000 pounds) + 500 pounds = 36,500 pounds

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Moderate, Min: 10-15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-11

1st

Quarter2nd

Quarter 3rd

Quarter 4th

Quarter Annual 1st Quarter next year

Budgeted production 5,000 7,500 9,000 12,000 33,500 6,000× Standard ounces per gallon × 100 × 100 × 100 × 100 × 100 × 100 = Production needs 500,000 750,000 900,000 1,200,000 3,350,000 600,000+ Budgeted ending inventorya 150,000 180,000 240,000 120,000 120,000 = Total DM required (lbs.) 650,000 930,000 1,140,000 1,320,000 3,470,000- Beginning inventory 80,000 150,000 180,000 240,000 80,000 = Budgeted purchases (lbs.) 570,000 780,000 960,000 1,080,000 3,390,000× Standard price per ounce × $0 .15 × $0 .15 × $0 .15 × $0 .15 × $0 .15 = Budgeted purchases cost $85,500 $117,000 $144,000 $162,000 $508,500

a Budgeted ending inventory is equal to 20% of the following quarter’s production needs. For the first quarter, this is calculated as 750,000 ounces × 0.20 = 150,000 ounces.

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Difficult, Min: 15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-12

MachiningJuly August September 3rd Quarter

Budgeted production 20,000 16,000 18,000 54,000× Standard DLH per

unit × 2 × 2 × 2 × 2

= Total DLH required 40,000 32,000 36,000 108,000× Standard wage rate × $6.75 × $6.75 × $6.75 × $6.75 = Budgeted DL cost $270,000 $216,000 $243,000 $729,000

AssemblyJuly August September 3rd Quarter

Budgeted production 20,000 16,000 18,000 54,000× Standard DLH per

unit × .5 × .5 × .5 × .5

= Total DLH required 10,000 8,000 9,000 27,000× Standard wage rate × $12 × $12 × $12 × $12 = Budgeted DL cost $120,000 $96,000 $108,000 $324,000

Total DL cost $390,000 $312,000 $351,000 $1,053,000

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Easy, Min: 10-15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation

Exercise 5-13

4 th Quarter Budgeted production 28,000 Variable overhead Indirect materials ($5.75 per hammock) $161,000 Indirect labor ($12.50 per hammock 350,000 Other ($2.25 per hammock) 63,000 Total variable overhead costs 574,000 Fixed overhead Salaries 78,000 Insurance 5,000 Depreciation 35,000 Total fixed overhead 118,000 Total manufacturing overhead 692,000Less non-cash items


Depreciation (35,000 ) Total cash cost $657,000



Exercise 5-14

Sales Budget1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Annual

Budgeted units sold 25,000 40,000 50,000 80,000 195,000Budgeted sales price × $ 12 × $ 12 × $ 12 × $ 12 × $ 12 Budgeted sales revenue $300,000 $480,000 $600,000 $960,000 $2,340,000

Cash Receipts Budget1st

Quarter2nd

Quarter3rd

Quarter4th

QuarterTotal Cash Receipts

BadDebts

Accounts Receivable

1st quarter sales $300,000 × 70% $210,000 $210,000 $300,000 × 25% $ 75,000 75,000 $300,000× 5% $15,0002nd quarter sales $480,000 × 70% 336,000 336,000 $480,000 × 25% $120,000 120,000 $480,000 × 5% 24,0003rd quarter sales $600,000 × 70% 420,000 420,000 $600,000 × 25% $150,000 150,000 $600,000× 5% 30,0004th quarter sales $960,000 × 70% 672,000 672,000 $960,000 × 25% 240,000 $960,000 × 5% 48,000 Totals $210,000 $411,000 $540,000 $822,000 $1,983,000 $117,000 $240,000

Note: Collections in the 1st quarter do not include Accounts Receivable from a prior period because the company is just beginning operations.


LO: 4, Bloom: AP, Unit: 5-4, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation

Exercise 5-15

April May June

Total Cash Receipts

Accounts Receivable

Cash salesa $ 33,600 $ 34,500 $ 37,500 $105,600March sales $110,000 × 20% 22,000 22,000April sales $112,000 × 50% 56,000 56,000 $112,000 × 20% 22,400 22,400May sales $115,000 × 50% 57,500 57,500 $115,000 × 20% 23,000 23,000June sales $125,000 × 50% 62,500 62,500 $125,000 × 20% $25,000 Totals $111,600 $114,400 $123,000 $349,000 $25,000

a Cash collections = 30% of current month’s sales

LO: 4, Bloom: AP, Unit: 5-4, Difficulty: Easy, Min: 15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-16

1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Annual Accounts

Payable A/P from last quarter $330,000 $ 330,0001st quarter purchases $320,000 × 30% 96,000 96,000 $320,000 × 70% $224,000 224,0002nd quarter purchases $400,000 × 30% 120,000 120,000 $400,000 × 70% $280,000 280,0003rd quarter purchases $465,000 × 30% 139,500 139,500 $465,000 × 70% $325,500 325,5004th quarter purchases $525,000 × 30% 157,500 157,500 $525,000 × 70% $367,500 Total $426,000 $344,000 $419,500 $483,000 $1,627,500 $367,500

LO: 4, Bloom: AP, Unit: 5-4, Difficulty: Easy, Min: 15, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-17

a.Beginning cash balance $ 50,200

+ Cash collections, March 700,000 = Total cash available to spend 750,200- Cash disbursements, March 710,300 = Cash excess (deficiency) 39,900- Minimum cash balance 50,000 = Cash excess (needed) ($10,100 )

Since borrowings must be done in increments of $500, Austin Paints must borrow $10,500.

b. Accrued interest at end of April = $10,500 × × 10% = $175

Excess cash $7,000- Interest payment 175 = Cash available for principal $6,825

Since principal repayment must be done in increments of $500, Austin Paints can repay only $6,500.

LO: 4, Bloom: AP, Unit: 5-4, Difficulty: Difficult, Min: 15-20, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-18

October November December Quarter Beginning cash balance $16,500a $15,500 $16,900j $16,500Collections from sales 55,000 80,500 f 103,100 k 238,600 Total cash available 71,500 96,000 120,000 255,100q

Less disbursementsMaterials purchases 12,000b 10,000 14,000 36,000Direct labor 5,000 6,000 8,000 19,000Manufacturing overhead 20,000 23,000 22,000 65,000r

Selling & administrative expenses 29,000 30,000 32,000o 91,000s

Equipment purchase 15,000n 15,000Dividends 5,000 5,000

Total disbursements 66,000 69,000 g 96,000 m 231,000 t Excess (deficiency) of cash 5,500c 27,000 24,000l 24,100u

Minimum cash balance 15,000 15,000 15,000 15,000 v Cash available (needed) (9,500) 12,000h 9,000 9,100w

Financing:Borrowings 10,000d 10,000Repayments (10,000)i (10,000)Interest (100 ) (100 )

Total financing 10,000 e (10,100 ) (100 ) Ending cash balance $15,500 $16,900 $24,000 p $24,000 x


5-18, continued

Solve in order of notation

a Beg. Cash Bal. + $55,000 = $71,500; Beg. Cash Bal. = $16,500b Materials purchases + $5,000 + $20,000 + $29,000 = $66,000; Materials

purchases = $12,000c $71,500 – $66,000 = Excess (deficiency) of cashd Cash deficiency of $9,500 requires $10,000 in borrowing, since all

borrowings are in increments of $1,000e Borrowings – Repayments – Interest = total financing; $10,000 - $0 - $0 =

$10,000f $15,500 + collections from sales = $96,000; collections from sales =

$80,500g $10,000 + $6,000 + $23,000 + $30,000h $27,000 – $15,000 = cash available (needed)i Borrowings – Repayments – Interest = Total financing

$0 – Repayments – $100 = ($10,100); Repayments = $10,000j Ending balance from November = $16,900k $16,900 + collections from sales = $120,000; collections from sales =

$103,100l Excess (deficiency) of cash – $15,000 = $9,000; Excess of cash =

$24,000m Total cash available – Total disbursements = Excess (deficiency) of cash

$120,000 – Total disbursements = $24,000; Total disbursements = $96,000

n from $15,000 equipment purchase total for quartero $14,000 + $8,000 + $22,000 + S&A Expenses + $15,000 + $5,000 =

$96,000; S&A Expenses = $32,000p Excess (deficiency) of cash – total financing; $24,000 – 0 = $24,000q $16,500 + $238,600r $20,000 + $23,000 + $22,000s $29,000 + $30,000 + $32,000t $66,000 + $69,000 + $96,000u $255,100 – $231,000v minimum cash balance of $15,000w $24,100 – $15,000x $24,100 + $10,000 – $10,000 – $100


LO: 4, Bloom: AN, Unit: 5-4, Difficulty: Moderate, Min: 20-25, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Exercise 5-19

a. The amounts reported in the footnote to the financial statements are pro-forma amounts. They represent the amounts “as if” the purchase had been made before the beginning of the fiscal year.

b. Perry Ellis reported the pro-forma amounts to provide users of the financial statements with information that would assist in interpreting the company’s operating results and making decisions about the company’s future prospects.

LO: 5, Bloom: C, AN, AP, Unit: 5-5, Difficulty: Difficult, Min: 10, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting


SOLUTIONS TO PROBLEMS

Problem 5-20a.

1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Annual Acoustic: Budgeted units sold 400 500 300 600 1,800 Budgeted sales price

× $ 1,260 × $ 1,260 × $ 1,260 × $ 1,260 × $ 1,260

Budgeted revenue $504,000 $630,000 $378,000 $756,000 $2,268,000Electric: Budgeted units sold 200 80 100 120 Budgeted sales price

× $ 2,530 × $ 2,530 × $ 2,530 × $ 2,530 × $ 2,530

Budgeted revenue $506,000 $202,400 $253,000 $303,600 $1,265,000Total revenue $1,010,000 $832,400 $631,000 $1,059,600 $3,533,000

b.1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter

Budgeted unit sales 400 500 300 600+ Budgeted ending inventorya 100 60 120 90 = Total units required 500 560 420 690- Beginning inventory 60 100 60 120= Budgeted production 440 460 360 570

aBudgeted ending inventory for the 1st quarter is 20% of the following quarter’s sales based on the statement that the desired ending inventory on December 31 was 80 guitars¸ 20% of 1st quarter sales of 400 guitars. Budgeted ending inventory for the 4th quarter is 20% of 1st quarter 2013 sales of 450 acoustic guitars.5-20 continuedc.

1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Budgeted production 440 460 360 570

× Standard necks per guitar × 1.2 × 1.2 × 1.2 × 1.2 = Production needs 528 552 432 684+ Budgeted ending inventory 276 216 342 300


= Total DM required (necks) 804 768 774 984- Beginning inventory 400 276 216 342 = Budgeted purchases (necks) 404 492 558 642× Standard price per neck × $60 × $60 × $60 × $60 = Budgeted purchases cost $24,240 $29,520 $33,480 $38,520

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Difficult, Min: 20-25, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Problem 5-21a.

1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter Budgeted unit sales 2,500 2,700 2,900 2,200

+ Budgeted ending inventory 540 580 440 600 = Total units required 3,040 3,280 3,340 2,800- Beginning inventory 500 540 580 440 = Budgeted production 2,540 2,740 2,760 2,360

b.1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter

Budgeted production 2,540 2,740 2,760 2,360× Standard necks per guitar × 25 × 25 × 25 × 25 = Production needs 63,500 68,500 69,000 59,000+ Budgeted ending inventory 6,850 6,900 5,900 10,000 = Total DM required (necks) 70,350 75,400 74,900 69,000- Beginning inventory 5,500 6,850 6,900 5,900 = Budgeted purchases (necks) 64,850 68,550 68,000 63,100× Standard price per neck × $5 × $5 × $5 × $5 = Budgeted purchases cost $324,250 $342,750 $340,000 $315,500


5-21 continued

c.1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter

Budgeted production 2,540 2,740 2,760 2,360× Standard DLH per unit × 12 × 12 × 12 × 12 = Total DLH required 30,480 32,880 33,120 28,320× Standard wage rate × $18 × $18 × $18 × $18 = Budgeted DL cost $548,640 $591,840 $596,160 $509,760

d.1 st Quarter 2 nd Quarter 3 rd Quarter 4 th Quarter

DLH needed 30,480 32,880 33,120 28,320- DLH availablea 30,000 30,000 30,000 30,000 = Overtime hours 480 2,880 3,120× Overtime rateb × $27 × $27 × $27 × $27 = Overtime cost $12,960 77,760 84,240 $0+ Regular hours at

$18/DLHc 540,000 540,000 540,000 540,000

= Budgeted DL cost $552,960 $617,760 $624,240 $540,000a60 employees × 500 hoursb($18 × 1.5)cbased on 30,000 DLH

LO: 3, Bloom: AP, Unit 5-3, Difficulty: Difficult, Min: 30-35, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Problem 5-22a.

September October NovemberBudgeted sales $53,000 $60,000 $48,000

× COGS percentage × .40 × .40 × .40 = Cost of goods sold 21,200 24,000 19,200+ Budgeted ending inventorya 15,600 12,480 = Total inventory required 36,800 36,480- Beginning inventoryb 13,780 15,600 = Budgeted purchases $23,020 $20,880

a65% of next month’s cost of goods soldbSeptember beginning inventory is the same as August ending inventory, 65% of September cost of goods sold.

b. 60% of September purchases: $23,020 .6 = $13,81240% of October purchases: $20,880 .4 = 8,352

$22,164LO: 3,4, Bloom: AP, Unit 5-3,5-4, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Problem 5-23a.

April May June Total Cash Receipts

BadDebts

March sales $580,000 32% $185,600 $185,600April sales $625,000 50%

98%

306,250 306,250

$625,000 15% 93,750 93,750 $625,000 32% $200,000 200,000 $625,000 3% $18,750May sales $560,000 50% 98%

274,400 274,400

$560,000 15% 84,000 84,000 $560,000 32% $179,200 179,200 $560,000 3% 16,800June sales $600,000 50% 98%

294,000 294,000

$600,000 15% 90,000 90,000 $600,000 3% 18,000 $600,000 32% Totals $585,600 $558,400 $563,200 $1,707,200 $53,550

b. April: $625,000 50% 2% = $6,250May: $560,000 50% 2% = 5,600June: $600,000 50% 2% = 6,000

$17,850

5-23 continued

c. Conradt may have offered the discount to customers because competitors were doing the same thing, or it could be that the company needed to accelerate its cash flows to be able to pay its bills on time.

LO: 4, Bloom: AP, AN, Unit 5-4, Difficulty: Moderate, Min: 30-35, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Problem 5-24a.

April May June Total Cash Receipts

Accounts Receivable

February sales $1,000,000 40% $400,000 $400,000March sales $900,000 60% 540,000 540,000 $900,000 40% $360,000 360,000April sales $1,150,000 60% 690,000 690,000 $1,150,000 40% $460,000 460,000May sales $1,250,000 60% 750,000 750,000 $1,250,000 40% $500,000Totals $940,000 $1,050,000 $1,210,000 $3,200,000 $500,000


5-24 continuedb.

April May June Total

Purchases April COGS $1,150,000 40% 30%

$138,000 $138,000

May COGS $1,250,000 40% 70%

350,000 350,000

$1,250,000 40% 30%

$150,000 150,000

June COGS $1,400,000 40% 70%

392,000 392,000

$1,400,000 40% 30%

$168,000 168,000

July COGS $1,500,000 40% 70%

$420,000 $420,000

Totals $488,000 $542,000 $588,000 $1,618,000


5-24 continuedc.

April May June Total Cash Payments

Accounts Payable

March purchases $430,000a 25% $107,500 $107,500April purchases $488,000 75% 366,000 366,000 $488,000 25% $122,000 122,000May purchases $542,000 75% 406,500 406,500 $542,000 25% $135,500 135,500June purchases $588,000 75% 441,000 441,000 $588,000 25% $147,000Totals $473,500 $528,500 $576,500 $1,578,500 $147,000

a30% of March COGS + 70% of April COGS = ($900,000 40% 30%) + ($1,150,000 40% 70%)


5-24 continuedd.

April May June Beginning cash balance $50,000 $50,500 $50,080Collections from sales 940,000 1,050,000 1,210,000 Total cash available to spend 990,000 1,100,500 1,260,080 Less disbursements

Payments for inventory 473,500 528,500 576,500Wages 345,000 375,000 420,000Salaries 27,000 27,000 27,000Advertising 31,000 31,000 31,000Property taxes 34,000Insurance 16,000 16,000 16,000Utilities 15,000 15,000 15,000Income taxes 128,000

Total cash disbursements 1,035,500 992,500 1,119,500 Cash excess (deficiency) (45,500) 108,000 140,580Minimum cash balance 50,000 50,000 50,000 Cash excess (needed) (95,500 ) 58,000 90,580 Financing:

Borrowings 96,000Repayments (56,000)b (40,000)Interest (1,920 ) a (400 ) c

Total financing 96,000 (57,920 ) (40,400 ) Ending cash balance $50,500 $50,080 $100,180

a$96,000 12% = $1,920b$58,000 – 1,920 = $56,080 → $56,000c($96,000 - $56,000) 12% = $400



SOLUTIONS TO CASES

Case 5-25

a. Any time standards are changed, there is potential for negative employee behavior. Among the possible negative behaviors that might occur are:

Employees may view the new standards as unreasonable. Employees may believe that top management is imposing new

stricter standards, possibly as a punitive action. Employees may view the new standards as unattainable;

therefore, they are not motivated to work to achieve the standards.

Employees may deliberately slow down in retaliation of the newly imposed standards.

b. Negative behaviors may be mitigated if Kate will:

clearly communicate her reasons for changing the standards to the employees.

explain what is expected from the employees under the new standards.

revise the performance evaluation system to reflect the new standards.

actively promote the new standards to employees to obtain their commitment.

c. Tightening the standards may result in positive behaviors by:

motivating employees to meet the challenge in attaining the tighter standards.

providing an incentive to attain excellence. encouraging employees to form groups and use teamwork to

meet the tighter standards. encouraging employees to be creative. promoting continuous improvement.


d. The employees who will be affected by the new standards should be involved in setting those standards. These are the employees who will be affected and evaluated by the new standards. Allowing them input in the standard setting process will promote commitment to achieving the standards, foster a sense of ownership and enhance the perception that the standards are fair.

LO: 2, Bloom: E, AN, Unit: 5-2, Difficulty: Difficult, Min: 20-25, AACSB: Ethics, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Applications


Case 5-26

a. Sales Budget April May June Quarter

Budgeted units sold 20,000 50,000 30,000 100,000Budgeted sales price × $ 10 × $ 10 × $ 10 × $ 10 Budgeted sales revenue $200,000 $500,000 $300,000 $1,000,000

Selling and Administrative Expense Budget

April May June Quarter Depreciationa $10,000 $10,000 $10,800 $30,800Sales personnel compensationb 35,000 50,000 40,000 125,000Advertising 1,000 1,000 1,000 3,000Management salaries 10,000 10,000 10,000 30,000Miscellaneous 500 500 500 1,500Bad debtsc 10,000 25,000 15,000 50,000 Total budgeted expenses $66,500 $96,500 $77,300 $240,300Less non-cash expenses Depreciation $10,000 $10,000 $10,800 $30,800 Bad debts 10,000 25,000 15,000 50,000 Total cash costs $46,500 $61,500 $51,500 $159,500

a$10,000 per month for April and May. Add $800 for Juneb$25,000 + (.05 × sales revenue)C$0.50 × units sold


5-26, continued

Production Budget April May June Quarter July

Budgeted unit sales 20,000 50,000 30,000 100,000 25,000+ Budgeted ending inventorya 10,000 6,000 5,000 5,000 3,000 = Total units required 30,000 56,000 35,000 105,000 28,000- Beginning inventory 4,000 10,000 6,000 4,000 5,000 = Budgeted production 26,000 46,000 29,000 101,000 23,000

a Budgeted ending inventory is equal to 20% of the following month’s unit sales10,000 = 50,000 × 20% 6,000 = 30,000 × 20% 5,000 = 25,000 × 20% 3,000 = 15,000 × 20%


5-26, continued

Materials Purchases Budget April May June Quarter July

Budgeted production 26,000 46,000 29,000 101,000 23,000× Standard pounds per unit 5 5 5 5 5 = Production needs 130,000 230,000 145,000 505,000 115,000+ Budgeted ending inventory

(pounds)a 23,000 14,500 11,500 11,500

= Total pounds required 153,000 244,500 156,500 516,500- Beginning inventory 13,000 23,000 14,500 13,000 = Budgeted purchases (pounds) 140,000 221,500 142,000 503,500× Standard price per pound $0 .40 $0 .40 $0 .40 $0 .40 = Budgeted purchases cost $56,000 $88,600 $56,800 $201,400

a Budgeted ending inventory is equal to 10% of the following month’s production needs23,000 = 230,000 × 10%14,500 = 145,000 × 10%11,500 = 115,000 × 10%


5-26, continued

Direct Labor Budget

April May June Quarter Budgeted production 26,000 46,000 29,000 101,000

× Standard DLH per unit 0 .25 0 .25 0 .25 0 .25 = Total direct labor hours required 6,500 11,500 7,250 25,250× Standard wage rate $10 $10 $10 $10 = Budgeted direct labor cost $65,000 $115,000 $72,500 $252,500

Manufacturing Overhead Budget


× Variable overhead per unit 0 .50 0 .50 0 .50 0 .50 = Total variable overhead 13,000 23,000 14,500 50,500+ Fixed overhead 50,000 50,000 50,000 150,000

Total budgeted manufacturing overhead 63,000 73,000 64,500 200,500Less: Non-cash items Depreciation 8,000 8,000 8,000 24,000

= Total cash costs $55,000 $65,000 $56,500 $176,500


5-26, continued

Ending Inventory and Cost of Goods Sold Budget

Raw Materials Beginning balance $5,200 Purchases of raw materials 201,400 Less: Ending raw materials inventory (11,500 lbs. $0.40)

4,600

Raw materials used $202,000

Finished Goods Unit costs: Direct materials ($0.40/lb. × 5 lbs.) $2 Direct labor ($10/DLH × .25 DLH) 2

Overhead 2

Total standard unit cost 6 × Ending inventory units 5,000 Ending finished goods inventory $32,500

Cost of Goods Sold Beginning work in process inventory $ 0 Direct materials used 202,000 Direct labor 252,500 Manufacturing overhead 200,500 Total manufacturing costs 655,000 Less: Ending work in process inventory Cost of goods manufactured 655,000 Add: Beginning finished goods inventory 26,000 Less: Ending finished goods inventory 32,500 Cost of goods sold $648,500


5-26, continued

Cash Receipts Budget

April May JuneTotal Cash Receipts Bad Debts

AccountsReceivable

March salesa

$120,000 × 25% $30,000 $30,000April sales $200,000 × 70% 140,000 140,000 $200,000 × 25% $50,000 50,000 $200,000 × 5% $10,000May sales $500,000 × 70% 350,000 350,000 $500,000 × 25% $125,000 125,000 $500,000 × 5% 25,000June sales $300,000 × 70% 210,000 210,000 $300,000 × 5% 15,000 $300,000 × 25% $75,000 Totals $170,000 $400,000 $335,000 $905,000 $50,000 $75,000

a April collections of March sales: 3/31 Accounts Receivable balance (= $30,000)


5-26, continued

Cash Payments for Materials Budget


Accounts Payable

A/P from March $12,000 $ 12,000April purchases $56,000 × 50% 28,000 28,000 $56,000 × 50% $28,000 28,000May purchases $88,600 × 50% 44,300 44,300 $88,600 × 50% $44,300 44,300June purchases $56,800 × 50% 28,400 28,400 $56,800 × 50% $28,400 Total $40,000 $72,300 $72,700 $185,000 $28,400


5-26, continued

Cash Budget April May June Quarter

Beginning cash balance $40,000 $30,500 $30,180 $40,000Collections from sales 170,000 400,000 335,000 905,000 Total cash available to spend 210,000 430,500 365,180 945,000 Less disbursements

Materials purchases 40,000 72,300 72,700 185,000Direct labor 65,000 115,000 72,500 252,500Manufacturing overhead 55,000 65,000 56,500 176,500Selling & administrative expenses

46,500 61,500 51,500 159,500

Income taxes 50,000 50,000Equipment purchase 48,000 48,000Dividends 49,000 49,000

Total cash disbursements 305,500 313,800 301,200 920,500 Cash excess (deficiency) (95,500) 116,700 63,980 24,500Minimum cash balance 30,000 30,000 30,000 30,000 Cash excess (needed) (125,500 ) 86,700 33,980 (5,500 ) Financing:

Borrowings 126,000 126,000Repaymentsb (84,000) (33,000) (117,000)Interesta (2,520 ) (420 ) (2,940 )

Total financing 126,000 (86,520 ) (33,420 ) 6,060 Ending cash balance $30,500 $30,180 $30,560 $30,560

aMay interest = $126,000 × 12% × = $2,520


June interest = ($126,000 - $84,000) × 12% × = $420bMay repayment = $86,700 - $2,520 = $84,180, rounded down to $84,000June repayment = $33,980 - $420 = $33,560, rounded down to $33,000


5-26, continued

b.Income StatementSales $1,000,000Cost of goods sold 648,500 Gross profit 351,500Selling and administrative expense 240,300 Operating income 111,200Interest expense 2,940 Income before taxes 108,260Income tax expense (30%) 32,478 Net income $75,782

c.Balance Sheet as of 6/30Cash $30,560 A/R 75,000 Finished Goods 32,500 Raw Materials Inventory 4,600 Property, Plant & Equipmenta 248,000 Less: Accumulated Depreciationb (104,800 ) Total Assets $285,860

A/P $28,400 Income Taxes Payable 32,478 Note Payablec 9,000Common Stock 52,000 Retained Earningsd 163,982 Total Liabilities and Equities $285,860

a$200,000 + $48,000b$50,000 + $30,800 + $24,000c$126,000 borrowed - $117,000 repaidd$137,200 + 75,782 - $49,000

LO: 3,4,5, Bloom: AP, Unit: 5-3,5-4,5-5, Difficulty: Difficult, Min: 50-60, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Case 5-27

a. Changes from base case in 5-26: decrease price, increase advertising, increase units sold

Affected budget components All budgets affectedNet income impact Income increases by $5,544 ($81,326 – $75,782)Balance sheet impact Accounts receivable increases by $5,025 due to higher

sales. By the end of the quarter, short-term debt is $2,000 less, though more cash had to be borrowed in April. Increased initial borrowing caused interest expense to be higher. Taxes payable and retained earnings are higher due to increased net income.

Recommendation A 7% increase in net income is a good result. Before Klandon implements this strategy, though, she needs to conduct sensitivity analysis, reducing the number of units sold to determine the minimum increase in sales required to break even on the price change.

Sales Budget April May June Quarter

Budgeted units sold 22,000 55,000 33,000 110,000Budgeted sales price × $ 9.70 × $ 9.70 × $ 9.70 × $ 9.70 Budgeted sales revenue $213,400 $533,500 $320,100 $1,067,000


5-27a, continued


April May June Quarter Depreciation $10,000 $10,000 $10,800 $30,800Sales personnel compensation 35,670 51,675 41,005 128,350Advertising 2,000 2,000 2,000 6,000Management salaries 10,000 10,000 10,000 30,000Miscellaneous 500 500 500 1,500Bad debts 10,670 26,675 16,005 53,350 Total budgeted expenses $68,840 $100,850 $80,310 $250,000Less non-cash expenses Depreciation $10,000 $10,000 $10,800 $30,800 Bad debts 10,670 26,675 16,005 53,350 Total cash costs $48,170 $64,175 $53,505 $165,850

Production Budget April May June Quarter

Budgeted unit sales 22,000 55,000 33,000 110,000+ Budgeted ending inventory 11,000 6,600 5,500 5,500 = Total units required 33,000 61,600 38,500 115,500- Beginning inventory 4,000 11,000 6,600 4,000 = Budgeted production 29,000 50,600 31,900 111,500


5-27a, continued

Materials Purchases Budget April May June Quarter

Budgeted production 29,000 50,600 31,900 111,500× Standard pounds per unit 5 5 5 5 = Production needs 145,000 253,000 159,500 557,500+ Budgeted ending inventory (pounds) 25,300 15,950 12,650 12,650 = Total pounds required 170,300 268,950 172,150 570,150- Beginning inventory 13,000 25,300 15,950 13,000 = Budgeted purchases (pounds) 157,300 243,650 156,200 557,150× Standard price per pound $0 .40 $0 .40 $0 .40 $0 .40 = Budgeted purchases cost $62,920 $97,460 $62,480 $222,860

Direct Labor Budget


× Standard DLH per unit 0 .25 0 .25 0 .25 0 .25 = Total direct labor hours required 7,250 12,650 7,975 27,875× Standard wage rate $10 $10 $10 $10 = Budgeted direct labor cost $72,500 $126,500 $79,750 $278,750


5-27a, continued

Manufacturing Overhead Budget


× Variable overhead per unit 0 .50 0 .50 0 .50 0 .50 = Total variable overhead 14,500 25,300 15,950 55,750+ Fixed overhead 50,000 50,000 50,000 150,000

Total budgeted manufacturing overhead 64,500 75,300 65,950 205,750Less: Non-cash items Depreciation 8,000 8,000 8,000 24,000

= Total cash costs $56,500 $67,300 $57,950 $181,750


5-27a, continued



5,060


Finished Goods Unit costs: Direct materials ($0.40/lb. × 5 lbs.) $2 Direct labor ($10/DLH × .25 DLH)

Overhead

Total standard unit cost × Ending inventory units 5,500 Ending finished goods inventory $35,750



5-27a, continued



Cash Receipts Bad DebtsAccounts

ReceivableMarch A/R $30,000 $30,000April sales 149,380 $53,350 202,730 $10,670May sales 373,450 $133,375 506,825 26,675June sales 224,070 224,070 16,005 $80,025 Totals $179,380 $426,800 $357,445 $963,625 $53,350 $80,025



Accounts Payable

A/P from March $12,000 $ 12,000April purchases 31,460 31,460 62,920May purchases 48,730 $48,730 97,460June purchases 31,240 31,240 $31,240 Total $43,460 $80,190 $79,970 $203,620 $31,240


5-27a, continued

Cash Budget

April May June Quarter Beginning cash balance $40,000 $30,750 $30,765 $40,000Collections from sales 179,380 426,800 357,445 963,625 Total cash available to spend 219,380 457,550 388,210 1,003,625 Less disbursements

Materials purchases 43,460 80,190 79,970 203,620Direct labor 72,500 126,500 79,750 278,750Manufacturing overhead 56,500 67,300 57,950 181,750Selling & administrative expenses 48,170 64,175 53,505 165,850Income taxes 50,000 50,000Equipment purchase 48,000 48,000Dividends 49,000 49,000


Borrowings 131,000 131,000Repayments (86,000) (38,000) (124,000)Interest (2,620 ) (450 ) (3,070 )



5-27a, continued

Sales $1,067,000Cost of goods sold 697,750 Gross profit 369,250Selling and administrative expense 250,000 Operating income 119,250Interest expense 3,070 Income before taxes 116,180Income tax expense (30%) 34,854 Net income $81,326

Balance Sheet as of 6/30Cash $30,585Accounts receivable 80,025Finished goods 35,750Raw materials inventory 5,060Property, plant & equipment 248,000 Less: Accumulated depreciation (104,800 ) Total Assets $294,620

Accounts payable $31,240Income taxes payable 34,854Short-term note payable 7,000Common stock 52,000 Retained earnings 169,526 Total Liabilities and Equities $294,620


5-27, continued

b. Changes from base case in 5-26: purchase lower quality rocks for $.32 per pound, requires 6 pounds per unit, maintain 15% ending raw materials inventory

Affected budget components Materials purchases budget, ending inventory & COGS budget, payments for materials budget, cash budget, pro-forma financial statements

Net income impact Income increases by $4,613 ($80,395 – $75,782), primarily driven by a decrease in COGS. Interest expense increases a slight bit, as does income tax expense.

Balance sheet impact Total assets don’t change by much. Finished goods inventory decreases because of reduced materials cost, but raw materials inventory increases since more materials needs to be held. $2,000 in additional short-term borrowing is required in April. But with the lower cash disbursements in May and June, the ending note payable balance is $4,000 lower.

Recommendation This alternative could be a good idea if Klandon can be convinced that the lower quality rocks won’t result in a lower quality finished product. It also requires a higher investment in inventory.


5-27b, continued




5-27b, continued



6,624


Finished Goods Unit costs: Direct materials ($0.32/lb. × 6 lbs.) $1 Direct labor ($10/DLH × .25 DLH) 2

Overhead 2

Total standard unit cost 6 × Ending inventory units 5,000 Ending finished goods inventory $32,100



5-27b, continued



Accounts Payable

A/P from March $12,000 $ 12,000April purchases 29,504 $29,504 59,008May purchases 41,712 $41,712 83,424June purchases 26,976 26,976 $26,976 Total $41,504 $71,216 $68,688 $181,408 $26,976


5-27b, continued

Cash Budget

April May June Quarter Beginning cash balance $40,000 $30,996 $30,720 $40,000Collections from sales 170,000 400,000 335,000 905,000 Total cash available to spend 210,000 430,996 365,720 945,000 Less disbursements






5-27b, continued


Balance Sheet as of 6/30Cash $30,102 A/R 75,000 Finished Goods 32,100 Raw Materials Inventory 6,624 Property, Plant & Equipment 248,000 Less: Accumulated Depreciation (104,800 ) Total Assets $287,026

A/P $26,976 Income Taxes Payable 34,455 Note Payable 5,000Common Stock 52,000 Retained Earnings 168,595 Total Liabilities and Equities $287,026


5-27, continued

c. Changes from base case in 5-26: purchase higher quality rocks for $.50 per pound; requires 4 pounds per unit; maintain 8% ending raw materials inventory

Affected budget components Materials purchases budget, ending inventory & COGS budget, payments for materials budget, cash budget, pro-forma financial statements

Net income impact Income increases by $959 ($76,741 – $75,782); COGS and interest expense both decrease by a small amount

Balance sheet impact Total assets changes by very little, and only by the decrease in raw materials inventory. $2,000 less short-term debt is borrowed in April and in total, as cash disbursements are lower for the quarter.

Recommendation A $959 dollar difference in expected income may not be enough to risk trying this strategy. While the cost of the rocks is certain, the amount of rocks needed per unit may not be as low as expected. A slight deviation from budgeted results could leave Klandon worse off than if the change had not been made.


5-27c, continued




5-27c, continued


Raw Materials Beginning balance $5,200 Purchases of raw materials 199,180 Less: Ending raw materials inventory (7,360 lbs. $0.50) Raw materials used $200,700

Finished Goods Unit costs: Direct materials ($0.40/lb. × 5 lbs.) Direct labor ($10/DLH × .25 DLH)

Overhead

Total standard unit cost × Ending inventory units Ending finished goods inventory $32,500



5-27c, continued



Accounts Payable

A/P from March $12,000 $ 12,000April purchases 26,430 26,430 52,860May purchases 44,640 44,640 89,280June purchases 28,520 28,520 $28,520 Total $38,430 $71,070 $73,160 $182,660 $28,520


5-27c, continued

Cash Budget







5-27c, continued



A/P $28,520 Income Taxes Payable 32,889 Note Payable 7,000Common Stock 52,000 Retained Earnings 164,941 Total Liabilities and Equities $285,350


5-27, continued

d. Changes from base case in 5-26: Sales price increased to $10.20; 2% cash discount; cash collection pattern changed

Affected budget components sales budget, selling and administrative expense budget, cash receipts budget, cash budget, pro-forma financial statements

Net income impact Income increases by $2,604 ($78,386 – $75,782) due to increase in net sales and decrease in interest expense.

Balance sheet impact Cash increased by almost $40,000 due to decrease in accounts receivable. By the end of the quarter, no short-term payable is outstanding.

Recommendation While this strategy has a good result, Klandon has made no prediction about the change in unit sales. Customers may not respond favorably to the change, and if it is easy to switch to another vendor, Klandon may lose sales. She needs to investigate what her competitors are doing and have her sales reps visit with customers before implementing this strategy.

Sales Budget April May June Quarter

Budgeted units sold 20,000 50,000 30,000 100,000Budgeted sales price × $ 10.20 × $ 10.20 × $ 10.20 × $ 10.20 Budgeted sales revenue $204,000 $510,000 $306,000 $1,020,000


5-27d, continued


April May June Quarter Depreciation $10,000 $10,000 $10,800 $30,800Sales personnel compensation 35,200 50,500 40,300 126,000Advertising 1,000 1,000 1,000 3,000Management salaries 10,000 10,000 10,000 30,000Miscellaneous 500 500 500 1,500Bad debts 10,200 25,500 15,300 51,000 Total budgeted expenses $66,900 $97,500 $77,900 $242,300Less non-cash expenses Depreciation $10,000 $10,000 $10,800 $30,800 Bad debts 10,200 25,500 15,300 51,000 Total cash costs $46,700 $62,000 $51,800 $160,500


5-27d, continued



Cash ReceiptsBad

DebtsAccounts

ReceivableSales

DiscountsMarch A/R $30,000 $30,000April sales Cash 149,940 149,940 $3,060a

Credit 20,400 $20,400 40,800 $10,200May sales Cash 374,850 374,850 7,650b

Credit 51,000 $51,000 102,000 25,500June sales Cash 224,910 224,910 4,590c

Credit 30,600 30,600 15,300 $30,600 Totals $200,340 $446,250 $306,510 $953,100 $51,000 $30,600 $15,300

a $204,000 × 0.75 × 0.02b $510,000 × 0.75 × 0.02c $204,000 × 0.75 × 0.02


5-27d, continued

Cash Budget



Total cash disbursements 305,700 314,300 301,500 921,500 Cash excess (deficiency) (65,360) 162,590 69,680 71,600Minimum cash balance 30,000 30,000 30,000 30,000 Cash excess (needed) (95,360 ) 132,590 39,680 41,600 Financing:

Borrowings 96,000 96,000Repayments (96,000) (96,000)Interest (1,920 ) (1,920 )

Total financing 96,000 (97,920 ) (1,920 ) Ending cash balance $30,640 $64,670 $69,680 $69,680


5-27d, continued

Sales $1,020,000Sales discounts 15,300 Net sales 1,004,700Cost of goods sold 648,500 Gross profit 356,200Selling and administrative expense 242,300 Operating income 113,900Interest expense 1,920 Income before taxes 111,980Income tax expense (30%) 33,594 Net income $78,386


A/P $28,400 Income Taxes Payable 33,594 Note Payable 0Common Stock 52,000 Retained Earnings 166,586 Total Liabilities and Equities $280,580

LO: 3,4,5, Bloom: AP, AN, Unit: 5-3,5-4,5-5, Difficulty: Difficult, Min: 60, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Case 5-28

a. Sales Budget July August September Quarter

Budgeted units sold 4,500 4,700 4,600 13,800Budgeted sales price × $225 × $225 × $225 × $225 Budgeted sales revenue $1,012,500 $1,057,500 $1,035,000 $3,105,000


July August September QuarterDepreciation $9,000 $9,000 $9,000 $27,000Rent 40,000 40,000 40,000 120,000Advertising 84,000 114,000 84,000 282,000Salaries 150,000 150,000 150,000 450,000Bad debts 40,500 42,300 41,400 124,200 Total budgeted expenses 323,500 355,300 324,400 1,003,200Less non-cash expenses Depreciation 9,000 9,000 9,000 27,000 Bad debts 40,500 42,300 41,400 124,200 Total Budgeted Cash Expenses $274,000 $304,000 $274,000 $852,000


5-28, continued

Inventory Purchases Budget July

August September Quarter October

Budgeted unit sales 4,500 4,700 4,600 13,800 4,600+ Budgeted ending inventorya 1,175 1,150 1,150 1,150 = Total materials required 5,675 5,850 5,750 14,950- Beginning inventory 1,125 1,175 1,150 1,125 = Budgeted purchases 4,550 4,675 4,600 13,825× Cost per unit

$146

$146 $146 $146

= Budgeted purchases cost $664,300 $682,550 $671,600 $2,018,450

a Budgeted ending inventory is equal to 25% of the following month’s sales needs

Ending Inventory Budget

Beginning balance $164,250 Inventory purchases 2,018,450 Less: Ending inventory (1,150 $146)

(167,900 )

Cost of goods sold $2,014,800


5-28, continued


July August SeptemberTotal

Cash Receipts Bad DebtsAccounts

ReceivableJune A/R $180,000 $180,000July sales $1,012,500 × 41%

415,125 415,125

$1,012,500 × 35%

354,375 354,375

$1,012,500 × 20%

$202,500 202,500

$1,012,500 × 4%

$40,500

August sales $1,057,500 × 41%

433,575 433,575

$1,057,500 × 35%

370,125 370,125

$1,057,500 × 20%

$211,500 211,500

$1,057,500 × 4%

42,300

September sales $1,035,000 × 41%

424,350 424,350

$1,035,000 × 35%

362,250 362,250


$1,035,000 × 4%

41,400

$1,035,000 × 20%

$207,000

Totals $949,500 $1,006,200 $998,100 $2,953,800 $124,200 $207,000


5-28, continued

Cash Payments for Inventory Budget

July August SeptemberTotal Cash Payments

Accounts Payable

June A/P $175,000 $175,000July purchases $664,300 × 70% 465,010 465,010 $664,300 × 30% $199,290 199,290August purchases $682,550 × 70% 477,785 477,785 $682,550 × 30% $204,765 204,765September purchases $671,600 × 70% 470,120 470,120 $671,600 × 30% $201,480 Totals $640,010 $677,075 $674,885 $1,991,970 $201,480


5-28, continued

Cash Budget

July August September QuarterBeginning cash balance $21,000 $20,490 $20,835 $21,000Collections from sales 949,500 1,006,200 998,100 2,953,800 Total cash available to spend 970,500 1,026,690 1,018,935 2,974,800 Less disbursements

Inventory purchases 640,010 677,075 674,885 1,991,970Selling & administrative expenses 274,000 304,000 274,000 852,000Income taxes 75,000 75,000Equipment purchase 45,000 45,000

Total disbursements 989,010 981,075 993,885 2,963,970 Cash excess (deficiency) (18,510) 45,615 25,050 10,830Minimum cash balance 20,000 20,000 20,000 20,000 Cash excess (needed) (38,510 ) 25,615 5,050 (9,170 ) Financing:

Borrowings 39,000 39,000Repaymentsb (24,000) (4,000) (28,000)Interesta (780 ) (150 ) (930 )


aAugust interest = $39,000 × 12% × = $780

September interest = ($39,000 - $24,000) × 12% × = $150bAugust repayment = $25,615 - $780 = $24,835, rounded down to $24,000September repayment = $5,050 - $150 = $4,900, rounded down to $4,000


5-28, continued

b.

Sales $3,105,000Cost of goods sold 2,014,800Gross profit 1,090,200Selling and administrative expense 1,003,200Operating income 87,000Interest expense 930 Income before taxes 86,070Income tax expense (30%) 25,821 Net income $60,249

c.Balance Sheet as of 9/30Cash $20,900A/R 207,000Inventory 167,900Property, Plant & Equipmenta 585,000Less: Accumulated Depreciationb (162,000 ) Total Assets $818,800

A/P $201,480Income Taxes Payable 25,821Note Payablec 11,000Common Stock 300,000Retained Earningsd 280,499 Total Liabilities and Equities $818,800

a$540,000 + $45,000b$135,000 + $27,000c$39,000 borrowed - $28,000 repaidd$220,250 + $60,249

LO: 3,4,5, Bloom: AP, Unit: 5-3,5-4,5-5, Difficulty: Difficult, Min: 50-60, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Budget Preparation


Case 5-29

a. Green cares about the budgeted net income because if the actual results exceed the budgeted net income, he will be eligible for bonus compensation. By budgeting a higher than expected increase in expenses, it is more likely that actual net income will exceed the budgeted amount.

b. There is no indication that Mayfield expects that budgetary padding is occurring. If she doesn’t expect this behavior is occurring, she will likely be surprised and disappointed to learn that her employees are taking such action.

c. Duvall has little to gain from his actions. One possible benefit to him is not having to endure the retaliation that Green apparently delivers on those who do not follow his directives. Remaining in Green’s good graces may also benefit Duvall indirectly when his wife opens a new franchised store in the region in 2012.

Duvall has much to lose from his actions. Falsifying information is a serious compromise of personal integrity. Repeating this action will be easier the next time he is asked by Green to alter information, and could spiral into larger, more serious manipulations and falsifications. If discovered, Duvall could lose not only his job, but the chance for future employment in the accounting field as well.

d. As a certified management accountant, Duvall is bound to abide by the IMA’s Statement of Ethical Professional Practice. Based on his actions, he has violated the Statement’s standards. By providing knowingly false information in the budget, Duvall violated the competence standard, which requires that information is accurate. He violated the integrity standard by carrying out activities that might discredit the accounting profession. Finally, he violated the credibility standard by not disclosing all relevant information.

LO:1,3,4,5 Bloom: E, AN, Unit: 5-1,5-3,5-4,5-5, Difficulty: Difficult, Min: 30-35, AACSB: Ethics, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Applications

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