Accounting Problem Production Budget Purchases Budget Worksheet

CHAPTER 8BUDGETING FOR PLANNING AND CONTROL
DISCUSSION QUESTIONS
1. Budgets are the quantitative expressions of
plans. Budgets are used to translate the
goals and strategies of an organization into
operational terms.
percentage to yield the amount of cash
expected.
8. If the vice president of sales is a pessimistic
individual, one might expect that she or he
would underestimate sales for the coming
year. In your role as head of the budget
process, you might increase the budgeted
sales figure to take out the individual bias.
2. Control is the process of setting standards,
receiving feedback on actual performance,
and taking corrective action whenever actual
performance
deviates
from
planned
performance. Budgets are the standards, and
they are compared with actual costs and
revenues to provide feedback.
9. If the factory controller is a particularly
optimistic individual, it is possible that the
costs for direct materials, direct labor, and
overhead could be underestimated. For
example, an optimistic person might assume
that everything will go well (e.g., that there will
be no problems in obtaining an adequate
supply of materials at the lowest possible
price). As head of the budget process, you
might allow for somewhat higher costs to
more accurately reflect reality.
3. Budgeting forces managers to plan, provides
resource information for decision making, sets
benchmarks for control and evaluation, and
improves the functions of communication and
coordination.
4. The master budget is the collection of all
individual area and activity budgets.
Operating budgets are concerned with the
income-generating activities of a firm.
Financial budgets are concerned with the
inflows and outflows of cash and with
planned capital expenditures.
5. The sales forecast is a critical input for building
the sales budget. It, however, is not
necessarily equivalent to the sales budget.
Upon
receiving
the
sales
forecast,
management may decide that the firm can do
better or needs to do better than the forecast
is indicating. Consequently, actions may be
taken to increase the sales potential for the
coming year (e.g., increasing advertising).
This adjustment then becomes the sales
budget.
10.
The learning curve is the relationship
between unit costs of production and
increasing number of units. As time goes on,
the number of units produced in a time period
will increase and the cost per unit will
decrease. The budgets affected will be the
direct materials purchases budget, the direct
labor budget, and the overhead budget.
11.
Small firms often do not engage in a
comprehensive master budgeting process.
(Personally, we believe that is a mistake. The
budgeting process helps management more
fully understand the business and helps them
to plan for the coming year.) Even small
businesses create cash budgets, however,
because cash flow is critically important. For
example, it is possible to have positive
operating income, but negative cash flow
(e.g., if sales on account are high, but
customers are slow to pay). Negative cash
flow could put a company out of business in
short order.
12.
The master budget has been criticized for the
following reasons: it does not recognize the
interdependencies among departments, it is
static, and it is results rather than process
oriented. These criticisms are especially
6. Yes. All budgets essentially are founded on
the sales budget. The production budget
depends on the level of planned sales. The
manufacturing budgets, in turn, depend on
the production budget. The same is true for
the financial budgets since sales is a critical
input for budgets in that category.
7. An accounts receivable aging schedule gives
the proportion of accounts receivable that are,
on average, collected in the months following
sale. It is important in creating the cash
budget, since the sales on account for past
months can be multiplied by the appropriate
8-1
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apparent when companies are in a
competitive, dynamic environment. When the
environment changes slowly, if at all, the
master budget would do a good job of both
planning and control.
13.
A static budget is one that is not adjusted for
changes in activity. Using a static budget for
control can be a real problem. For example,
suppose that the master (static) budget is
based on the production and sale of 100,000
units, but that only 90,000 units are actually
produced and sold. Further suppose that the
budgeted variable cost of goods sold was
$2,000,000, and that the actual variable cost
of goods sold was $1,890,000. It looks as if
the company spent less than expected for
variable manufacturing costs. However, the
budgeted variable cost was $20 per unit
($2,000,000/100,000), and the actual
variable cost per unit is $21 per unit
($1,890,000/90,000). Not adjusting the
budget for changes in activity level can
mislead managers about efficiency.
14.
A flexible budget is (1) a budget for various
levels of activity or (2) a budget for the actual
level of activity. The first type of flexible budget
is used for planning and sensitivity analysis.
The second type of budget is used for control,
since the actual costs of the actual level of
activity can be compared with the planned
costs for the actual level of activity.
15.
The activity-based budget starts with output,
determines the activities necessary to create
that output, and then determines the
resources necessary to support the activities.
This differs from the traditional master
budgeting process in that the master budget
leaps directly from output to resources. Some
of the resource levels are assumed to be
fixed. This makes them independent of
volume changes and hides the drivers that
actually do affect the fixed resources. As a
result, the budget format does not support the
creation of value and the thinking that would
go into determining the sources of waste.
8-2
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CORNERSTONE EXERCISES
Exercise 8.16
1.
Berring Company
Sales Budget
For the Year Ended December 31
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Year
Deluxe:
Units …………
Unit price ….
Sales ………..
12,000
14,300
16,600
20,000
62,900
×
$40 ×
$40 ×
$40 ×
$40 ×
$40
$ 480,000 $ 572,000 $ 664,000 $ 800,000 $2,516,000
Standard:
Units …………
Unit price ….
Sales ………..
Total sales……..
90,000
88,400
92,000
91,600
362,000
×
$10 ×
$10 ×
$10 ×
$10 ×
$10
$ 900,000 $ 884,000 $ 920,000 $ 916,000 $3,620,000
$1,380,000 $1,456,000 $ 1,584,000 $1,716,000 $6,136,000
2.
Berring Company probably asked the marketing vice president for sales
quantity and price estimates. This vice president might have considered the
level of the past year’s sales of the two products, the actions of competitors,
status of customers, the state of the economy, and so on.
Exercise 8.16
3.
(Concluded)
Production budget for deluxes:
Unit sales ……………………………….
Desired ending inventory ………..
Total needed ……………………..
Less: Beginning inventory ………
Units produced………………….
Quarter 1
12,000
2,860
14,860
1,300
13,560
Quarter 2
14,300
3,320
17,620
2,860
14,760
Quarter 3
16,600
4,000
20,600
3,320
17,280
Quarter 1
90,000
8,840
98,840
1,170
97,670
Quarter 2
88,400
9,200
97,600
8,840
88,760
Quarter 3
92,000
9,160
101,160
9,200
91,960
Production budget for standards:
Unit sales ……………………………….
Desired ending inventory ………..
Total needed ……………………..
Less: Beginning inventory ………
Units produced………………….
8-3
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Exercise 8.17
1.
Crescent Company
Direct Materials Purchases Budget for Fabric
For the Fourth Quarter
October
Units produced ……………………… 42,000
DM per unit (yd.) ……………………. × 0.20
Production needs …………….
8,400
Desired ending inventory (yd.) ..
3,600
Total needed …………………… 12,000
Less: Beginning inventory ……..
1,680
DM to be purchased (yd.) … 10,320
Cost per yard ………………………… × $3.50
Total purchase cost ………… $ 36,120
……………………………127,120
November
90,000
× 0.20
18,000
2,000
20,000
3,600
16,400
× $3.50
57,400
December
50,000
× 0.20
10,000
1,600
11,600
2,000
9,600
× $3.50
$ 33,600
Exercise 8.17
(Concluded)
2.
Crescent Company
Direct Materials Purchases Budget for Polyfiberfill
For the Fourth Quarter
October
Units produced ………………………
42,000
DM per unit (oz.) ……………………. ×
8
Production needs ………………….. 336,000
Desired ending inventory (oz.) .. 288,000
Total needed …………………… 624,000
Less: Beginning inventory …….. 134,400
DM to be purchased (oz.) … 489,600
Cost per ounce ……………………… × $0.05
Total purchase cost ………… $ 24,480
3.
November
90,000
×
8
720,000
160,000
880,000
288,000
592,000
× $0.05
$ 29,600
Total
182,000
×
0.20
36,400
1,600
38,000
1,680
36,320
× $3.50
$
December
50,000
×
8
400,000
128,000
528,000
160,000
368,000
× $0.05
$ 18,400
Total
182,000
×
8
1,456,000
128,000
1,584,000
134,400
1,449,600
× $0.05
$ 72,480
November
90,000
December
50,000
Total
182,000
×
×
Crescent Company
Direct Labor Budget
For the Fourth Quarter 20XX
October
Units produced ……………………… 42,000
Direct labor time per
unit (hours) …………………….. ×
0.10
Direct labor hours needed ………
4,200
Cost per direct labor hour ……… ×
$15
Total direct labor cost ……… $63,000
0.10
9,000
×
$15
$135,000
0.10
5,000
×
$15
$75,000
×
0.10
18,200
×
$15
$273,000
8-4
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Exercise 8.22
1.
Cash Budget
For the Month of October
Beginning cash balance ………………………………………
Collections:
Cash sales ……………………………………………………
Credit sales:
October ($63,000 × 40%) …………………………
September ($62,000 × 36%) ……………………..
August ($58,000 × 22%) …………………………..
Total cash available …………………………………………….
Disbursements:
Inventory purchases:
October ($68,000 × 70% × 45%) ……………….
September ($66,500 × 70% × 55%) …………..
Salaries and wages ……………………………………….
Rent ……………………………………………………………..
Taxes ……………………………………………………………
Other operating expenses ……………………………..
Owner withdrawal …………………………………………
Advertising …………………………………………………..
Internet and telephone ………………………………….
Ending cash balance …………………………………………..
2.
$ 1,118
5,000
25,200
22,320
12,760
$66,398
$21,420
25,603
3,850
3,150
1,635
3,800
3,500
1,500
320
The ending cash balance does not meet the desired level of $3,000. To quickly
adjust the expected ending cash balance, the owner could consider
withdrawing less for her own salary or decreasing discretionary expenses.
Alternatively, she could look into borrowing money.
Exercise 8.23
1.
From payments in May for credit sales in:
February ($182,000 × 0.80 × 0.05) ………………….
March ($192,000 × 0.80 × 0.20) ………………………
April ($196,000 × 0.80 × 0.35)…………………………
May ($210,000 × 0.80 × 0.40) ………………………….
Plus: May cash sales ……………………………………
Total ………………………………………………………..
2.
64,778
$ 1,620
$
7,280
30,720
54,880
67,200
42,000
$202,080
April credit sales = $196,000 × 0.80 = $156,800
Decrease in cash from April credit sales = 0.02 × $156,800 = $3,136
8-5
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Exercise 8.24
Del Spencer’s Men’s Clothing Store
Schedule of Cash Receipts
For the months of August and September
Cash sales …………………………………………………..
Received from sales in:
June:
[(0.9 × $55,000) × (0.14 × 1.03)]
July:
[(0.9 × 0.65) × 45,000)] ……………
(0.9)(0.14)($45,000)(1.03) ………..
August:
[(0.9 × 0.15) × $56,000]……………
[(0.9 × 0.65) × $56,000]……………
September: [(0.9 × 0.15) × $83,000]……………
Total cash receipts ………………………………………..
August
$ 5,600
September
$ 8,300
7,138
26,325
—
5,840
7,560
—
$46,623
32,760
11,205
$58,105
Exercise 8.29
1. Sales revenue:
Pessimistic
$2,250,000
3,000,000
1,800,000
$7,050,000
Expected
$ 3,000,000
4,200,000
5,000,000
$12,200,000
Optimistic
$ 3,600,000
5,040,000
6,000,000
$14,640,000
Pessimistic
Salaries ……………………… $ 130,000
Depreciation ……………….
20,000
Office supplies & other ..
21,000
Advertising:
Sleepeze & Plushette
20,000
Ultima ……………………..
270,000
Commissions ……………..
262,500
Shipping:
Sleepeze …………………
625,000
Plushette…………………
500,000
Ultima ……………………..
150,000
Total ………………………….. $1,998,500
Expected
$ 130,000
20,000
21,000
Optimistic
$ 130,000
20,000
21,000
20,000
750,000
360,000
20,000
900,000
432,000
750,000
600,000
375,000
$3,026,000
900,000
700,000
375,000
$3,498,000
Sleepeze ………………….
Plushette ………………….
Ultima ………………………
Total sales …………..
2.
8-6
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MBA 450
EXAMINATION #2
Fall 2023
Prof. Sankara
NAME: __________________________________
UID: ____________________________________
This examination consists of 5 problems. You must answer all questions. Ensure you show all
workings.
Problem I (10 points) – Master Budget
Miley Co. manufactures beanies. The budgeted units to be produced and sold are below:
August
September
Expected Production
3,100
2,800
Expected Sales
2,900
3,900
It takes 24 yards of yarn to produce a beanie. The company’s policy is to maintain yarn at the end
of each month equal to 5% of next month’s production needs and to maintain a finished goods
inventory at the end of each month equal to 20% of next month’s anticipated production needs.
The cost of yarn is $0.20 a yard. At August 1, 3,720 yards of yarn were on hand.
Required: Compute the budgeted cost of material purchases for August (Round to the nearest
dollar).
Problem II (14 points) – Cash Budget
Wynn Company has budgeted sales revenues as follows:
Credit sales
Cash sales
Total sales
June
$135,000
90,000
$225,000
July
$145,000
255,000
$400,000
August
$ 90,000
195,000
$285,000
Budgeted inventory purchases
$300,000
$250,000
$105,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and
the remaining 40% will be collected in the following month. Purchases of inventory are all on
credit and 50% is paid in the month of purchase and 50% in the month following purchase.
Other cash disbursements budgeted: selling and administrative expenses of $48,000 each month.
The beginning cash balance on July 1 was $50,000.
Requirements: Prepare a cash budget for the month of July. Prepare separate schedules for
expected collections from customers and expected payments for purchases of inventory. Round
to the nearest dollar.
Problem III (20 points) – Standard Costing
Standard costs were developed for one of the products of Amazon Corporation. Standard costs
per unit for Direct Materials and Direct Labor were as follows:
Materials: 4 feet x $14.25 per foot
Direct labor: 8 hours x $10 per hour
$ 57.00
80.00
The following information is available regarding the company’s operations for the period:
Units produced:
Materials purchased and used:
Direct labor:
11,000
40,000 feet @ $13.95 per foot
84,000 hours costing $840,000
Manufacturing overhead incurred:
Variable
Fixed
$756,000
$1,000,000
Manufacturing overheads’ cost driver is direct labor hours. Total budgeted manufacturing
overhead for the period is $1,600,000 (of which $640,000 is variable) and the standard fixed and
variable overhead rates are based on expected capacity of 80,000 direct labor hours.
Required:
Calculate all the direct materials, direct labor and overhead variances (there should be eight
variances in total).
Note: Expected capacity in units = 80,000 hours/8 hours per unit = 10,000 units
Problem IV– Allocating Costs
1) Joint Cost allocation (10 points)
Vegan Products produces two products, Soyburgers and Soy steaks, in a single process. In 2014,
the joint costs of this process were $36,000. In addition, 20,000 pounds of soyburgers and 10,000
pounds of soy steaks were produced. Separable processing costs beyond the split-off point were:
soyburgers, $7,500; soy steaks, $4,500. Soyburgers sells for $2 per pound; Soy steaks sells for $4
per pound.
Required:
a. Allocate the joint costs using the net realizable value method (round to the nearest dollar).
b. Allocate the joint costs using the physical units method (round to the nearest dollar).
Problem IV (continued) – Allocating Costs
2) Support Department Allocation (16 points)
Swirl Enterprises has two support departments (S1 and S2) and two producing departments (A
and B). The distribution of services by the support departments is as follows:
Services Provided from
S1 S2
S1
21% –
Services Provided to
S2
A
8%
74%
47%
B
18%
32%
Total department costs for the support and producing departments are as follows:
Department
Total Costs
S1
$ 58,000
S2
124,000
A
712,000
B
568,000
Required:
Allocate the costs of the support department to the producing departments (A and B) using the
reciprocal method (round to the nearest dollar), and show the amount of total costs for A and B
after the allocation. Show all workings including any algebra equations and the distribution of
support department costs.
Problem V (10 points) – Under/Over-applied Overhead
The Welch Guitar Company uses a predetermined overhead rate of $5 per machine hour to apply
overhead. During the year, 32,500 machine hours were worked. Actual manufacturing overhead
cost for the year was $187,500. Company records showed the following account balances at the
end of the year:
Materials
Work in process
Finished goods
Cost of goods sold
$ 22,500
37,500
50,000
112,500
Required:
a. Determine the amount of underapplied or overapplied overhead.
b. Assuming the amount of underapplied or overapplied overhead is material, prepare the
journal entry to dispose of the variance at the end of the year (Round to the nearest dollar).
c. Assuming the amount of underapplied or overapplied overhead is immaterial, prepare the
journal entry to dispose of the variance at the end of the year (Round to the nearest dollar).