Chapter 13 Answers

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SM-Ch13-5e - Answers
Cost Accounting (Silliman University)
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13
Planning and Budgeting
Solutions to Review Questions
13-1.
Next period’s budget has more detail because it is closer in time than the longer-range
forecasts. The budget plan is a blueprint for operations in the coming period. It must be
sufficiently detailed so that it provides adequate direction to the various people
responsible for operations.
13-2.
Cash receipts and disbursements often take place in different time periods from when
items are recognized in the income statement and balance sheet. Thus, a company
needs to prepare a cash budget to ensure that cash needs will be met.
13-3.
Answers will vary, but examples include:
a. Econometric methods—using economic data to forecast using statistical models;
b. Delphi technique—collecting and synthesizing the opinion of experts;
c. Estimates from salespeople and other knowledgeable personnel;
d. Trend analysis—statistical analysis of historical data;
e. Market research—collecting information on the macroeconomic trends in the
industry and in the local markets.
13-4.
©The McGraw-Hill Companies, Inc., 2017

Solutions Manual, Chapter 13 607

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13-4.
The master budget links long-term objectives and short-term, tactical plans.
Organization goals are broad-based statements of purpose. Strategic plans take the
broad-based statements and expresses them in terms of detailed steps needed to attain
those goals. Budgets are the short-term plans used to implement the steps included in
the strategic plans.
For example, a company might have a goal of "Becoming the number 1 company in the
industry." The strategic plans would include such statements as: "Increase sales volume
by 20% per year." The master budget would state the number of units that are needed
to be produced and sold in the coming period to meet the 20% volume increase as well
as the production and marketing costs necessary to attain that objective. The master
budget would also include estimates of the levels of cash, accounts receivable,
inventories, and fixed assets needed to support the budgeted level of activity.
13-5.
Because middle management has better knowledge about operations at lower levels in
the organization, and because budgets are usually used to evaluate performance or
compute bonuses for middle management, middle management might have a tendency
to underestimate revenues and overestimate costs. This bias arises because if the
biased plans are adopted, middle management will find it easier to meet targets and to
achieve bonus awards. Of course, if upper management always "tightens" the budget
plans suggested by middle management, gaming might result. The disadvantage of this
gaming is that the planning effectiveness might be reduced.
13-6.
Budgeting aids in coordination in a number of ways. By relating sales forecasts to
production activities it is possible to reduce the likelihood of over- or under-production. It
coordinates production so that plants making subassemblies are making the appropriate
number at the right time as needed by the plant making the final assemblies. In addition,
the budget process is used to make certain that adequate cash is on hand to finance
company activities for the coming period. Guidelines are set for administrative and
selling departments so that their costs are commensurate with the company’s income
and output goals.
13-7.
Participative budgeting is a process that uses inputs from lower- or middle-management
employees. The advantages include enhanced motivation, acceptance of goals,
increased information. The primary disadvantage is the time taken away from other
activities.

608 Fundamentals of Cost Accounting

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13-8.
Required Budgete Ending Beginning
production = d sales + inventor – inventory
(units) (units) y (units) (units)
13-9.
It is often more difficult to create the marketing and administration budget, because the
managers have more discretion about both the amount and timing of the spending.
13-10.
“Use it or lose it” in the context of budgeting refers to the incentive managers have to
spend any unused funds prior to the end of the budget year. If they fail to do this, they
will lose the money and, possibly, see reduced budgets in the future.


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Solutions to Critical Analysis and Discussion Questions
13-11.
The strategic plan provides broad, long-range goals for the company. The budget
provides more detail for how to work toward achieving those goals on an annual (or
quarterly, or monthly) basis.
13-12.
Answers will vary. Two possible reasons are (1) smaller firms have less of a “cushion”
and therefore require better estimates of cash and (2) smaller firms might have more
difficulty (might need to pay higher rates) borrowing money.
13-13.
The earlier the budgeting process is started, the earlier the company will understand
some of the problems it must address. In addition, an early start allows managers to
work on the budget, step back and think about it, and then revise it. A later start avoids
some of the costs of developing budgets only to have them revised as more current
data become available.
13-14.
Because inventories would be eliminated, the timing of purchases would be closer to
the time of production. This would minimize the differences between the timing of cash
outflows for materials purchases, work in process and finished goods, and the time
when the related costs are recognized in the production budget.
13-15.
The purpose of tying spending to budgets is to ensure that the wishes of the legislature
are carried out. The problem is that managers cannot take advantage of funds in one
budget to use in another area, even if that means lower overall costs to the government.
13-16.
Planning communicates the goals of the organization and can be used to coordinate the
activities of different units in the organization. The control purpose of the budget is to
provide a mechanism to influence managers, either by limiting resources available or by
providing a performance evaluation benchmark.
Problems can arise when the manager who is most knowledgeable, and, therefore the
best source of information for planning, will be evaluated at the end of the period.
Knowing that the information he or she submits for planning purposes will be used to
evaluate performance can affect the manager’s actions when providing information
needed for preparing the budget.

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13-17.
It is common to start the budgeting process with a sales forecast because sales are
most out of control of managers. However, if raw materials were difficult to obtain and a
ready market existed for output, especially if prices were regulated, a company might
start with a forecast of production. Electricity production might be an example.
13-18.
In organizations where spending is literally tied to the budget, managers often spend
what remains in the budget as the year ends to avoid losing the funds and potentially
leading to lower budgets in the future.
13-19.
A positive balance at the end of the budgeting period does not ensure that there is
always cash available. An example is when all bills are due on the first of the month and
receipts are collected at the end of the month. The net cash flows can be positive even
though, during the month, there is a negative cash balance.
13-20.
Answers will vary. Many people will submit a budget in excess of their best guess. Part
of this is natural conservatism. Part of this is concern over their performance evaluation.
Other people might submit a number below their best guess, because they fear that
management will cancel the project if the estimated cost is too high.
13-21.
Answers will vary. Some basic factors are the nature of the product and the nature of
the market. For products that are well established (mature), there might be enough data
available to make trend analysis and econometric techniques reliable. In other cases,
the product might be so new, that the data that are available are not representative. In
that case, market researchers and Delphi techniques might be preferred. Similarly, if
market conditions are stable over time, trend analysis and econometric models might be
helpful. If market conditions are changing or unstable, trend analysis and econometric
models based on historical data might not be useful.


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Solutions to Exercises
13-22. (15 min.) Estimate Sales Revenues: Stubs-R-Us.
.80 = market volume in the coming year (as a percent of last year)
.95 = number of sales in the coming year (as a percent of last year)
1.10 = average commission per trade in the coming year (as a percent of last year)
900,000 trades x $5 per sale x .80 x .95 x 1.10 = $3,762,000.
Note: This is not the same as a 25 percent reduction (20% + 5%) because the volume
would not have been 5 percent of last year’s volume but 5 percent of the reduced
volume of 720,000 sales (= 900,000 x 80%).
13-23. (15 min.) Estimate Sales Revenues: Friendly Financial.

Portfolio Interest Income
Amount Rate (thousands)
Consumer loans..................................................
$168 million 10.5% $17,640
Home equity loans...............................................
80 million 9 7,200
Securities.............................................................
25 million 6 1,500
Total............................................................. $26,340
13-24. (15 min.) Estimate Sales Revenues: Larson, Inc.
Market size last year = 85,000 units ÷ 0.2 = 425,000 units

Market size next year = 1.15 x 425,000 units
= 488,750 units
Company share = 16% x 488,750 units
= 78,200 units
Sales revenue = 78,200 units x $22 per unit
= $1,720,400


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13-25. (15 min.) Estimate Production Levels: Offenbach & Son.
Offenbach & Son

Production Budget
For the Year Ended December 31
(in units)
Expected sales revenue..................................................... 225,000 units
Add: Desired ending inventory of finished goods
(1 months ÷ 12 months) x 225,000................................. 18,750
Total needs......................................................................... 243,750
Less: Beginning inventory of finished goods...................... 15,000
Units to be produced........................................................... 228,750 units
13-26. (15 min.) Estimate Sales Levels Using Production Budgets: Sunset

Motors, Inc.
Sunset Motors, Inc.

Sales Budget
(in units)
Expected production........................................................... 75,000 units
Add: Decrease in inventory level.................................... 4,000 units
Budgeted sales............................................................... 79,000 units
13-27. (15 min.) Estimate Inventory Levels Using Production Budgets: Flex-Tite.
Flex-Tite
Sales Budget
(in units)
Expected sales......................................................................... 900,000 units
Plus: Desired ending inventory (1/12 x 900,000 x 130%)........ 97,500 units
Subtract: Planned production................................................... 930,000 units
Beginning inventory.................................................................. 67,500 units


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13-28. (15 min.) Estimate Production Levels: Capacity Constraints: Waterloo,

Ltd..
a.
Waterloo Ltd.
Sales Budget
(in units)
Expected sales.................................................................... 660,000 units
Add: Desired ending inventory (660,000 x 1/12 x 1.5). . . 82,500 units
Subtract: Beginning inventory......................................... 30,000 units
Required production........................................................ 712,500 units
b. The main issue is that the required production (712,500 units) is greater than plant
capacity (700,000 units).
c. There are several possible solutions, including:

1. Reducing ending inventory for next year;
2. Reducing sales (probably not desirable);
3. Producing more at the end of this year (increasing the beginning inventory
next year).


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13-29. (15 min.) Estimate Production and Materials Requirements: Wyoming

Machines.
a.
Wyoming Machines
Casings Plant
Production Budget
(in units)
Expected sales................................................................................. 160,000 units
Add: Desired ending inventory of finished goods............................. 5,000
Total needs....................................................................................... 165,000
Less: Beginning inventory of finished goods.................................... 20,000
Units to be produced........................................................................ 145,000 units
b.
Wyoming Machines
Casings Plant
Direct Materials Requirements
(in units)
Units to be produced...........................................................................
145,000
Direct materials needed per unit.........................................................

x6
ounces
Total production needs (amount per unit times 145,000 units)..........
870,000
ounces
Add: Desired ending inventory
(2 months ÷ 12 months)
x 160,000 x 6...................................
160,000
Total direct materials needs................................................................

1,030,000


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Less: Beginning inventory of materials...............................................

60,000
Direct materials to be purchased........................................................

970,000
ounces
Alternative Method
Production (P)—assumes finished goods in inventory reduced to 20,000 units at the end
of this year (BB = Beginning Balance; EB = Ending Balance):
BB + P = Sales + EB
20,000 + P = 160,000 + 5,000
P = 145,000 units
Materials Requirements:
BB + P = Usage + EB
60,000 + P = (6 x 145,000) + (2 ÷ 12) x 160,000 x 6 oz.
P = 970,000 oz.


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13-30. (25 min.) Estimate Purchases And Cash Disbursements: Midland

Company.
a. and b. Midland Company
Merchandise Purchases Budget
For the Period Ended March 31
(in units)
January February March
Estimated sales revenue.....................................

12,400 17,800 13,200
Add: Estimated sales inventory........................... 45,200a 37,000 31,000
Total merchandise needs................................ 57,600 57,800 44,200
Less: Beginning inventory...................................
28,000 45,200 37,000
Merchandise to be purchased............................. 29,600 9,600 7,200
Estimated cost per unit........................................ x $3 x $3 x $3
Total estimated cost of merchandise.................. $88,800 $28,800 $21,600
aEstimated sales for following three months: 45,200 = 17,800 (February) + 13,200
(March) + 14,200 (April)
Note: Once the process reaches equilibrium, the estimated purchases (in units) are
equal to the budgeted sales three months in the future.


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13-31. (25 min.) Estimate Purchases And Cash Disbursements: Lakeside

Components.
a. Lakeside Components
Merchandise Purchase Budget
For the Period Ended July 31
(in units)
June July
Estimated sales...................................................
12,900 10,500
Add: Estimated ending inventory........................ 10,500 11,100
Total merchandise needs.................................... 23,400 21,600
Less: Beginning inventory...................................12,000 10,500
Merchandise to be purchased............................. 11,400 11,100
b. Payments for these purchases are made as follows:

Month of Delivery
Month of Payment Total May June July
June.....................................................................
$192,600 $90,000a $102,600b –0–
July......................................................................
168,300 68,400c $99,900d
a $90,000 = 40% x $15 x 15,000 units.

b $102,600 = 60% x $15 x 11,400 units.
c $68,400 = 40% x $15 x 11,400 units.
d $99,900 = 60% x $15 x 11,100 units.


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13-32. (15 min.) Estimate Cash Disbursements: Cascade, Ltd.

Cascade, Ltd.
Schedule of Cash Disbursements
For the Period Ended March 31
Payments for purchases prior to February...................... $ 67,500

Payments for February purchases................................... 371,250
March purchases.............................................................. 891,000a
Total cash disbursements................................................ $1,329,750
a $891,000 = $1,485,000  60%
13-33. (15 min.) Estimate Cash Collections: Minot Corporation.

Minot Corporation
Schedule of Cash Collections
For the Month Ended August 31
Collections in August for sales prior to July........................ $ 14,400

July sales............................................................................ 101,250a
August sales....................................................................... 36,000b
Total cash collections......................................................... $151,650
a $101,250 = $135,000 x 75%
b $36,000 = $180,000 x 20%


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13-34. (20 min.) Estimate Cash Collections: Ewing Company.

Ewing Company
Schedule of Cash Collections
For the Month Ended September 30
September
June sales...........................................................
$ 5,700a
July sales.............................................................
9,600b
August sales........................................................
113,400c
September sales................................................. 50,000d
Total cash collections.......................................
$178,700
a$5,700 = $190,000 x 3%
b$9,600 = $160,000 x 6%
c$113,400 = $180,000 x 63%
d$50,000 = $200,000 x 25%


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13-35. (30 min.) Estimate Cash Receipts: Scare-2-B-U.
a. Revenues are as follows:

April.....................................................................
$18,000 = 75 occasions x $240
May......................................................................
$10,800 = 45 occasions x $240
June.....................................................................
$7,200 = 30 occasions x $240
July......................................................................
$14,400 = 60 occasions x $240
August.................................................................
$18,000 = 75 occasions x $240
September...........................................................
$39,600 = 165 occasions x $240
b. Cash receipts are as follows:

Scare-2-B-U
Multiperiod Schedule of Cash Receipts
Total Cash
Cash Receipts in Month of: Receipts for
April May June July Period
April sales............................................................
$ 5,400a $ 5,400
May sales............................................................
5,400b $3,240 8,640
June sales...........................................................
1,440c 3,600 $ 2,160 7,200
July sales.............................................................
2,880 7,200 $ 4,320 14,400
August sales........................................................ 3,600 9,000 12,600
September sales.................................................
________ _______ _______ 7,920 7,920
_______ _______
Total cash collections $12,240 $9,720 $12,960 $21,240 $56,160
a $5,400 = 18,000 x 30%
b $5,400 = $10,800 x 50%
c $1,440 = $7,200 x 20%
This pattern is repeated for subsequent months.


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13-36. (30 min.) Estimate Cash Receipts: Varmit-B-Gone.
Revenues are as follows:

March...... $28,800 = 0.6 calls x 600 subscribers x $80
April......... 50,400 = 0.9 calls x 700 subscribers x $80
May......... 168,000 = 1.5 calls x 1,400 subscribers x $80
June........ 320,000 = 2.5 calls x 1,600 subscribers x $80
July......... 384,000 = 3.0 calls x 1,600 subscribers x $80
August..... 288,000 = 2.4 calls x 1,500 subscribers x $80
Collections of these revenues are expected according to the following schedule:

Varmit-B-Gone
Multiperiod Schedule of Cash Receipts
Total Cash
Cash Receipts in Month of: Receipts
May June July August for Period
March sales.........................................................
$ 2,304a $2,304
April sales............................................................
30,240b $ 4,032 34,272
May sales............................................................
50,400c 100,800 $13,440 164,640
June sales...........................................................
96,000 192,000 $ 25,600 313,600
July sales............................................................. 115,200 230,400 345,600
August sales........................................................
_________ ________ ________ 86,400 86,400
Total cash collections......................................
$82,944 $200,832 $320,640 $342,400 $946,816
a $2,304 = 8% x $28,800
b $30,240 = 60% x $50,400
c $50,400 = 30% x $168,000
This pattern is repeated for subsequent months.


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13-37. (30 min.) Prepare Budgeted Financial Statements: Varmit-B-Gone.

Varmit-B-Gone
Budgeted Income Statement
For the Month of September
Calculations
Sales revenue.....................................................
$207,360 (90% x 1,500) x (80% x 2.4) x $80
Less service costs:
Variable costs..................................................
$ 17,280 (.72a x $24,000)
Maintenance and repair................................... 22,220 (1.01 x $22,000)
Depreciation.....................................................42,000 (no change)
Total service costs...............................................
$ 81,500
Marketing and administrative:
Marketing (variable) ........................................
$ 10,440 (.72a x $14,500)
Administrative (fixed) ...................................... 57,750 (1.05 x $55,000)
Total marketing and administrative costs............ $ 68,190
Total costs...........................................................
$149,690
Operating profit....................................................
$ 57,670
a Ratio of September to August volume:
September: (90% x 1,500) x (80% x 2.4) = 2,592
August: 1,500 x 2.4 = 3,600
Ratio = .72 = 2,592 ÷ 3,600
or
Ratio = .80 x .90 = .72


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13-38. (15 min.) Prepare Budgeted Financial Statements: Cycle-1

Cycle-1
November
Calculations
Sales revenue (360 units @ $540/unit) .............. $194,400 ($180,000 x 1.20 x .90)
Less
Manufacturing costs:
Variable........................................................
$ 32,448 ($26,000 x 1.20 x 1.04)
Depreciation (fixed) ..................................... 27,540 (unchanged)
Total manufacturing costs................................... $ 59,988
Gross profit margin..............................................
$134,412
Less:
Marketing and Administrative
Fixed costs (cash) ....................................... $72,900 ($67,500 x 1.08)
Depreciation (fixed) ..................................... 22,860 (unchanged)
Total marketing and administrative costs............ $95,760
Operating profits..................................................
$38,652


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13-39. (15 min.) Prepare Budgeted Financial Statements: Carreras Café.

Carreras Café
June
Calculations
Sales revenue
(2,520 meals @ $18.75/meal) ............................ $47,250 ($15 x 4,200 x 0.60 x 1.25)
Less
Service costs:
Food.............................................................$ 7,623 ($11,550 x 0.60 x 1.10)
Labor.................................................................
10,080 ($16,800 x 0.60)
Other variable costs..........................................3,450 ($5,750 x 0.60)
Fixed service costs .....................................9,600 (unchanged)
Total service costs...............................................
$ 30,753
Gross profit margin.............................................. $16,497
Less:
Marketing and Administrative
Marketing (variable) .................................... $ 3,780 ($6,300 x 0.60)
Administrative ..............................................5,000 (unchanged)
Total marketing and administrative costs............ $8,780
Operating profits.................................................. $7,717


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13-40. (15 min.) Budgeting in a Service Organization: Executive Solutions.

Executive Solutions
May and June
May June
Revenues:
Managers (@ $900).................................. $1,080,000 $675,000
Staff (@ $450)........................................... 2,880,000 2,025,000
Total revenue....................................... $3,960,000 $2,700,000
Expenses:
Manager compensation (@ $225)............ $540,000 $540,000
Staff compensation (@ $125)................... 1,200,000 1,200,000
Total compensation.............................. $1,740,000 $1,740,000
SG&A........................................................ 550,000 550,000
Depreciation.............................................. 225,000 225,000
Marketing.................................................. 350,000 350,000
Total expenses..................................... $2,865,000 $2,865,000
Income............................................................ $1,095,000 $(165,000)


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13-41. (15 min.) Budgeting in a Service Organization: Jolly Cleaners.

Jolly Cleaners
April
April
Revenues:
Commercial (48 @ $1,400)...................................... $67,200 (a)
Residential (176 @ $300)........................................ 52,800 (b)
Total revenue...................................................... $120,000
Expenses:
Cleaner compensation (4,160 hours @ $15)........... $ 62,400 (c)
Supplies (4,160 hours @ $5)................................... 20,800 (c)
SG&A........................................................................ 30,000 (d)
Other expenses........................................................ 2,000 (d)
Total expenses.................................................... $115,200
Income........................................................................... $ 4,800
a. 48 commercial clients = 40 + (40 x 20%).

b. 176 residential clients = 160 + (160 x 10%).
c. 4,160 hours = (48 commercial clients x 50 hours + 176 residential clients x 10 hours).
d. Given.


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13-42. (15 min.) Budgeting in a Service Organization: Solving for Unknown: Jolly
Cleaners.
The contribution margin for a residential client is:
$100 = $300 – (10 hours x $15 per hour) – (10 hours x $5 per hour).
The contribution margin for a commercial client is:
$400 = $1,400 – 50 hours x $15 per hour – 50 hours x $5 per hour.
Fixed costs are $32,000 per month.
Budgeted profit with commercial clients only is:
$($12,000) = (50 x $400) – $32,000.
If the total budgeted profit is $5,000, the contribution margin from residential customers
is:
$17,000 = $5,000 – ($12,000).
The number of residential clients, therefore, must be budgeted to be:
170 clients = $17,000 ÷ $100 per client.
To check:
Jolly Cleaners
July
July
Revenues:
Commercial (50 @ $1,400)...................................... $70,000 (a)
Residential (170 @ $300)........................................ 51,000 (b)
Total revenue...................................................... $121,000
Expenses:
Cleaner compensation (4,200 hours @ $15)........... $ 63,000 (c)
Supplies (4,200 hours @ $5)................................... 21,000 (c)
SG&A........................................................................ 30,000 (d)
Other expenses........................................................ 2,000 (d)
Total expenses.................................................... $116,000
Income........................................................................... $ 5,000
a. Given. 50 commercial clients.

b. From calculations above.
c. 4,200 hours = (50 commercial clients x 50 hours + 170 residential clients x 10 hours).
d. Given.


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13-43. (15 min.) Incentives and Sales Forecasts—Ethical Issues: Northwest

Hardware.
a. One explanation is that Lloyd has better (more specific) local knowledge about
conditions in the Montana District that the statistical analysis does not include. A second
explanation is that Lloyd wants to “be conservative” in his estimate because he believes
his performance evaluation depends on how well the district does relative to this
forecast.
b. The first explanation is the same as in requirement (a); Lloyd has better information.
A second explanation is that Lloyd is trying to justify hiring additional employees to sell
in the district and thinks it will be easier to justify if the sales forecast is higher.
c. Answers will vary. Gaming the system is common and, given that firms use targets to
assess performance, is expected. The answer to this question depends, in part, on what
Lloyd’s motives are and how good his information is. For example, if he “knows” that the
sales will be $1 million, but reports $900,000 to ensure a higher bonus, that might be
considered unethical. If he thinks sales might be $1 million, but knows he will be fired if
he fails to meet the target, that would not generally be considered unethical.
The controller should consider both forecasts. Both forecasts represent different types
of knowledge and the forecasters have different incentives (and biases).
By understanding the knowledge incorporated in each forecast and the incentives that
the forecasters have, the controller is in a better position to use the information from
both forecasts.
13-44. (15 min.) Budget Revisions—Ethical Issues: Galaxy Electronics.

a. Elizabeth is probably hoping that because the company is committed to the aircraft
guidance program, it will not cut funding for that program and she can protect the other
projects, including her favorite.
Is this ethical? Answers will vary. It certainly depends on Elizabeth’s motives. If she
believes that cutting other programs will truly harm them, more than cuts to the aircraft
guidance program, then she is doing what she is paid to do, manage the department. At
the other extreme, if she is simply trying to fund her personal project at the expense of
the company, that might be considered unethical.
b. The managers of the company probably have been promoted from positions similar
to Elizabeth’s and understand her motives and incentives. They can adjust the budget
after she submits the revision. The final budget will depend on many factors including
negotiation skills.


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13-45. (15 min.) Sensitivity Analysis: Sanjana’s Sweet Shoppe.
The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the
specific row number. For example, to enter the formula for gross margin for unit gross
margin of $2 and 15,000 customers, place the cursor in cell c6 and type everything
between, not including, the following quotation marks: “=a6*b6”.
Notice the range of incomes is quite large, from a loss of $5,900 to a profit of $90,500.


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13-46. (15 min.) Sensitivity Analysis: Classic Limo, Inc.
The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the
specific row number. For example, to enter the formula for gross margin for unit gross
margin of $15 and 4,500 customers, place the cursor in cell c6 and type everything
between, not including, the following quotation marks: “=a6*b6”.
Notice the range of incomes is quite large, from a loss of $14,250 to a profit of
$280,500.


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Solutions to Problems
13-47. (30 min.) Prepare Budgeted Financial Statements: Pepper Products.

Pepper Products
For Year 2
Calculations
Sales revenue.....................................................
$3,113,625a $2,850,000 x 0.95 x 1.15
Materials..........................................................
$ 178,752 $168,000 x 0.95 x 1.12
Other variable costs.........................................121,752 $142,400 x 0.95 x 0.90
Fixed cash costs..............................................340,704 $327,600 x 1.04
Depreciation (fixed) ........................................999,000 $999,000 (unchanged)
Total manufacturing costs................................... $1,640,208
Marketing and administrative costs:
Marketing (variable, cash) .............................. $ 401,280 $422,400 x 0.95
Marketing depreciation....................................149,600 $149,600 (unchanged)
Administrative (fixed, cash) ............................534,660 $509,200 x 1.05
Administrative depreciation............................. 74,800 $74,800 (unchanged)
Total marketing and administrative costs............ $1,160,340
Total costs...........................................................
$2,800,548
$ 313,077
a Alternatively, $3,113,625 = (0.95 x 200,000 units) x (1.15 x $14.25 per unit)


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13-48. (10 min.) Estimate Cash from Operations: Pepper Products.

Pepper Products
Cash Basis Budgeted Income Statement
For Year 2
Sales revenue..................................................... $3,113,625
Manufacturing costs (cash):
Materials.......................................................... $ 178,752
Other variable costs......................................... 121,752
Fixed cash costs.............................................. 340,704
Total cash manufacturing costs.......................... $ 641,208
Marketing (variable, cash) .............................. $ 401,280
Administrative (fixed, cash) ............................ 534,660
Total cash marketing and administrative costs... $935,940
Total cash costs.................................................. $1,577,148
Cash operating profits......................................... $1,536,477
Cash from operations would equal revenues less cash costs, which excludes
depreciation.


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13-49. (30 min.) Prepare Budgeted Financial Statements: Gulf States

Manufacturing.
Gulf States Manufacturing

For Year 2
Calculations
Sales revenue.....................................................
$2,781,000 $2,500,000 x 1.08 x 1.03
Materials..........................................................
$ 457,920 $400,000 x 1.08 x 1.06
Variable cash costs.......................................... 559,170 $545,000 x 1.08 x 0.95
Fixed cash costs.............................................. 196,560 $216,000 x 0.91
Depreciation (fixed) ........................................ 279,900 $267,000 – $29,100 + $42,000
Marketing (variable, cash) .............................. $ 307,800 $285,000 x 1.08
Marketing depreciation.................................... 67,800 $67,800 (unchanged)
Administrative (fixed, cash) ............................ 297,330 $270,300 x 1.10
Administrative depreciation............................. 25,200 $25,200 unchanged
Total marketing and administrative costs............ $ 698,130
Total costs...........................................................
$2,191,680
$589,320


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13-50. (10 min.) Estimate Cash from Operations: Gulf States Manufacturing.

Gulf States Manufacturing
Cash Basis Budgeted Income Statement
For Year 2
Sales revenue..................................................... $2,781,000
Materials.......................................................... $ 457,920
Variable cash costs.......................................... 559,170
Fixed cash costs.............................................. 196,560
Marketing (variable, cash) .............................. $ 307,800
Administrative (fixed, cash) ............................ 297,330
Total cash marketing and administrative costs... $605,130
Total cash costs.................................................. $1,818,700
Cash operating profits......................................... $962,220
Cash from operations would equal revenues less cash costs, which excludes
depreciation.


lOMoARcPSD|7242917
13-51. (25 min.) Prepare A Production Budget: EcoSacks.

EcoSacks
Production Budget
Coming Year
(in units)
Expected Sales......................................................... 540,000 units
Add: Desired ending inventory of finished goods..... 210,000
Total needs................................................................ 750,000
Less: Beginning inventory of finished goods............. 120,000
Units to be produced................................................. 630,000 units
Alternative method:
First, compute the estimated production:
P = Sales + EB – BB
P = Sales + (210,000 – 120,000)
= 540,000 + 90,000
= 630,000 units
Next estimate the costs:
Direct materials
Cotton 630,000 x 1 yard x $4.00 x 1.20.............. $3,024,000
Canvas 630,000 x 0.2 yards x $12.00................ 1,512,000
Total direct materials....................................... $4,536,000
Direct labor:
630,000 x 0.5 hr. x $18.................................... $5,670,000
Overhead:
Indirect labor........................................................
630,000 x $0.60 $ 378,000
Indirect materials.................................................
630,000 x $0.20 126,000
Power..................................................................
630,000 x $0.40 252,000
Equipment costs..................................................
600,000 x $1.30 780,000
Building occupancy.............................................
600,000 x $0.90 540,000
Total overhead............................................... $2,076,000
Total budgeted manufacturing costs...................$12,282,000


lOMoARcPSD|7242917
13-52. (25 min.) Prepare A Production Budget: Haggstrom, Inc.

Haggstrom, Inc.
Production Budget
Year 2
(in units)
Expected Sales......................................................... 210,000 units
Add: Desired ending inventory of finished goods..... 10,000
Total needs................................................................ 220,000
Less: Beginning inventory of finished goods............. 20,000
Units to be produced................................................. 200,000 units
Alternative method:
First, compute the estimated production:
P = Sales + EB – BB
P = Sales + (10,000 – 20,000)
= 210,000 – 10,000
= 200,000 units
Next estimate the costs:
Direct materials
Steel 200,000 x 3 pounds x $0.50 x 0.90............ $270,000
Alloy 200,000 x 0.5 pounds x $2.00.................... 200,000
Total direct materials....................................... $470,000
Direct labor:
200,000 x 0.02 hr. x $25 x 1.04....................... $104,000
Overhead:
Indirect materials.................................................
200,000 x $0.60 $ 120,000
Indirect labor........................................................
200,000 x $0.70 140,000
Utilities.................................................................
200,000 x $0.50 100,000
Plant and equipment depreciation......................250,000 x $0.90 x 1.06 238,500
Miscellaneous......................................................
250,000 x $0.70 175,000
Total overhead............................................... $773,500
Total budgeted manufacturing costs................... $1,347,500


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13-53. (25 min.) Sales Expense Budget: SPU, Ltd.
Budgeted
Item January Adjustments Typical Month
Sales commissions..............................................
$364,500 x 1.14 x 0.90 = $373,977
Sales staff salaries..............................................
86,400 x 1.06 = 91,584
Telephone & mailing............................................
43,000 x 1.14 x 1.05 = 51,471
Building lease payment.......................................
54,000 (unchanged) = 54,000
Utilities.................................................................
11,100 x 1.03 = 11,433
Packaging & delivery...........................................
74,000 x 1.14 = 84,360
Depreciation........................................................
33,750 + ($53,040 ÷ 120 months) = 34,192
Marketing consultants.........................................
–0– + $64,500 = 64,500
Total budgeted costs.. $765,517


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13-54. (30 min.) Budgeted Purchases And Cash Flows: Mast Corporation.
a. $113,000
BB + P = Sales + EB
(120% x 11,900) + P = 11,900 + (120% x 11,400)
14,280 + P = 11,900 + 13,680
P = 11,900 + 13,680 – 14,280
= 11,300 units
11,300 x $10 = $113,000
b. $121,200
BB + P = Sales + EB
(120% x 11,400) + P = 11,400 + (120% x 12,000)
13,680 = 11,400 + 14,400
P = 11,400 + 14,400 – 13,680
= 12,120 units
12,120 x $10 = $121,200
c. $691,896
70% x $726,000 x 98% = $498,036
15% x $726,000 = 108,900
12% x $708,000 = 84,960
$691,896


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13-54. (continued)
d. $218,320 June cash disbursement.

May purchases paid in June: $113,000* x 40% = $45,200
May selling general and administrative expenses paid in June:
[($714,000 x 15%) – $4,000] x 40% = $41,240
June purchases paid in June:
$121,200** x 60% = $72,720
June selling, general and administrative expenses paid in June:
[($684,000 x 15%) – $4,000] x 60% = $59,160
$45,200 + $41,240 + $72,720 + $59,160 = $218,320
*From part a. of this problem

**From part b. of this problem
e. 49,040
BB + P = Sales + EB
(120% x 12,000) + P = 12,000 + (120% x 12,200)
P = 12,000 + 14,640 – 14,400
= 12,240 units


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13-55. (45 min.) Prepare Budgeted Financial Statements: HomeSuites.
It is useful to calculate some variable costs per night and property in Year 1:
Number of nights (Year 1) = 766,500 (= 15 x 365 nights x 200 rooms x 70%).
Average food and beverage revenue per night = $25 (= $19,162,500 ÷ 766,500)
Average miscellaneous revenue per night = $10 (= $7,665,000 ÷ 766,500)
Average food and beverage cost per night = $18 (= $13,797,000 ÷ 766,500)
Average miscellaneous cost per night = $12 (= $9,198,000 ÷ 766,500)
Average variable labor cost per night:
$50 [= $44,325,000 – (15 x $400,000)] ÷ 766,500.
For Year 2, the estimated number of nights is:
919,800 [= (15 + 3) x 365 nights x 200 rooms x 70%].
The budget appears on the following page.


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13-55. (continued)


lOMoARcPSD|7242917
13-56. (30 min.) Budgeted Purchases And Cash Flows: Home Suites.
a. Under the “High Price” strategy, the number of nights will be:
788,400 [= (15 + 3) x 365 nights x 200 rooms x 60%].
The estimated budget is:


lOMoARcPSD|7242917
13-56. (continued)
a. Under the “High Occupancy” strategy, the number of nights will be:
1,051,200 [= (15 + 3) x 365 nights x 200 rooms x 80%].
The estimated budget is:


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13-56. (continued)
c. Based on the budget, the High Price Strategy is expected to earn more profit than
the High Occupancy strategy ($20,778,800 versus $19,990,400). However, neither
strategy appears as profitable as the current one with an estimated profit of
$22,092,800.


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13-57. (40 min.) Comprehensive Budget Plan: Brighton, Inc.
a. (1)
Brighton, Inc.
Schedule Computing Production
Budget (Units)
For April, May, and June
April May June
Budgeted sales—Units........................................ 600,000 450,000 600,000
Inventory required at end of montha................... 90,000 120,000 120,000
Total to be accounted for.................................... 690,000 570,000 720,000
Less inventory on hand at beginning of month... 120,000 90,000 120,000
Budgeted production—Units............................... 570,000 480,000 600,000
a April: 450,000 x .2 = 90,000

May: 600,000 x .2 = 120,000
June: 600,000 x .2 = 120,000
(2)
Schedule Computing Raw Materials Inventory
Purchase Budget (Pounds)
For April and May
April May
Budgeted production—Pounds (1/4 lb. per Unit) a...... 142,500 120,000
Inventory required at end of monthb........................... 48,000 60,000
Total to be accounted for............................................ 190,500 180,000
Less inventory on hand at beginning of month.......... 57,000 102,000c
Balance required by purchase.................................... 133,500 78,000
Budgeted purchases—Pounds
(Based on Minimum Shipments of 62,500 lbs. each) 187,500 125,000
a April: 570,000 x .25 = 142,500

May: 480,000 x .25 = 120,000
b April: 480,000 x .4 x .25 = 48,000
May: 600,000 x .4 x .25 = 60,000
c 102,000 = 57,000 + 187,500 – 142,500


lOMoARcPSD|7242917
13-57. (continued)
b.
Brighton, Inc.
Projected Income Statement
For the Month of May
Sales revenue (450,000 Units at $4) ........................................ $1,800,000
Less: Cash discounts on Sales................................................. $ 18,000
Estimated bad debts (1/2 percent of gross sales) ................... 9,000 27,000
Net Sales................................................................................... $1,773,000
Cost of Sales:
$1,100,000
Variable cost per unit (= x 450,000 Units) ................................................
$990,000
500,000
Fixed Cost............................................................................... 400,000 1,390,000
Gross profit on sales................................................................... $ 383,000
Expenses:
Selling (10 percent of gross sales) .........................................$180,000
Administrative ($165,000 per month) ..................................... 165,000
Interest expense (.01 x $500,000) ......................................... 5,000 350,000
Operating profit........................................................................... $ 33,000


lOMoARcPSD|7242917
13-58. (60 min.) Comprehensive Budget Plan: Panther Corporation

Panther Corporation
(in thousands)
Actual Budgeted
For the Year Ended For the Year Ended
December 31, December 31,
(Year 1) (Year 2)
Revenue:
Sales revenue..............................................
$1,800,000 $2,400,000
Other income................................................
60,000 36,000
Total Revenue..........................................$1,860,000 $2,436,000
Expenses:
Cost of goods manufactured &
sold:
$ 528,000
Materials....................................................... $ 852,000
Direct labor...................................................
540,000 872,000
Variable overhead........................................
324,000 520,000
Fixed overhead
48,000
(Depreciation and other).......................... 51,000
$1,440,000 $2,295,000
Beginning inventory.........................................
192,000 192,000
$1,632,000 $2,487,000
Ending inventory..............................................
192,000 $1,440,000 459,000a $2,028,000
Marketing:
$ 54,000
Salaries........................................................ $ 64,000
60,000
Commissions................................................ 80,000
Promotions and advertising.........................
126,000 240,000 180,000 324,000
Administrative:
$ 56,000
Salaries........................................................ $ 64,000
8,000
Travel........................................................... 10,000
Office costs..................................................
32,000 96,000 36,000 110,000
Income taxes (credit) ...................................... 33,600 (10,400)a
Total expenses.............................................$1,809,600 $2,451,600
Operating profit (loss) ......................................... $ 50,400 $ (15,600)
a
See notes to the balance sheet.
CMA adapted
Note: Actual for December 31, Last Year not required but included for comparison.


lOMoARcPSD|7242917
13-58. (continued)
Panther Corporation
Budgeted Balance Sheet
(in thousands)
Budgeted
December 31,
Year 2
Current Assets
Cash................................................................. $ 4,800
Accounts receivable........................................ 320,000
Inventory.......................................................... 459,000a
Income tax receivable...................................... 10,400b
Total current assets..................................... $794,200
Plant and equipment........................................... 520,000
Less: Accumulated depreciation..................... 164,000 356,000
Total assets.................................................. $1,150,200
Current liabilities
Accounts payable............................................ $180,000
Accrued payable.............................................. 93,000
Notes payable.................................................. 200,000
Total current liabilities.................................. $473,000
Shareholders’ equity
Common stock................................................. 280,000
Retained earnings............................................ 397,200c
Total shareholders’ equity............................ 677,200
Total liabilities and shareholders’ equity...... $1,150,200
Notes on the next page:


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13-58. (continued)
a Inventory
Units:
$1,440,000
Beginning inventory $192,000  = 40,000 units
300,000
Added to inventory 450,000 – 400,000............... = 50,000 units
Ending inventory.................................................. 90,000 units
Cost:
Manufacturing costs........................................$2,295,000
Units manufactured.......................................... 450,000
Cost per unit ($2,295,000  450,000) ............. $5.10
Ending units..................................................... x 90,000
Cost of ending inventory.................................. $459,000
b Income tax:
Sales & other income.......................................... $2,436,000
Cost of goods sold............................................... $2,028,000
Selling expense................................................... 324,000
General & administrative expense...................... 110,000
Total cost......................................................... $2,462,000
Tax loss............................................................... $ (26,000)
Tax rate............................................................... 40%
Tax receivable..................................................... $ 10,400
c Ending retained earnings = Expected beginning balance plus net income – Dividends
= $432,800 – 15,600 – $20,000.


lOMoARcPSD|7242917
Solutions to Integrative Case
13-59. (40 min.) Prepare Cash Budget for Service Organization: Cortez Beach
Yacht Club.
The income statement is on a cash basis, hence we start with a budgeted income
statement.
a. Cortez Beach Yacht Club
Budgeted Statement of Income (Cash Basis)
For the Year 10

Cash revenue
Annual membership fees....................................
$710,000 x 1.1 x 1.03 ..............................................................
$804,430
Lesson and class fees ....................................
(468,000 ÷ 360,000) x $468,000) $608,400
Miscellaneous .................................................
(4,000 ÷ 3,000) x $4,000) 5,333 613,733
Total cash received ......................................................................................................................
$1,418,163
Cash costs
Manager’s salary and benefits ($72,000 x 1.15) ..................................... $ 82,800
Regular employees’ wages and benefits ($380,000 x 1.15) ................... 437,000
Lesson and class employee wages and benefits (given)......................... 604,650
Supplies ($32,000 x 1.25) ........................................................................ 40,000
Utilities (heat and light) ($44,000 x 1.25) ................................................. 55,000
Mortgage interest ($720,000 x .06)a......................................................... 43,200
Miscellaneous ($4,000 x 1.25) ................................................................. 5,000
Total cash expenses............................................................................. $1,267,650
Cash income................................................................................................. $ 150,513
Additional Cash Flows
Cash payments:
Mortgage payment.................................................................................... $ 60,000
Accounts payable balance at 10/31/Year 9.............................................. 5,000
Accounts payable on equipment at 10/31/Year 9..................................... 30,000
Planned new equipment purchase........................................................... 50,000
Total cash payments............................................................................. $ 145,000
Cash inflows from income statement........................................................... 150,513
Beginning cash balance (including petty cash)............................................ 14,600
Cash available for working capital and to acquire property.......................... $ 20,113
aOn November 1, Year 9, the unpaid balance after annual payment is $720,000,
computed as follows: Balances after the $60,000 annual payment November 1, Year 6
= $900,000; November 1, Year 7 = $840,000; November 1, Year 8 = $780,000;
November 1, Year 9 = $720,000 and as given in the problem.


lOMoARcPSD|7242917
13-59. (continued)
b. Operating problems that Cortez Beach Yacht Club could experience in Year 10
include:
 The lessons and classes contribution to cash decreased because the projected
wage increase for lesson and class employees is not made up by the increased
volume of lessons and classes.
 Operating costs are increasing faster than revenues from membership fees.
 CBYC seems to have a cash management problem. Although there appears to
be enough cash generated for the club to meet its obligations, there are past-due
amounts on equipment and regular accounts. Perhaps the cash balance might
not be large enough for day-to-day operating purposes.
c. The manager’s concern with regard to the Board’s expansion goals is justified. The
Year 10 budget projections show only a minimal increase in the cash balance. The
total cash available is well short of the cash needed for the land purchase over and
above the club’s working capital needs. However, it appears that the new equipment
purchases can be made on an annual basis. If the Board desires to purchase the
adjoining property, it is going to have to consider significant increases in fees or
other methods of financing such as membership bonds, or additional mortgage debt.


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Cost Accounting (Silliman University)

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Solutions to Review Questions

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Solutions to Critical Analysis and Discussion Questions

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13-22. (15 min.) Estimate Sales Revenues: Stubs-R-Us.

13-23. (15 min.) Estimate Sales Revenues: Friendly Financial.

13-24. (15 min.) Estimate Sales Revenues: Larson, Inc.

Market size last year = 85,000 units ÷ 0.2 = 425,000 units

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13-25. (15 min.) Estimate Production Levels: Offenbach & Son.

Offenbach & Son

13-26. (15 min.) Estimate Sales Levels Using Production Budgets: Sunset

Sunset Motors, Inc.

13-27. (15 min.) Estimate Inventory Levels Using Production Budgets: Flex-Tite.

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13-28. (15 min.) Estimate Production Levels: Capacity Constraints: Waterloo,

c. There are several possible solutions, including:

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13-29. (15 min.) Estimate Production and Materials Requirements: Wyoming

Direct materials needed per unit.........................................................

Total direct materials needs................................................................

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Less: Beginning inventory of materials...............................................

Direct materials to be purchased........................................................

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13-30. (25 min.) Estimate Purchases And Cash Disbursements: Midland

Estimated sales revenue.....................................

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13-31. (25 min.) Estimate Purchases And Cash Disbursements: Lakeside

b. Payments for these purchases are made as follows:

a $90,000 = 40% x $15 x 15,000 units.

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13-32. (15 min.) Estimate Cash Disbursements: Cascade, Ltd.

Payments for purchases prior to February...................... $ 67,500

13-33. (15 min.) Estimate Cash Collections: Minot Corporation.

Collections in August for sales prior to July........................ $ 14,400

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13-34. (20 min.) Estimate Cash Collections: Ewing Company.

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13-35. (30 min.) Estimate Cash Receipts: Scare-2-B-U.

a. Revenues are as follows: