costacctg13_sm_ch06

costacctg13_sm_ch06 - CHAPTER 6 MASTER BUDGET AND...

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Unformatted text preview: CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6­1 a. b. c. d. The budget ing cycle includes the fo llowing eleme nts: Planning the performance of the co mpany as a whole as well as planning the performance of its subunit s. Management agrees on what is expected. Providing a frame of reference, a set of specific expectations against which actual result s can be co mpared. Invest igat ing variat ions from plans. If necessary, corrective action fo llows invest igat ion. Planning again, in light of feedback and changed condit ions. 6­2 The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the init ial plan of what the company intends to accomplish in the period. 6­3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organizat ion matches it s own capabilit ies with the opportunit ies in the marketplace to accomplish its object ives. Strategic analysis underlies both lo ng­run and short­run planning. In turn, these plans lead to the formulat ion o f budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans. 6­4 We agree that budgeted performance is a better criterion than past performance for judging managers, because inefficiencies included in past results can be detected and eliminated in budget ing. Also, future condit ions may be expected to differ fro m the past, and these can also be factored into budgets. 6­5 Production and market ing tradit ionally have operated as relat ively independent business funct ions. Budgets can assist in reducing conflic ts between these two funct ions in two ways. Consider a beverage co mpany such as Coca­Cola or Pepsi­Co la: · Communicat ion. Market ing could share infor mation about seasonal demand wit h production. · Coordinat ion. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer. 6­6 In many organizat ions, budgets impel managers to plan. Wit hout budgets, managers drift fro m crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost­benefit test. 6­7 A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four­quarter rolling budget for 2009 is superseded by a four­quarter rolling budget for April 2009 to March 2010, and so on. 6­1 6­8 The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget 2. Prepare the production budget (in unit s) 3. Prepare the direct material usage budget and direct material purchases budget 4. Prepare the direct manufacturing labor budget 5. Prepare the manufacturing overhead budget 6. Prepare the ending inventories budget 7. Prepare the cost of goods sold budget 8. Prepare the nonmanufacturing costs budget 9. Prepare the budgeted income statement 6­9 The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level o f sales. 6­10 Sensit ivit y analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change wit h changes in the underlying assumptions. This assists managers in monitoring those assumpt ions that are most crit ical to a company in attaining its budget and allows them to make t imely adjustments to plans when appropriate. 6­11 Kaizen budgeting explicit ly incorporates continuous improvement ant icipated during the budget period into the budget numbers. 6­12 Nonoutput­based cost drivers can be incorporated into budgeting by the use o f act ivit y­ based budget ing (ABB). ABB focuses on the budgeted cost of act ivit ies necessary to produce and sell products and services. Nonoutput­based cost drivers, such as the number of part numbers, number of batches, and number of new products can be used with ABB. 6­13 The cho ice o f the t ype o f responsibilit y center determines what the manager is accountable for and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or invest ments. The cho ice o f a responsibilit y center type guides the variables to be included in the budget ing exercise. 6­14 Budgeting in mult inat ional co mpanies may invo lve budget ing in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareho lders, by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates, and where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuat ions. In developing budgets for operations in different countries, they must also have good understanding of po lit ical, legal and economic issues in those countries. 6­15 No. Cash budgets and operating inco me budgets must be prepared simultaneously. In preparing their operating inco me budgets, companies want to avo id unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating inco me budget, highlights periods of idle cash and periods o f cash shortage, and it allows the accountant to plan cost effect ive ways o f eit her using excess cash or raising cash fro m outside to achieve the co mpany’s operating inco me goals. 6­2 6­16 (15 min.) Sales budget, service setting. 1. McGrath & Sons Radon Tests Lead Tests 2009 At 2009 Volume Selling Prices 11,000 $250 15,200 $200 Expected 2010 Change in Volume +5% ­10% Expected 2010 Volume 11,550 13,680 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Selling Price $250 $200 Units Sold 11,550 13,680 Total Revenues $2,887,500 2,736,000 $5,623,500 Radon Tests Lead Tests 2. McGrath & Sons Radon Tests Lead Tests Expected 2010 Expected 2010 2009 Planned 2010 Change in Volume Selling Prices Volume Volume 11,000 $250 +5% 11,550 15,200 $190 ­5% 14,440 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Selling Price Units Sold $250 11,550 $190 14,440 Total Revenues $2,887,500 2,743,600 $5,631,100 Radon Tests Lead Tests Expected revenues at the new 2010 prices are $5,631,100, which are greater than the expected 2010 revenues of $5,623,500 if the prices are unchanged. So, if the goal is to maximize sales revenue and if Jim McGrath’s forecasts are reliable, the company should lower its price for a lead test in 2010. 6­3 6­17 (5 min.) Sales and production budget. 200,000 25,000 225,000 15,000 210,000 Budgeted sales in units Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 6­18 (5 min.) Direct materials purchases budget. Direct materials to be used in production (bottles) Add target ending direct materials inventory (bottles) Total requirements (bottles) Deduct beginning direct materials inventory (bottles) Direct materials to be purchased (bottles) 6­19 (10 min.) Budgeting material purchases. Production Budget: 2,500,000 80,000 2,580,000 50,000 2,530,000 Budgeted sales Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct Materials Purchases Budget: Finished Goods (units) 45,000 18,000 63,000 16,000 47,000 Direct materials needed for production (47,000 ´ 3) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased Direct Materials (in gallons) 141,000 50,000 191,000 60,000 131,000 6­4 6­20 (30 min.) Revenues and production budget. 1. Selling Price $0.25 1.50 Units Sold a 4,800,000 b 1,200,000 Total Revenues $1,200,000 1,800,000 $3,000,000 12­ounce bottles 4­gallo n units a b 400,000 × 12 months = 4,800,000 100,000 × 12 months = 1,200,000 2. Budgeted unit sales (12­ounce bottles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 4,800,000 600,000 5,400,000 900,000 4,500,000 3. Beginning = Budgeted + Target - Budgeted inventory sales ending inventory production = 1,200,000 + 200,000 - 1,300,000 = 100,000 4­gallo n units 6­21 (30 min.) Budgeting: direct material usage, manufacturing cost and gross margin. 1. Direct Material Usage Budget in Quantity and Dollars Material Wool Physical Units Budget Direct materials required for Blue Rugs (100,000 rugs × 30 skeins and 0.5 gal.) 3,000,0000 skeins Cost Budget Available fro m beginning direct materials inventory (under a FIFO cost­flow assumpt ion) Wool: 349,000 skeins $ 715,450 Dye: 5,000 gallo ns To be purchased this period Wool: (3,000,000 ­ 349,000) skeins × $2 per skein 5,302,000 Dye: (50,000 – 5,000) gal. × $5 per gal. _________ Direct materials to be used this period: (a) + (b) $6,017,450 Dye Total 50,000 gal. $ 24,850 225,000 $ 249,850 $6,267,300 6­5 2. Weaving budgeted = $18, 852, 000 = $3.3664 per DMLH overhead rate 5, 600, 000 DMLH Dyeing budgeted = $12, 809, 000 = $28.4644 per MH overhead rate 450, 000 MH 3. Budgeted Unit Cost of Blue Rug Input per Unit of Output 30 skeins 0.5 gal. 56 hrs. 1 4.5 mach­hrs. 56 DMLH Wool Dye Direct manufacturing labor Dyeing overhead Weaving overhead Total 1 Cost per Unit of Input $2 5 15 28.4644 3.3664 Total $ 60.00 2.50 840.00 128.09 188.52 $1219.11 0.15 machine hour per skein ´ 30 skeins per rug = 4.5 machine­hrs. per rug. 4. Revenue Budget Selling Units Price Total Revenues Blue Rugs 100,000 $2,000 $200,000,000 Blue Rugs 95,000 $2,000 $190,000,000 5a. Sales = 100,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory Cost of goods sold $ $ 6,267,300 84,000,000 12,809,000 18,852,000 Total 0 121,928,300 121,928,300 0 $121,928,300 6­6 5b. Sales = 95,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory ($1,219.11 × 5,000) Cost of goods sold 6. Revenue Less: Cost of goods sold Gross margin 100,000 rugs sold $200,000,000 121,928,300 $ 78,071,700 95,000 rugs sold $190,000,000 115,832,750 $ 74,167,250 $ 6,267,300 84,000,000 12,809,000 18,852,000 121,928,300 121,928,300 6,095,550 $115,832,750 Total $ 0 6­22 (15–20 min.) Revenues, production, and purchases budget. 1. 2. 900,000 motorcycles ´ 400,000 yen = 360,000,000,000 yen Budgeted sales (motorcycles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct materials to be used in production, 880,000 × 2 (wheels) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased (wheels) Cost per wheel in yen Direct materials purchase cost in yen 900,000 80,000 980,000 100,000 880,000 3. 1,760,000 60,000 1,820,000 50,000 1,770,000 16,000 28,320,000,000 Note the relat ively small inventory o f wheels. In Japan, suppliers tend to be located very close to the major manufacturer. Inventories are controlled by just­in­t ime and similar systems. Indeed, some direct materials inventories are almo st nonexistent. 6­7 6­23 (15­25 min.) Budgets for production and direct manufacturing labor. Roletter Company Budget for Production and Direct Manufacturing Labor for the Quarter Ended March 31, 2010 January 10,000 February 12,000 12,500 24,500 16,000 8,500 × 2.0 17,000 March 8,000 13,500 21,500 12,500 9,000 ´ 1.5 13,500 50,500 Quarter 30,000 13,500 43,500 16,000 27,500 Budgeted sales (unit s) Add target ending finished goods a inventory (units) 16,000 Total requirements (units) 26,000 Deduct beginning finished goods inventory (units) 16,000 Units to be produced 10,000 Direct manufacturing labor­hours (DMLH) per unit × 2.0 Total hours of direct manufacturing labor time needed 20,000 Direct manufacturing labor costs: Wages ($10.00 per DMLH) $200,000 Pensio n contribut ions ($0.50 per DMLH) 10,000 Workers’ compensat ion insurance ($0.15 per DMLH) 3,000 Emplo yee medical insurance ($0.40 per DMLH) 8,000 Social Securit y tax (emplo yer’s share) ($10.00 ´ 0.075 = $0.75 per DMLH) 15,000 Total direct manufacturing labor costs $236,000 a $170,000 $135,000 $505,000 8,500 2,550 6,800 12,750 6,750 2,025 5,400 10,125 25,250 7,575 20,200 37,875 $200,600 $159,300 $595,900 100% of the first following month’s sales plus 50% of the second following month’s sales. Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from employees’ wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not additional costs to the employer. 6­8 6­24 (20–30 min.) Activity­based budgeting. 1. This quest ion links to the ABC example used in the Problem for Self­Study in Chapter 5 and to Question 5­23 (ABC, retail product­line profitabilit y). Activity Ordering $90 ´ 14; 24; 14 Deliver y $82 ´ 12; 62; 19 Shelf­stocking $21 ´ 16; 172; 94 Customer support $0.18 ´ 4,600; 34,200; 10,750 Total budgeted indirect costs Percentage of total indirect costs (subject to rounding) Cost Hierarchy Batch­level Batch­level Output­unit­ level Output­unit­ level Soft Drinks $1,260 984 336 828 $3,408 13% Fresh Produce $ 2,160 5,084 3,612 6,156 $17,012 63% Packaged Food $1,260 1,558 1,974 1,935 $6,727 25% Total $ 4,680 7,626 5,922 8,919 $27,147 2. Refer to the last row of the table in requirement 1. Fresh produce, which probably represents the smallest portion o f COGS, is the product category that consumes the largest share (63%) of the indirect resources. Fresh produce demands the highest level of ordering, delivery, shelf­stocking and customer support resources of all three product categories—it has to be ordered, delivered and stocked in small, perishable batches, and supermarket customers o ften ask for a lot of guidance on fresh produce items. 3. An ABB approach recognizes how different products require different mixes of support activit ies. The relative percentage of how each product area uses the cost driver at each activit y area is: Cost Hierarchy Batch­level Batch­level Output­unit­level Output­unit­level Soft Fresh Packaged Drinks Produce Food 27% 46% 27% 13 67 20 6 61 33 9 69 22 Activity Ordering Delivery Shelf­stocking Customer support Total 100% 100 100 100 By recognizing these differences, FS managers are better able to budget for different unit sales levels and different mixes of individual product­line items sold. Using a single cost driver (such as COGS) assumes ho mogeneit y in the use of indirect costs (support activit ies) across product lines which does not occur at FS. Other benefits cited by managers include: (1) better ident ificat ion of resource needs, (2) clearer linking of costs with staff responsibilit ies, and (3) ident ificat ion of budgetary slack. 6­9 6­25 (20–30 min.) Kaizen approach to activity­based budgeting (continuation of 6­24). 1. Activity Ordering Delivery Shelf­stocking Customer support Cost Hierarchy Batch­level Batch­level Output­unit­level Output­unit­level Budgeted Cost­Driver Rates January February March $90.00 $89.82000 $89.64 82.00 81.83600 81.67 21.00 20.95800 20.92 0.18 0.17964 0.179 The March 2008 rates can be used to compute the total budgeted cost for each activit y area in March 2008: Activity Ordering $89.64 ´ 14; 24; 14 Delivery $81.67 ´ 12; 62; 19 Shelf­stocking $20.92 ´ 16; 172; 94 Customer support $0.179 ´ 4,600; 34,200; 10,750 Total Cost Hierarchy Batch­level Batch­level Output­unit­level Soft Drinks Fresh Packaged Produce Food $1,255 1,552 1,966 Total $ 4,661 7,596 5,899 $1,255 $ 2,151 980 335 5,064 3,598 Output­unit­level 823 6,122 $3,393 $16,935 1,924 $6,697 8,869 $27,025 2. A kaizen budget ing approach signals management’s co mmit ment to systematic cost reduction. Compare the budgeted costs fro m Questio n 6­24 and 6­25. Shelf­ Stocking $5,922 5,899 Customer Support $8,919 8,869 Quest ion 6­24 Quest ion 6­25 (Kaizen) Ordering $4,680 4,661 Delivery $7,626 7,596 The kaizen budget number will show unfavorable variances for managers whose act ivit ies do not meet the required monthly cost reductions. This likely will put more pressure on managers to creatively seek out cost reductions by working “smarter” within FS or by having “better” interact ions wit h suppliers or customers. One limitat ion of kaizen budget ing, as illustrated in this quest ion, is that it assumes small incremental improvements each mo nth. It is possible that so me cost improvements arise fro m large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discont inuous improvements as well as the small incremental improvements. 6­10 6­26 (15 min.) Responsibility and controllability. 1. (a) Salesman (b) VP of Sales Permit the salesman to offer a reasonable discount to customers, but require that he clear bigger discounts with the VP. Also, base his bonus/performance evaluat ion not just on revenues generated, but also on margins (or, abilit y to meet budget). 2. (a) VP of Sales (b) VP of Sales VP of Sales should compare budgeted sales wit h actuals, and ask for an analys is of all the sales during the quarter. Discuss wit h salespeople why so many discounts are being offered—are they really needed to close each sale. Are our prices too high (i.e., unco mpet it ive)? 3. (a) Manager, Shipping depart ment (b) Manager or Director of Operations (including shipping) Shipping department manager must report delays more regularly and request addit ional capacit y in a t imely manner. Operations manager should ask for a review of shipping capacit y ut ilizat ion, and consider expanding the department. 4. (a) HR department (b) Production supervisor The production supervisor should devise his or her own educational standards that all new plant emplo yees are held to before they are allowed to work on the plant floor. Offer remedial in­plant training to those workers who show promise. Be very specific about the types of skills required when using the HR department to hire plant workers. Test the workers periodically for required skills. 5. (a) Production supervisor (b) Production supervisor Get feedback fro m the workers, analyze it, and act on it. Get extra coaching and training fro m experienced mentors. 6. (a) Maintenance department (b) Production supervisor First, get the requisite maintenance done on the machines. Make sure that the maintenance department head clearly understands the repercussio ns of poor maintenance. Discuss and establish maintenance standards that must be met (frequency o f maintenance and tolerance limits, for example). Test and keep a log o f the maintenance work. 6­11 6­27 (30 min.) Cash flow analysis, chapter appendix. 1. The cash that TabComp, Inc., can expect to collect during April 2006 is calculated below. April cash receipts: April cash sales ($400,000 ´ .25) April credit card sales ($400,000 ´ .30 ´ .96) Collect ions on account: March ($480,000 ´ .45 ´ .70) February ($500,000 ´ .45 ´ .28) January (unco llect ible­not relevant) Total collect ions $100,000 115,200 151,200 63,000 0 $429,400 2. (a) The projected number of the MZB­33 computer hardware units that TabComp, Inc., will order on January 25, 2006, is calculated as fo llows. MZB­33 Units 110 27 137 33 104 March sales a Plus: Ending inventory Total needed b Less: Beginning inventory Projected purchases in unit s a 0.30 ´ 90 unit sales in April 0.30 ´ 110 unit sales in March b (b) Selling price = $2,025,000 ¸ 675 units, or for March, $330,000 ¸110 units = $3,000 per unit $ 1,800 Purchase price per unit, 60% ´ $3,000 Projected unit purchases x 104 $187,200 Total MZB­33 purchases, $1,800 ´ 104 3. Monthly cash budgets are prepared by companies such as TabCo mp, Inc., in order to plan for their cash needs. This means identifying when both excess cash and cash shortages ma y occur. A company needs to know when cash shortages will occur so that prior arrangements ca n be made with lending inst itutions in order to have cash available for borrowing when the company needs it. At the same t ime, a co mpany should be aware o f when there is excess cash available for invest ment or for repaying loans. 6­12 6­28 (40 min.) Budget schedules for a manufacturer. 1a. Revenues Budget Units sold Selling price Budgeted r evenues Executive Line 740 $ 1,020 $754,800 Chairman Line 390 $ 1,600 $624,000 Total $1,378,800 b. Production Budget in Unit s Budgeted unit sales Add budgeted ending fin. goods inventory Total requir ements Deduct beginning fin. goods. inventory Budgeted production Executive Line 740 30 770 20 750 Chairman Line 390 15 405 5 400 c. Direct Materials Usage Budget (units) Oak Executive Line: 1. Budgeted input per f.g. unit 2. Budgeted production 3. Budgeted usage (1 × 2) Chairma n Line: 4. Budgeted input per f.g. unit 5. Budgeted production 6. Budgeted usage (4 × 5) 7. Total direct materials usage (3 + 6) Direct Materials Cost Budget 8. Beginning inventory 9. Unit price (FIFO) 10. Cost of DM used from beginning inventory (8 × 9) 11. Materials to be used from purchases (7 – 8) 12. Cost of DM in March 13. Cost of DM purchased and used in March (11 × 12) 14. Direct materials to be used (10 + 13) 16 750 12,000 Red Oak – – – Oak Legs 4 750 3,000 Red Oak Legs – – – Total – – – 12,000 25 400 10,000 10,000 – – – 3,000 4 400 1,600 1,600 320 $18 $5,760 11,680 $20 $233,600 $239,360 150 $23 $3,450 9,850 $25 $246,250 $249,700 100 $11 $1,100 2,900 $12 $34,800 $35,900 40 $17 $680 1,560 $18 $28,080 $542,730 $28,760 $553,720 $10,990 6­13 Direct Materials Purchases Budget Oak Budgeted usage (from line 7) Add target ending inventory Total requir ements Deduct beginning inventory Total DM purchases Purchase price (March) Total purchases 12,000 192 12,192 320 11,872 $20 $237,440 Red Oak 10,000 200 10,200 150 10,050 $25 $251,250 Oak Legs 3,000 80 3,080 100 2,980 $12 $35,760 Red Oak Legs Total 1,600 44 1,644 40 1,604 $18 ________ $28,872 $553,322 d. Direct Manufacturing Labor Budget Direct Output Manuf. Labor­ Units Hours per Produced Output Unit 750 3 400 5 Total Hours 2,250 2,000 4,250 Hourly Rate $30 $30 Executive Line Chairma n Line Total $ 67,500 60,000 $127,500 e. Manufacturing Overhead Budget Variable manufacturing overhead costs (4,250 × $35) Fixed manufacturing overhead costs Total manufacturing overhead costs $191,250 Total manuf. overhead cost per hour = = 4,250 $42,500 Fixed manuf. overhead cost per hour = = 4,250 $148,750 42,500 $191,250 $45 per direct manufacturing labor­hour $10 per direct manufacturing labor­hour f. Computation of unit costs of ending inventory of finished goods Executive Chairman Line Line Direct materials Oak top ($20 × 16, 0) $320 $ 0 Red oak ($25 × 0, 25) 0 625 Oak legs ($12 × 4, 0) 48 0 Red oak legs ($18 × 0, 4) 0 72 Direct manufacturing labor ($30 × 3, 5) 90 150 Manufacturing overhead Variable ($35 × 3, 5) 105 175 Fixed ($10 × 3, 5) 30 50 Total manufacturing cost $593 $1,072 6­14 Ending Inventories Budget Cost per Unit Direct Materials Oak top Red oak top Oak legs Red oak legs Finished Goods Execut ive Chairman Total g. $ 20 25 12 18 Units 192 200 80 44 Total $ 3,840 5,000 960 792 10,592 17,790 16,080 33,870 $44,462 593 1,072 30 15 Cost of goods sold budget Budgeted fin. goods inventory, March 1, 2009 ($10,480 + $4,850) Direct materials used ( from Dir. materials purch. budget) $553,720 Direct manufacturing labor (Dir. manuf. labor budget) 127,500 Manufacturing overhead (Manuf. overhead budget) 191,250 Cost of goods manufactured Cost of goods available for sale Deduct ending fin. goods inventory, March 31, 2009 (Inventories budget) Cost of goods sold $ 15,330 872,470 887,800 33,870 $853,930 2. Areas where cont inuous improvement might be incorporated into the budgeting process: (a) Direct materials. Either an improvement in usage or price could be budgeted. For example, the budgeted usage amounts could be related to the maximum improvement (current usage – minimum possible usage) of 1 square foot for either desk: • Execut ive: 16 square feet – 15 square feet minimum = 1 square foot • Chairman: 25 square feet – 24 square feet minimum = 1 square foot Thus, a 1% reduction target per month could be: • Execut ive: 15 square feet + (0.99 × 1) = 15.99 • Chairman: 24 square feet + (0.99 × 1) = 24.99 Some students suggested the 1% be applied to the 16 and 25 square­foot amounts. This can be done so long as after several improvement cycles, the budgeted amount is not less than the minimum desk requirements. (b) Direct manufacturing labor. The budgeted usage of 3 hours/5 hours could be continuously revised on a monthly basis. Similarly, the manufacturing labor cost per hour of $30 could be cont inuously revised down. The former appears more feasible than the latter. (c) Variable manufacturing overhead. By budget ing more efficient use of the allocation base, a signal is given for continuous improvement. A second approach is to budget continuous improvement in the budgeted variable overhead cost per unit of the allocat ion base. (d) Fixed manufacturing overhead. The approach here is to budget for reductions in the year­to­year amounts of fixed overhead. If these costs are appropriately classified as fixed, then they are more difficult to adjust down on a monthly basis. 6­15 6­29 (45 min.) Activity­based budget: kaizen improvements. 1. Revenue Budget For the Quarter Ending March 31, 20xx Units 20,000 Selling price ´ $120 Total revenues $2,400,000 2. Direct Material Usage Budget in Quantity and Dollars For the Quarter Ending March 31, 20xx Physical units budget Direct materials required (20,000 units ´ 10 oz.) 200,000 oz. Cost budget To be purchased this period $8,000,000 (200,000 oz. ´ $4 per oz.) Direct materials to be used this period $8,000,000 3. Direct Manufacturing Labor Costs Budget For the Quarter Ending March 31, 20xx Output units produced 20,000 Direct manufacturing labor­hours per unit 2 Total direct manufacturing labor­hours 40,000 Hourly wage rate ´ $15 Total direct manufacturing labor costs $600,000 4. Manufacturing Overhead Costs Budget For the Quarter Ending March 31, 20xx Machine setup overhead 1 (400 setup­hours ´ $80 per hour) $32,000 Operations overhead 64,000 (40,000 hours ´ $1.60 per hour) Total manufacturing overhead costs $96,000 20, 000 units = 200 batches. Each batch requires 2 setup hours, so 100 units per batch 200 batches ´ 2 setup­hours per batch = 400 setup­hours 1 6­16 5. Budgeted Unit Cost For the Quarter Ending March 31, 20xx Cost per Unit of Input per Input Unit of Output Direct material $ 4 10 oz. Direct manufacturing labor 15 2 DMLH Machine setup overhead 80 0.02 setup­hours1 Operations overhead 1.60 2 DMLH Total cost per gizmo 1 Total $40.00 30.00 1.60 3.20 $74.80 Setup­hours per gizmo = 400 setup­hours ÷ 20,000 gizmos = 0.02 setup­hours per gizmo. Alternat ively, Budgeted Unit Cost For the Quarter Ending March 31, 20xx Total Per unit (1) (2) = (1) ÷ 20,000 Direct material costs (requirement 2) $ 800,000 $40.00 Direct manufacturing labor costs 600,000 30.00 (requirement 3) Machine setup overhead costs 32,000 1.60 (requirement 4) Operations overhead costs 64,000 3.20 (requirement 4) Total costs $1,496,000 $74.80 6. Cost of Goods Sold Budget For the Quarter Ending March 31, 20xx Total Beginning finished goods inventory, Jan. 1 Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale 1 Deduct: Ending finished goods inventory, Mar. 31 Cost of goods sold 1 $ $800,000 600,000 96,000 72,000 1,496,000 1,568,000 72,000 $1,496,000 Under LIFO cost flow assumption, the 1,000 gizmos in beginning finished goods inventory that remain in inventory on March 31 continue to be valued at $72,000. 6­17 7. Budgeted Gross Margin For the Quarter Ending March 31, 20xx Revenues $2,400,000 Cost of goods sold 1,496,000 Gross margin $ 904,000 8. st 1 Quarter Quantity (1) 10 oz 2 DMLH 0.02 setup­hours 2 DMLH r 2d Quarter 3 d Quarter Revised Revised Quantity Quantity (3) = (1)×(100% ─ (2)) (4) = (3)×(100% ─ (2)) 9.9 oz. 9.8 oz. 1.98 DMLH 1.96 DMLH 0.0194 setup­hours 0.01882 setup­hours 1.98 DMLH 1.96 DMLH Direct material Direct manufacturing labor Machine setup overhea d Operations over head Proposed Decrease (2) 1% 1% 3% 1% Budgeted Unit Cost For the Quarters Ending June 30 and Sept. 30, 20xx Cost per Unit of Input $ 4 15 80 1.60 2d Quarter Input per Unit of Output 9.9 oz. 1.98 DMLH 0.0194 setup hrs. 1.98 DMLH Budgeted Unit Cost June 30 $39.60 29.70 1.55 3.17 $74.02 r 3 d Quarter Input per Unit of Output 9.80 oz 1.96 DMLH 0.0188 setup­hr 1.96 DMLH Direct material Direct manufacturing labor Machine setup overhea d Operations over head Total Budgeted Unit Cost Sept. 30 $39.20 29.40 1.50 3.14 $73.24 Revenues Cost of goods sold ($74.02; $73.24 × 20,000) Gross margin Budgeted Gross Margin For the Quarters Ending June 30, 20xx $2,400,000 1,480,400 $ 919,600 Sept. 30, 20xx $2,400,000 1,464,800 $ 935,200 9. Reduction in materials can be acco mplished by reducing waste and scrap. Reduction in direct labor and setup time can be acco mplished by improving the efficiency o f operations and decreasing down time. Emplo yees who make the gizmos may have suggestions for ways to do their jobs more efficient ly. For instance, emplo yees may recommend process changes that reduce idle time, setup time, and scrap. To motivate workers to improve efficiency, many co mpanies have set up programs that share productivit y gains wit h the workers. Korna must be careful that productivit y improvements and cost reductions do not in any way co mpromise product qualit y. 6­18 6­30 (30–40 min.) Revenue and production budgets. This is a routine budget ing problem. The key to its so lut ion is to compute the correct quantities of finished goods and direct materials. Use the fo llowing general formula: æ Budgeted ö æ Target ö æ Budgeted ö Beginning ö ç production ÷ = ç ending ÷ + ç sales or ÷ – æ ç ÷ç ÷ç ÷ ç inventory ÷ è ø èor purchases èinventory èmaterials used ø ø ø 1. Scarborough Corporation Revenue Budget for 2010 Units 60,000 40,000 Price $165 250 Total $ 9,900,000 10,000,000 $19,900,000 Thingone Thingtwo Budgeted revenues 2. Scarborough Corporation Production Budget (in units) for 2010 Thingone 60,000 25,000 85,000 20,000 65,000 Thingtwo 40,000 9,000 49,000 8,000 41,000 Budgeted sales in units Add target finished goods inventories, December 31, 2010 Total requirements Deduct finished goods inventories, January 1, 2010 Units to be produced 3. Scarborough Corporation Direct Materials Purchases Budget (in quantities) for 2007 Direct Materials B C A Direct materials to be used in production • Thingone (budgeted production of 65,000 units times 4 lbs. of A, 2 lbs. of B) • Thingtwo (budgeted production of 41,000 units times 5 lbs. of A, 3 lbs. of B, 1 lb. of C) Total Add target ending inventories, December 31, 2010 Total requir ements in units Deduct beginning inventories, January 1, 2010 Direct materials to be purchased (units) 260,000 205,000 465,000 36,000 501,000 32,000 469,000 130,000 123,000 253,000 32,000 285,000 29,000 256,000 ­­ 41,000 41,000 7,000 48,000 6,000 42,000 6­19 4. Scarborough Corporation Direct Materials Purchases Budget (in dollars) for 2010 Budgeted Purchases (Units) 469,000 256,000 42,000 Expected Purchase Price per unit $12 5 3 Direct material A Direct material B Direct material C Budgeted purchases 5. Total $5,628,000 1,280,000 126,000 $7,034,000 Scarborough Corporation Direct Manufacturing Labor Budget (in dollars) for 2010 Direct Budgeted Manufacturing Production Labor­Hours Total (Units) per Unit Hours 65,000 2 130,000 41,000 3 123,000 Thingone Thingtwo Total 6. Rate per Hour $12 16 Total $1,560,000 1,968,000 $3,528,000 Scarborough Corporation Budgeted Finished Goods Inventory at December 31, 2010 Thingone: Direct materials costs: A, 4 pounds × $12 $48 B, 2 pounds × $5 10 Direct manufacturing labor costs, 2 hours × $12 Manufacturing overhea d costs at $20 per direct manufacturing labor­hour (2 hours × $20) Budgeted ma nufacturing costs per unit Finished goods inventory of Thingone $122 × 25,000 units Thingtwo: Direct materials costs: A, 5 pounds × $12 $60 B, 3 pounds × $5 15 C, 1 each × $3 3 Direct manufacturing labor costs, 3 hours × $16 Manufacturing overhea d costs at $20 per direct manufacturing labor­hour (3 hours × $20) Budgeted ma nufacturing costs per unit Finished goods inventory of Thingtwo $186 × 9,000 units Budgeted finished goods inventor y, December 31, 2010 $ 58 24 40 $122 $3,050,000 $ 78 48 60 $186 1,674,000 $4,724,000 6­20 6­31 (30 min.) Budgeted income statement. Easecom Company Budgeted Income Statement for 2008 (in thousands) Revenues Equipment ($6,000 × 1.06 × 1.10) Maintenance contracts ($1,800 × 1.06) Total revenues Cost of goods sold ($4,600 × 1.03 × 1.06) Gross margin Operating costs: Marketing costs ($600 + $250) Distribut ion costs ($150 × 1.06) Customer maintenance costs ($1,000 + $130) Administrative costs Total operating costs Operating inco me 6­32 (15 min.) Responsibility of purchasing agent. The time lost in the plant should be charged to the purchasing depart ment. The plant manager probably should not be asked to underwrite a loss due to failure o f delivery over which he had no supervis io n. Although the purchasing agent may feel that he has done everything he possibly could, he must realize that, in the whole organization, he is the one who is in the best posit ion to evaluate the situat ion. He receives an assignment. He may accept it or reject it. But if he accepts, he must perform. If he fails, the damage is evaluated. Everybody makes mistakes. The important point is to avo id making too many mistakes and also to understand fully that the extensive control reflected in responsibilit y account ing is the necessary balance to the great freedo m o f action that individual execut ives are given. Discussions o f this problem have again and again revealed a tendency amo ng students (and among accountants and managers) to “fix the blame”––as if the variances arising fro m a responsibilit y account ing system should pinpo int misbehavior and provide answers. The point is that no accounting system or variances can provide answers. However, variances can lead to questions. In this case, in deciding where the penalt y should be assigned, the student might inquire who should be asked––not who should be blamed. Classroom discussio ns have also raised the following diverse points: (a) Is the railroad company liable? (b) Costs of idle time are usually routinely charged to the production department. Should the informat ion system be fine­tuned to reallocate such costs to the purchasing depart ment? (c) How will the purchasing managers behave in the future regarding willingness to take risks? The text emphasizes the fo llowing: Beware o f overemphasis on controllabilit y. For example, a t ime­honored theme o f management is that responsibilit y should not be given wit hout accompanying authorit y. Such a guide is a useful first step, but responsibilit y accounting is more far­reaching. The basic focus should be on informat ion or knowledge, not on control. The ke y question is: Who is the best informed? Put another way, “Who is the person who can tell us the most about the specific item, regardless of abilit y to exert personal control?” 6­21 $6,996 1,908 $8,904 5,022 3,882 850 159 1,130 900 3,039 $ 843 6­33 (60 min.) Comprehensive problem with ABC costing 1. Revenue Budget For the Month of April Units Selling Price Total Revenues 500 $160 $ 80,000 300 250 75,000 $155,000 Cat­allac Dog­eriffic Total 2. Production Budget For the Month of April Product Cat­allac Dog­eriffic Budgeted unit sales 500 300 Add target ending finished goods inventory 35 15 Total required units 535 315 Deduct beginning finished goods inventory 15 30 Units of finished goods to be produced 520 285 3a. Direct Material Usage Budget in Quantity and Dollars For the Month of April Material Plastic Metal Physical Units Budget Direct materials required for Cat­allac (520 units × 4 lbs. and 0.5 lb.) Dog­errific (285 units × 6 lbs. and 1 lb.) Total quant it y of direct material to be used Total 2,080 lbs. 1,710 lbs. 3,790 lbs. 260 lbs. 285 lbs. 545 lbs. Cost Budget Available fro m beginning direct materials inventory (under a FIFO cost­flow assumpt ion) Plast ic: 250 lbs. × $3.80 per lb. $ 950 Metal: 60 lbs. × $3 per lb. To be purchased this period . Plast ic: (3,790 – 250) lbs. ´ $4 per lb. 14,160 Metal: (545 – 60) lbs. ´ $3 per lb. __ ____ Direct materials to be used this period $15,110 $ 180 1,455 $ 1,635 $16,745 6­22 Direct Material Purchases Budget For the Month of April Material Plastic Metal Physical Units Budget To be used in production (requirement 3) Add target ending inventory Total requirements Deduct beginning inventory Purchases to be made Cost Budget Plast ic: 3,920 lbs. ´ $4 Metal: 540 lbs. ´ $3 Purchases 4. Direct Manufacturing Labor Costs Budget For the Month of April Output Units Produced (requirement 2) 520 285 Hourly Wage Rate $10 10 3,790 lbs. 380 lbs. 4,170 lbs. 250 lbs. 3,920 lbs. 545 lbs. 55 lbs. 600 lbs. 60 lbs. 540 lbs. Total $15,680 ______ $15,680 $ 1,620 $ 1,620 $ 17,300 Cat­allac Dog­errific Total DMLH per Unit 3 5 Total Hours 1,560 1,425 Total $15,600 14,250 $29,850 5. Machine Setup Overhead Units to be produced Units per batch Number of batches Setup time per batch Total setup time Cat­allac 520 ÷ 20 26 ´ 1.5 hrs. 39 hrs. Dog­errific 285 ÷15 19 ´ 1.75 hrs. 33.25 hrs. Total 72.25 hrs. Budgeted machine setup costs = $100 per setup hour ´ 72.25 hours = $7,225 Processing Overhead Budgeted machine­hours (MH) = (10 MH per unit × 520 units) + (18 MH per unit × 285 units) = 5,200 MH + 5,130 MH = 10,330 MH Budgeted processing costs = $5 per MH × 10,330 MH = $51,650 Inspection Overhead Budgeted inspect ion­hours = (0.5 ´ 26 batches) + (0.6 ´ 19 batches) = 13 + 11.4 = 24.4 inspect ion hrs. Budgeted inspect ion costs = $16 per inspect ion hr. ´ 24.4 inspection hours = $390.40 6­23 Manufacturing Overhead Budget For the Month of April Machine setup costs $ 7,225 Processing costs 51,650 Inspect ion costs 390 Total costs $59,265 6. Unit Costs of Ending Finished Goods Inventory April 30, 20xx Product Cat­allac Dog­errific Cost per Input per Input per Unit of Unit of Unit of Total Total Input Output Output Plast ic $ 4 4 lbs. $ 16.00 6 lbs. $ 24.00 Metal 3 0.5 lbs. 1.50 1 lb. 3.00 Direct manufacturing labor 10 3 hrs. 30.00 5 hrs. 50.00 Machine setup 100 0.075 hrs. 1 7.50 0.1167 hr1 11.67 Processing 5 10 MH 50.00 18 MH 90.00 2 2 Inspect ion 16 0.025 hr 0.40 0.04 hr. 0.64 Total $105.40 $179.31 1 2 39 setup­hours ÷ 520 units = 0.075 hours per unit; 33.25 setup­hours ÷ 285 units = 0.1167 hours per unit 13 inspection hours ÷ 520 units = 0.025 hours per unit; 11.4 inspection hours ÷ 285 units = 0.04 hours per unit Ending Inventories Budget April 30, 20xx Quantity Direct Materials Plast ic Metals Finished goods Cat­allac Dog­errific Total ending inventory 380 55 Cost per unit $4 3 Total $1,520 165 $1,685 35 15 $105.40 179.31 $3,689 2,690 6,379 $8,064 6­24 7. Cost of Goods Sold Budget For the Month of April, 20xx Beginning finished goods inventory, April, 1 ($1,500 + $5,580) Direct materials used (requirement 3) $16,745 Direct manufacturing labor (requirement 4) 29,850 Manufacturing overhead (requirement 5) 59,265 Cost of goods manufactured Cost of goods available for sale Deduct: Ending finished goods inventory, April 30 (reqmt. 6) Cost of goods sold $ 7,080 105,860 112,940 6,379 $106,561 8. Nonmanufacturing Costs Budget For the Month of April, 20xx Salaries ($36,000 ÷ 2 ´ 1.05) $18,900 Other fixed costs ($36,000 ÷ 2) 18,000 Sales commissio ns ($155,000 ´ 1%) 1,550 Total nonmanufacturing costs $38,450 9. Budgeted Income Statement For the Month of April, 20xx Revenues $155,000 Cost of goods sold 106,561 Gross margin 48,439 Operating (nonmanufacturing) costs 38,450 Operating inco me $ 9,989 6­25 6­34 (25 min.) (Continuation of 6­33) Cash budget (Appendix) Cash Budget April 30, 20xx Cash balance, April 1, 20xx Add receipts Cash sales ($155,000 × 10%) Credit card sales ($155,000 × 90% × 97%) Total cash available for needs (x) Deduct cash disbursements Direct materials ($8,500 + $17,300 × 50%) Direct manufacturing labor Manufacturing overhead ($59,265 ─ $20,000 depreciat ion) Nonmanufacturing salaries Sales commissio ns Other nonmanufacturing fixed costs ($18,000 ─ $10,000 deprn) Machinery purchase Income taxes Total disbursements (y) Financing Repayment of loan 1 Interest at 12% ($2,000 ´ 12% ´ ) 12 Total effects of financing (z) Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 5,360 15,500 135,315 $156,175 $ 17,150 29,850 39,265 18,900 1,550 8,000 13,700 5,000 $133,415 $ 2,000 20 $ 2,020 $ 20,740 6­26 6­35 (60 min.) Comprehensive operating budget, budgeted balance sheet. 1. Schedule 1: Revenues Budget for the Year Ended December 31, 2010 Snowboards Units Selling Price 1,000 $450 Total Revenues $450,000 2. Schedule 2: Production Budget (in Units) for the Year Ended December 31, 2010 Snowboards Budgeted unit sales (Schedule 1) 1,000 Add target ending finished goods inventory 200 Total requirements 1,200 Deduct beginning finished goods inventory 100 Units to be produced 1,100 3. Schedule 3A: Direct Materials Usage Budget for the Year Ended December 31, 2010 Wood Fiberglass Total Physical Units Budget Wood: 1,100 × 5.00 b.f. Fiber glass: 1,100 × 6.00 yards To be used in production Cost Budget Available from beginning inventory Wood: 2,000 b.f. × $28.00 Fiber glass: 1,000 b.f. × $4.80 To be used from purchases this period Wood: (5,500 – 2,000) × $30.00 Fiber glass: (6,600 – 1,000) × $5.00 Total cost of direct materials to be used 5,500 5,500 6,600 6,600 $ 56,000 $ 4,800 105,000 $161,000 28,000 $32,800 $193,800 Schedule 3B: Direct Materials Purchases Budget for the Year Ended December 31, 2010 Wood Physical Units Budget Production usage (from Schedule 3A) Add target ending inventory Total requir ements Deduct beginning inventory Purchases Cost Budget Wood: 5,000 × $30.00 Fiber glass: 7,600 × $5.00) Purchases 5,500 1,500 7,000 2,000 5,000 Fiberglass Total 6,600 2,000 8,600 1,000 7,600 $150,000 $150,000 $38,000 $38,000 $188,000 6­27 4. Schedule 4: Direct Manufacturing Labor Budget for the Year Ended December 31, 2010 Labor Category Manufacturing labor Cost Driver Units 1,100 DML Hours per Driver Unit 5.00 Total Hours 5,500 Wage Rate $25.00 Total $137,500 5. Schedule 5: Manufacturing Overhead Budget for the Year Ended December 31, 2010 At Budgeted Level of 5,500 Direct Manufacturing Labor­Hours Variable manufacturing overhea d costs ($7.00 × 5,500) Fixed ma nufacturing over head costs Total manufacturing overhea d costs $ 38,500 66,000 $104,500 $104,500 = $19.00 per hour 5,500 $104,500 7. Budgeted manufacturing overhead cost per output unit: = $95.00 per output unit 1,100 8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2010 6. Budgeted manufacturing overhead rate: Cost per Unit of a Input Direct materials Wood Fiber glass Direct manufacturing labor Total manufacturing overhea d a b b Inputs Total $150.00 30.00 125.00 95.00 $400.00 $30.00 5.00 25.00 5.00 6.00 5.00 cost is per board foot, yard or per hour inputs is the amount of each input per board 9. Schedule 6B: Ending Inventories Budget, December 31, 2010 Cost per Units Unit Total Direct materials Wood 1,500 $ 30.00 $ 45,000 Fiberglass 2,000 5.00 10,000 Finished goods Snowboards 200 400.00 80,000 Total Ending Inventory $135,000 6­28 10. Schedule 7: Cost of Goods Sold Budget for the Year Ended December 31, 2010 From Schedule Total Beginning finished goods inventory January 1, 2010, $374.80 × 100 Given $ 37,480 Direct materials used 3A $193,800 Direct manufacturing labor 4 137,500 Manufacturing overhead 5 104,500 Cost of goods manufactured 435,800 Cost of goods available for sale 473,280 Deduct ending finished goods inventory, December 31, 2010 6B 80,000 Cost of goods sold $393,280 11. Budgeted Income Statement for Slopes for the Year Ended December 31, 2010 Revenues Schedule 1 $450,000 Cost of goods sold Schedule 7 393,280 Gross margin 56,720 Operating costs Variable marketing costs ($250 × 30) $ 7,500 Fixed nonmanufacturing costs 30,000 37,500 Operating inco me $ 19,220 12. Budgeted Balance Sheet for Slopes as of December 31, 2010 Cash $ 10,000 Inventory Schedule 6B 135,000 Property, plant, and equipment (net) 850,000 Total assets $995,000 Current liabilit ies Long­term liabilit ies Stockholders’ equit y Total liabilit ies and stockholders’ equit y $ 17,000 178,000 800,000 $995,000 6­29 6­36 (30 min.) Cash budgeting, chapter appendix. 1. Projected Sales May Sales in units Revenues (Sales in units × $450) Collections of Receivables May From sales in: May (30% ´ $36,000) June (50%; 30% ´ $54,000) July (20%; 50%; 30% ´ $90,000) August (20%; 50% ´ $45,000) September (20% ´ $27,000) Total Calculation of Payables May Material and Labor Use, Units Budgeted production Direct materials Wood (board feet) Fiber glass (yards) Direct manuf. labor (hours) Disbursement of Payments Direct materials Wood (1,000; 500; 300 ´ $30) Fiber glass (1,200; 600; 360 ´ $5) Direct manuf. labor (500; 300; 200 ´ $25) Inter est payment (6% ´ $30,000 ÷12) Variable Overhead Calculation Variable over head rate Over head driver (dir ect manuf. labor­hours) Variable over head expense June 200 1,000 1,200 1,000 July 100 500 600 500 August September October 60 300 360 300 40 200 240 200 June July August September October 80 June 120 July 200 August September October 100 60 $27,000 40 $36,000 $54,000 $90,000 $45,000 $10,800 27,000 $16,200 18,000 45,000 9,000 $55,800 $70,200 $ 27,000 22,500 5,400 $54,900 $30,000 $15,000 6,000 12,500 150 3,000 7,500 150 $9,000 1,800 5,000 150 $ 7 500 $ 3,500 $ 7 300 $ 2,100 $ 7 200 $1,400 6­30 Cash Budget for the months of July, August, September 2007 July August Beginning cash balance $10,000 $ 5,650 Add receipts: Collect ion of receivables Total cash available Deduct disbursements: Material purchases Direct manufacturing labor Variable costs Fixed costs Interest payments Total disbursements Ending cash balance 55,800 $65,800 70,200 $75,850 September $40,100 54,900 $95,000 $36,000 12,500 3,500 8,000 150 60,150 $ 5,650 $18,000 7,500 2,100 8,000 150 35,750 $40,100 $10,800 5,000 1,400 8,000 150 25,350 $69,650 2. Yes. Slopes has a budgeted cash balance o f $69,650 on 10/1/2010 and so it will be in a posit ion to pay off the $30,000 1­year note on October 1, 2010. 3. No. Slopes does not maintain a $10,000 minimum cash balance in July. To maintain a $10,000 cash balance in each of the three months, it could perhaps encourage its customers to pay earlier by o ffering a discount. Alternat ively, Slopes could seek short­term credit from a bank. 6­31 6­37 (40–50 min.) Cash budgeting, chapter appendix. Itami Wholesale Co. Statement of Budgeted Cash Receipts and Disbursements For the Months of December 2009 and January 2010 December 2009 $ 10,000 235,900 245,900 $183,875 50,000 10,000 243,875 $ 2,025 January 2010 $ 2,025 285,800 287,825 $141,750 25,000 10,000 176,750 $111,075 Cash balance, beginning Add receipts: Collect ions of receivables (Schedule 1) (a) Total cash available for needs Deduct disbursements: For merchandise purchases (Schedule 2) For variable costs (Schedule 3) For fixed costs (Schedule 3) (b) Total disbursements Cash balance, end of mo nth (a – b) Enough cash should be available for repayment of the note on January 31, 2010. Schedule 1: Collections of Receivables Collections in December January a b c October a $14,400 November b $50,000 } c 171,500 d 20,000 December Total $235,900 e $ 60,000 } f 205,800 $285,800 0.08 × $180,000 0.20 × $250,000 0.70 × $250,000 × .98 d 0.08 × $250,000 e 0.20 × $300,000 f 0.70 × $300,000 × .98 6­32 Schedule 2: Payments for Merchandise Target ending inventory (in units) Add units so ld (sales ÷ $100) Total requirements Deduct beginning inventory (in unit s) Purchases (in unit s) Purchases in do llars (units × $70) December a 875 3,000 3,875 b 1,250 2,625 $183,750 December Cash disbursements: For December, accounts payable; For January, December’s purchases at 50% For current month’s purchases at 50% a January c 800 1,500 2,300 875 1,425 $99,750 January $ 92,000 91,875 $183,875 $ 91,875 49,875 $141,750 500 units + 0.25 ($150,000 ÷ $100) $87,500 ÷ $70 c 500 units + 0.25($120,000 ÷ $100) b Schedule 3: Marketing, Distribution, and Customer­Service Costs Total annual fixed costs, $150,000, minus $30,000 depreciat ion $120,000 Monthly fixed cost requiring cash outlay $ 10,000 $400,000 - $150,000 Variable cost ratio to sales = = 1/6 $1,500,000 December variable costs: 1/6 × $300,000 sales $50,000 January variable costs: 1/6 × $150,000 sales $25,000 6­33 6­38 (60 min.) Comprehensive problem; ABC manufacturing, two products. 1. Revenues Budget For the Year Ending December 31, 2009 Selling Price Total Revenues $ 80 $13,760,000 $900 $40,500,000 $54,260,000 Chairs Tables Total Units 172,000 45,000 2a. Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs = $2,011,200 + $4,500,000 = $6,511,200 $6, 511, 200 Marketing allocation rate = = $0.12 per sales dollar $54, 260, 000 2b. Total budgeted distribution costs = Budgeted variable distribution costs + Budgeted fixed distribution costs = $54,000 + $380,000 = $434,000 Chairs: Tables: Total 172,000 units ÷ 500 units per delivery 344 deliveries 45,000 units ÷ 500 units per delivery 90 deliveries 434 deliveries $434, 000 = $1,000 per delivery 434 deliveries Delivery allo cat ion rate = 3. Production Budget (in Units) For the Year Ending December 31, 2009 Product Chairs Tables Budgeted unit sales 172,000 45,000 Add target ending finished goods inventory 8,500 2,250 Total required units 180,500 47,250 Deduct beginning finished goods inventory 8,000 2,100 Units of finished goods to be produced 172,500 45,150 6­34 4a. Chairs Machine setup overhead Units to be produced Units per batch Number of setups Hours to setup per batch Total setup hours 172,500 ÷500 345 ×3 1,035 Tables 45,150 ÷50 903 ×2 1,806 Total 2,841 Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs = $97,000 + $300,740 = $397,740 $397, 740 Machine setup = = $140 per setup hour allocation rate 2, 841 setup­hours b. Chairs: Tables: Total 172,500 units × 3 MH per unit 517,500 MH 45,150 units × 5 MH per unit 225,750 MH 743,250 MH Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs = $789,250 + $5,900,000 = $6,689,250 Processing allocat ion rate = 5. Direct Material Usage Budget in Quantity and Dollars For the Year Ending December 31, 2009 Material Wood Glass Physical Units Budget Direct materials required for Chairs (172,500 units × 5 b.f. and 0 sheets) Tables (45,150 units × 7 b.f. and 2 sheets) Total quant it y of direct materials to be used $6, 689, 250 = $9 per MH 743, 250 MH Total 862,500 b.f. 316,050 b. f. 1,178,550 b. f. 90,300 sheets 90,300 sheets Cost Budget Available fro m beginning direct materials inventory (under a FIFO cost­flow assumpt ion) $ 170,352 To be purchased this period Wood: (1,178,550 b.f. ─ 109,200 b.f.) × $1.60 per b. f. 1,710,960 Glass: (90,300 sheets ─ 8,750 sheets) × $12 per sheet _________ Direct materials to be used this period $1,881,312 $ 109,375 978,600 $ 1,087,975 $2,969,287 6­35 Direct Materials Purchases Budget For the Year Ending December 31, 2009 Material Wood Physical Units Budget To be used in production (requirement 5) Add: Target ending direct material inventory Total requirements Deduct: Beginning direct material inventory Purchases to be made Cost Budget Wood: 1,186,850 b.f. ´ $1.60 per b.f. Glass: 90,550 sheets ´ $12 per sheet Purchases 1,178,550 b.f. 117,500 b. f. 1,296,050 b. f. 109,200 b. f. 1,186,850 Glass 90,300 sheets 9,000 sheets 99,300 sheets 8,750 sheets 90,550 sheets Total $ 1,898,960 __________ $ 1,898,960 $ 1,086,600 $ 1,086,600 $2,985,560 Total budgeted materials­handling costs = Budgeted variable materials­handling costs + Budgeted fixed materials­handling costs = $342,840 + $600,000 = $942,840 Materials handling = $942, 840 = $0.80 per b.f. allocation rate 1,178, 550 b.f. 7. Direct Manufacturing Labor Costs Budget For the Year Ending December 31, 2009 Output Units Produced 172,500 45,150 Direct Manufacturing Total Hourly Wage Total Labor­Hours per Unit Hours Rate 4 690,000 $15 $10,350,000 8 361,200 15 5,418,000 $15,768,000 Chairs Tables Total 8. Manufacturing Overhead Cost Budget For the Year Ending December 31, 2009 Variable $ 342,840 97,000 789,250 $1,229,090 Fixed $ 600,000 300,740 5,900,000 $6,800,740 Total $ 942,840 397,740 6,689,250 $8,029,830 Materials handling Machine setup Processing Total 6­36 9. Unit Costs of Ending Finished Goods Inventory For the Year Ending December 31, 2009 Chair Table Input per Input per Unit of Unit of Output Total Output 5 b.f. $ 8.00 7 b.f. ─ ─ 2 sheets 4 hrs. 60.00 8 hrs. 5 b.f. 4.00 7 b.f. 1 0.006 hrs. 1 0.84 0.04 setup­hr 3 MH 27.00 5 MH $ 99.84 Wood Glass Direct manufacturing labor Materials handling Machine setup Processing Total 1 Cost per Unit of Input $1.60 12 15 0.80 140 9 Total $ 11.20 24.00 120.00 5.60 5.60 45.00 $211.40 1,035 setup­hours ÷ 172,500 units = 0.006 hours per unit; 1,806 setup hours ÷ 45,150 units = 0.04 hours per unit Ending Inventories Budget December 31, 2009 Quantity Direct Materials Wood Glass Finished goods Chairs Tables Total ending inventory 10. Cost of Goods Sold Budget For the Year Ending December 31, 2009 Beginning finished goods inventory, Jan. 1 ($760,000 + $477,000) Direct materials used (requirement 5) $ 2,969,287 Direct manufacturing labor (requirement 7) 15,768,000 Manufacturing overhead (requirement 8) 8,029,830 Cost of goods manufactured Cost of goods available for sale Deduct: Ending finished goods inventory, December 31 (reqmt. 9) Cost of goods sold 11. Nonmanufacturing Costs Budget For the Year Ending December 31, 2009 Variable $2,011,200 54,000 $2,065,200 6­37 Fixed $4,500,000 380,000 $4,880,000 Total $6,511,200 434,000 $6,945,200 117,500 b.f. 9,000 sheets Cost per unit $1.60 12.00 Total $188,000 108,000 $ 296,000 8,500 2,250 $99.84 211.40 $848,640 475,650 1,324,290 $1,620,290 $ 1,237,000 26,767,117 28,004,117 1,324,290 $26,679,827 Marketing Distribut ion Total 12. Budgeted Income Statement For the Year Ending December 31, 2009 Revenue $54,260,000 Cost of goods sold 26,679,827 Gross margin 27,580,173 Operating (nonmanufacturing) costs 6,945,200 Operating inco me $20,634,973 13. The budgeted unit cost of the chair is $99.84, which is $20 more than the selling price of $80 per chair. The company is willing to accept the loss on chairs because of the high markup on tables ($900 $688. 60 ─ $211.40) = $688.60 ( = 76.5% ). Customers who purchase a table will likely want $ 900 matching chairs. Thus the markup on tables more than recoups the loss on four chairs. Dinette could, of course, reduce the price on tables and increase the price on chairs. If, however, customers care less about the price o f the table and more about the price of chairs and buy 4 chairs for every 1 table, Dinette’s pricing strategy may well be optimal. 6­38 6­39 (15 min.) Budgeting and ethics. 1. The standards proposed by Wert are not challenging. In fact, he set the target at the level his department currently achieves. DM 2.95 lbs. ´ 100 units = 295 lbs. DL 19.2 min. ´ 100 units = 1,920 min ÷ 60 = 32 hrs. MT 9.9 min. ´ 100 units = 990 min. ÷ 60 = 16.5 hrs. 2. Wert probably chose these standards so that his department would be able to make the goal and receive any result ing reward. With a little effo rt, his department can likely beat these goals. 3. As discussed in the chapter, benchmarking might be used to highlight the easy targets set by Wert. Perhaps the organizat ion has mult iple plant locat ions that could be used as co mparisons. Alternat ively, management could use industry averages. Also, management should work with Wert to better understand his depart ment and encourage him to set more realist ic targets. Finally, the reward structure should be designed to encourage increasing productivit y, not beat ing the budget. 6­40 (60 min.) Comprehensive budgeting problem; activity­based costing, operating and financial budgets. 1a. Revenues Budget For the Month of June, 20xx Units Selling Price Total Revenues 3,000 $3 $ 9,000 1,800 4 7,200 $16,200 Large Giant Total b. Production Budget For the Month of June, 20xx Product Large Giant 3,000 1,800 300 180 3,300 1,980 200 150 3,100 1,830 Budgeted unit sales Add: target ending finished goods inventory Total required units Deduct: beginning finished goods inventory Units of finished goods to be produced 6­39 c. Direct Material Usage Budget in Quantity and Dollars For the Month of June, 20xx Material Sugar Sticks Physical Units Budget Direct materials required for Large (3,100 units × 0.25 lb.; 1 stick) Giant (1,830 units × 0.50 lb.; 1 st ick) Total quant it y of direct materials to be used Total 775 lbs. 915 lbs. 1,690 lbs. 3,100 1,830 4,930 Cost Budget Available fro m beginning direct materials inventory (under a FIFO cost­flow assumpt ion) $ 64 To be purchased this period Sugar: (1,690 lbs. – 125 lbs.) × $0.50 per lb. 783 Sticks: (4,930 – 350) × $0.30 per stick ____ Direct materials to be used this period $847 $ 105 1,374 $1,479 $2,326 Direct Materials Purchases Budget For the Month of June, 20xx Material Sugar Sticks Physical Units Budget To be used in production Add: Target ending direct material inventory Total requirements Deduct: beginning direct material inventory Purchases to be made Cost Budget Sugar: (1,805 lbs. × $0.50 per lb.) Sticks: (5,060 × $0.30 per stick) Total d. Direct Manufacturing Labor Costs Budget For the Month of June, 20xx Output Units Produced 3,100 1,830 Direct Manufacturing Total Hourly Wage Labor­Hours per Unit Hours Rate 0.20 620 $8 0.25 457.5 8 1,077.5 Total $4,960 3,660 $8,620 1,690 lbs. 240 lbs. 1,930 lbs. 125 lbs. 1,805 lbs. 4,930 480 5,410 350 5,060 Total $903 ____ $903 $1,518 $1,518 $2,421 Large Giant Total 6­40 e. Manufacturing Overhead Costs Budget For the Month of June 20xx Total Machine setup (Large 310 batches1 ´ 0.08 hrs./batch + Giant 183 batches2 ´ 0.09 hrs./batch) ´ $20/hour Processing (1,077.5 DMLH ´ $1.70) Total 1 $ 825 1,832 $2,657 Large: 3,100 units ÷ 10 units per batch = 310; 2 Giant: 1,830 units ÷ 10 units per batch = 183 f. Unit Costs of Ending Finishe d Goods Inventory For the Mont h of June, 20xx Large Giant Cost per Input per Input per Unit of Input Unit of Output Total Unit of Output $ 0.50 0.25 lb $0.125 0.50 lb. 0.30 1 0.30 1 8.00 0.2 hr. 1.60 0.25 hr. 20.00 0.008 hr. 1 0.16 0.009 hr1 1.70 0.2 hr 0.34 0.25 hr $2.525 Sugar Sticks Direct ma nufacturing labor Machine setup Processing Total 1 Total $ 0.25 0.30 2.00 0.18 0.425 $3.155 0.08 hour per setup ÷ 10 units per batch = 0.008 hr. per unit; 0.09 hour per setup ÷ 10 units per batch = 0.009 hr. per unit. Ending Inventories Budget June, 20xx Quantity Direct Materials Sugar Sticks Finished goods Large Giant Total ending inventory 240 lbs. 480 sticks Cost per unit $0.50 0.30 $120 144 Total $ 264 300 180 $2.525 3.155 $757 568 1,325 $1,589 6­41 g. Cost of Goods Sold Budget For the Month of June, 20xx Beginning finished goods inventory, June 1 ($500 + $474) Direct materials used (requirement c) Direct manufacturing labor (requirement d) Manufacturing overhead (requirement e) Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, June 30 (requirement f) Cost of goods sold h. Nonmanufacturing Costs Budget For the Month of June, 20xx Total Marketing and general administration 10% ´ 16,200 2. Cash Budget June 30, 20xx Cash balance, June 30, 20xx Add receipts Collect ions from May accounts receivable Collect ions from June accounts receivable ($16,200 ´ 80% ´ 50%) Collect ions from June cash sales ($16,200 ´ 20%) Total co llect ion from customers Total cash available for needs (x) Deduct cash disbursements Direct material purchases in May Direct material purchases in June ( $2,421 ´ 70%) Direct manufacturing labor Manufacturing overhead ( $2,657 ´ 60% because 40% is depreciat ion) Nonmanufacturing costs ( $1,620 ´ 70% because 30% is depreciat ion) Taxes Total disbursements (y) Financing Interest at 12% ($20,000 ´ 12% ´ 1 ÷ 12) (z) Ending cash balance, June 30 (x) ─ (y) ─ (z) $ 587 4,704 6,480 3,240 14,424 $15,011 $ 696 1,695 8,620 1,594 1,134 500 $14,239 $ 200 $ 572 $1,620 $ 974 $2,326 8,620 2,657 13,603 14,577 1,325 $13,252 6­42 3. Budgeted Income Statement For the Month of June, 20xx Revenues Cost of goods sold Gross margin Operating (nonmanufacturing) costs Bad debt expense ($16,200 ´ 80% ´ 1%) Interest expense ( for June) Net inco me $16,200 13,252 2,948 $1,620 130 200 1,950 $ 998 Budgeted Balance Sheet June 30, 20xx Assets Cash Accounts receivable ($16,200 ´ 80% ´ 50%)) Less: allowance for doubtful accounts Inventories Direct materials Finished goods Fixed assets Less: accumulated depreciat ion ($55,759 + 2,657 ´ 40% + 1,620 ´ 30%) Total assets $ $ 6,480 130 $ 264 1,325 $190,000 57,308 572 6,350 1,589 132,692 $141,203 Liabilities and Equity Accounts payable ($2,421 ´ 30%) Interest payable Long­term debt Commo n stock Retained earnings ($109,279 + $998) Total liabilit ies and equit y $ 726 200 20,000 10,000 110,277 $141,203 6­43 ...
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