Chap 013
Chap 013
Chap 013
13
13-1
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 express 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
companys income and output goals.
13-2
13-3
13-12.
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
13-4
performance can affect the managers actions when providing information needed for
preparing the budget.
13-13.
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.
13-14.
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.
13-15.
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.
13-5
Solutions to Exercises
13-16. (15 min.)Estimate Sales Revenues: SVI.
.90 = market volume in the coming year (as a percent of last year)
.85 = number of trades in the coming year (as a percent of last year)
1.15 = average commission per trade in the coming year (as a percent of last year)
150,000 trades x $60 per trade x .85 x .90 x 1.15 = $7,917,750.
Note: This is not the same as a 25 percent reduction (15% + 10%) because the volume
would not have been 10 percent of last years volume but 10 percent of the reduced
volume of 127,500 trades (= 150,000 x 85%).
13-17. (15 min.) Estimate Sales Revenues: EZ-Credit, Inc.
Portfolio
Interest
Income
Amount
Rate
(thousands)
Consumer loans..................................................
$84 million
12%
$10,080
Home equity loans..............................................
60 million
8
4,800
Securities.............................................................
16 million
7
1,120
Total..............................................................
$16,000
13-18. (15 min.)Estimate Sales Revenues: Starlite Company.
Market size last year = 45,000 units 0.3 = 150,000 units
Market size next year = 1.10 x 150,000 units
= 165,000 units
Company share
= 25% x 165,000 units
= 41,250 units
Sales revenue
= 41,250 units x $11 per unit
= $453,750
13-6
13-20. (15 min.)Estimate Sales Levels Using Production Budgets: Sanlax, Inc.
Sanlax, Inc.
Sales Budget
For the Year Ended December 31
(in units)
Expected Production........................................................... 200,000 units
Subtract: Increase in inventory level...............................
20,000 units
Available for sale............................................................. 180,000 units
13-7
Wyoming Machines
Casings Plant
Direct Materials Requirements
For the Year Ended December 31
(in units)
Units to be produced........................................................................... 145,000
Direct materials needed per unit.........................................................
x 6 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
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.
13-8
Westile Company
Merchandise Purchases Budget
For the Period Ended March 31
(in units)
January
Estimated sales...................................................
24,800
Add: Estimated sales inventory...........................
90,400a
Total merchandise needs................................
115,200
Less: Beginning inventory...................................
56,000
Merchandise to be purchased.............................
59,200
Estimated cost per unit........................................ x $2
Total estimated cost of merchandise...................
$118,400
February March
35,600
74,000
109,600
90,400
19,200
x $2
$38,400
26,400
62,000
88,400
74,000
14,400
x $2
$28,800
Estimated sales for following three months: 90,400 = 35,600 (February) + 26,400
(March) + 28,400 (April)
a
Note: Once the process reaches equilibrium, the estimated purchases (in units) are
equal to the budgeted sales three months in the future.
13-9
White Products
Merchandise Purchase Budget
For the Period Ended May 31
(in units)
April
May
Estimated sales...................................................
8,600
Add: Estimated ending inventory........................
7,000
Total merchandise needs....................................
15,600
Less: Beginning inventory...................................
8,000
Merchandise to be purchased.............................
7,600
7,000
7,400
14,400
7,000
7,400
Total
March
April.....................................................................
$385,200
$180,000a
May......................................................................
336,600
$180,000 = 40% x $45 x 10,000 units.
b $205,200 = 60% x $45 x 7,600 units.
c $136,800 = 40% x $45 x 7,600 units.
d $199,800 = 60% x $45 x 7,400 units.
a
13-10
Month of Delivery
April
$205,200b
136,800c
May
0
$199,800d
$ 30,000
165,000
462,000a
$657,000
= $660,000 70%
13-11
= $285,000 x 4%
b$16,800 = $240,000 x 7%
c$167,400 = $270,000 x 62%
d$75,000 = $300,000 x 25%
13-12
$8,160
______
$6,480
a $3,600
_______
$8,640
= 12,000 x 30%
b $3,600 = $7,200 x 50%
c $960 = $4,800 x 20%
This pattern is repeated for subsequent months.
13-13
$14,160
Total Cash
Receipts for
Period
$3,600
5,760
4,800
9,600
8,400
5,280
$37,440
$28,800
50,400
168,000
320,000
384,000
288,000
=
=
=
=
=
=
0.6 calls
0.9 calls
1.5 calls
2.5 calls
3.0 calls
2.4 calls
x
x
x
x
x
x
600 subscribers
700 subscribers
1,400 subscribers
1,600 subscribers
1,600 subscribers
1,500 subscribers
x
x
x
x
x
x
$80
$80
$80
$80
$80
$80
Total Cash
Receipts
for Period
$2,304
34,272
$13,440
164,640
192,000 $25,600
313,600
115,200
230,400
345,600
86,400
86,400
$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.
13-14
Calculations
Revenues............................................................
$207,360 (90% x 1,500) x (80% x 2.4) x $80
Less manufacturing 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
13-15
13-16
Calculations
($150,000 x 1.20 x .90)
($56,340 x 1.10)
(unchanged)
13-17
Calculations
($15 x 4,200 x 0.60 x 1.25)
($6,300 x 0.60)
(unchanged)
13-18
13-19
Solutions to Problems
13-36. (30 min.)Prepare Budgeted Financial Statements: Dancer Components.
Dancer Components
Budgeted Income Statement
For Year 2
Calculations
Revenues............................................................
$6,389,700a $5,700,000 x 1.18 x .95
Manufacturing costs:
Materials..........................................................
$ 364,762 $336,000 x .92 x 1.18
Other variable costs.........................................329,343 $284,800 x .98 x 1.18
Fixed cash costs..............................................687,960 $655,200 x 1.05
Depreciation (fixed) .........................................
1,998,000 unchanged
Total manufacturing costs...................................
$3,380,065
Marketing and administrative costs:
Marketing (variable, cash) ..............................
$ 996,864 $844,800 x 1.18
Marketing depreciation....................................299,200 unchanged
Administrative (fixed, cash) .............................
1,120,240 $1,018,400 x 1.10
Administrative depreciation..............................149,600 unchanged
Total marketing and administrative costs............
$2,565,904
Total costs............................................................
$5,945,969
Operating profits..................................................
$443,731
a
13-20
13-21
13-22
13-23
13-24
13-25
$256,000
600,000
$856,000
$132,000
$ 200,000
320,000
160,000
525,000
350,000
$1,555,000
$2,543,000
Item
January
Adjustments
Sales commissions.............................................
$607,500 x 1.05 x 1.10
=
Sales staff salaries..............................................
144,000 x 1.04
=
Telephone & mailing............................................
72,900 x 1.08 x 1.10
=
Building lease payment.......................................
90,000 (unchanged)
=
Utilities.................................................................
18,450 x 1.15
=
Packaging & delivery...........................................
123,300 x 1.10
=
Depreciation........................................................
56,250 + ($85,500 120 months) =
Marketing consultants.........................................
0 + $157,500
=
Total budgeted costs. .
13-26
Budgeted
Typical Month
$701,663
149,760
86,605
90,000
21,218
135,630
56,963
157,500
$1,399,339
x $1,452,000 x 97%
x $1,452,000
x $1,416,000
=
=
=
$845,064
363,000
127,440
$1,335,504
13-27
13-43. (continued)
d. $1,141,516 September cash disbursement.
August purchases paid in September:
13-28
Brighton, Inc.
Schedule Computing Production
Budget (Units)
For April, May, and June
Budgeted salesUnits........................................
Inventory required at end of montha...................
Total to be accounted for.....................................
Less inventory on hand at beginning of month...
Budgeted productionUnits...............................
a April:
May:
June:
(2)
April
600,000
90,000
690,000
120,000
570,000
May
450,000
120,000
570,000
90,000
480,000
450,000 x .2 = 90,000
600,000 x .2 = 120,000
600,000 x .2 = 120,000
Schedule Computing Raw Materials Inventory
Purchase Budget (Pounds)
For April and May
April
b April:
June
600,000
120,000
720,000
120,000
600,000
13-29
187,500
May
120,000
60,000
180,000
102,000c
78,000
125,000
13-44. (continued)
b.
Brighton, Inc.
Projected Income Statement
For the Month of May
Sales (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
13-30
Revenue:
Sales............................................................
$1,800,000
Other income................................................
60,000
Total Revenue...........................................$1,860,000
Expenses:
Cost of goods manufactured &
sold:
Materials.......................................................
$ 528,000
Direct labor...................................................
540,000
Variable overhead........................................
324,000
Fixed overhead
48,000
(Depreciation and other)..........................
$1,440,000
Beginning inventory.........................................
192,000
$1,632,000
Ending inventory..............................................
192,000 $1,440,000
Marketing:
Salaries........................................................
$ 54,000
Commissions................................................
60,000
Promotions and advertising.........................
126,000
240,000
Administrative:
Salaries........................................................
$ 56,000
Travel............................................................
8,000
Office costs..................................................
32,000
96,000
Income taxes (credit) ......................................
33,600
Total expenses.............................................$1,809,600
Operating profit (loss) ......................................... $50,400
a
Budgeted
For the Year Ended
December 31,
(Year 2)
$2,400,000
36,000
$2,436,000
$ 852,000
872,000
520,000
51,000
$2,295,000
192,000
$2,487,000
459,000a $2,028,000
$
64,000
80,000
180,000
64,000
10,000
36,000
324,000
110,000
(10,400)a
$2,451,600
$ (15,600)
CMA adapted
Note: Actual for December 31, Last Year not required but included for comparison.
13-31
13-45. (continued)
Panther Corporation
Budgeted Balance Sheet
(in thousands)
Budgeted
December 31,
Year 2
Current Assets
Cash.................................................................
Accounts receivable.........................................
Inventory..........................................................
Income tax receivable......................................
Total current assets......................................
Plant and equipment...........................................
Less: Accumulated depreciation.....................
Total assets..................................................
Current liabilities
Accounts payable.............................................
Accrued payable..............................................
Notes payable..................................................
Total current liabilities...................................
Shareholders equity
Common stock.................................................
Retained earnings............................................
Total shareholders equity............................
Total liabilities and shareholders equity......
Notes on the next page:
13-32
$4,800
320,000
459,000a
10,400b
520,000
164,000
$180,000
93,000
200,000
280,000
397,200c
$794,200
356,000
$1,150,200
$473,000
677,200
$1,150,200
13-45. (continued)
a Inventory
Units:
$1,440,000
= 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
Beginning inventory $192,000
b Income
tax:
Sales & other income..........................................
Cost of goods sold.............................................. $2,028,000
Selling expense...................................................
324,000
General & administrative expense......................
110,000
Total cost..........................................................
Tax loss...............................................................
Tax rate................................................................
Tax receivable.....................................................
$2,436,000
$2,462,000
$(26,000)
40%
$10,400
Ending retained earnings = Expected beginning balance plus net income Dividends
= $432,800 15,600 $20,000.
13-33
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
Managers salary and benefits ($72,000 x 1.15) .....................................
Regular employees wages and benefits ($380,000 x 1.15) ...................
Lesson and class employee wages and benefits (given).........................
Supplies ($32,000 x 1.25) ........................................................................
Utilities (heat and light) ($44,000 x 1.25) .................................................
Mortgage interest ($720,000 x .06) a.........................................................
Miscellaneous ($4,000 x 1.25) .................................................................
Total cash expenses..............................................................................
Cash income.................................................................................................
Additional Cash Flows
Cash payments:
Mortgage payment....................................................................................
Accounts payable balance at 10/31/Year 9..............................................
Accounts payable on equipment at 10/31/Year 9.....................................
Planned new equipment purchase...........................................................
Total cash payments..............................................................................
Cash inflows from income statement............................................................
Beginning cash balance (including petty cash)............................................
Cash available for working capital and to acquire property.........................
aOn
$82,800
437,000
604,650
40,000
55,000
43,200
5,000
$1,267,650
$150,513
$60,000
5,000
30,000
50,000
$ 145,000
150,513
14,600
$20,113
13-34
13-46. (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.
c. The managers concern with regard to the Boards 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 clubs 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.
13-35