Budgeting for College Expenses

CHAPTER 9
Profit Planning, Activity-Based Budgeting, and

e-Budgeting
ANSWERS TO REVIEW QUESTIONS
9-1
A budget facilitates communication and coordination by making each manager

throughout the organization aware of the plans made by other managers. The
budgeting process pulls together the plans of each manager in the organization.
9-2
An example of using the budget to allocate resources in a university is found in the

area of research funds and grants. Universities typically have a limited amount of
research-support resources that must be allocated among the various colleges and
divisions within the university. This allocation process often takes place within the
context of the budgeting process.
9-3
A master budget, or profit plan, is a comprehensive set of budgets covering all

phases of an organization's operations for a specified period of time. The master
budget includes the following parts: sales budget, operational budgets (including a
production budget, inventory budgets, a labor budget, an overhead budget, a selling
and administrative expense budget, and a cash budget), and budgeted financial
statements (including a budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-4
The flowchart on the following page depicts the components of the master budget
for a service station.
9-5
General economic trends are important in forecasting sales in the airline industry.
The overall health of the economy is an important factor affecting the extent of
business travel. In addition, the health of the economy, inflation, and income levels
affect the extent to which the general public travels by air.
9-6
Operational budgets specify how an organization's operations will be carried out to

meet the demand for its goods and services. The operational budgets prepared in a
hospital would include a labor budget showing the number of professional personnel
of various types required to carry out the hospital's mission, an overhead budget
listing planned expenditures for such costs as utilities and maintenance, and a cash
budget showing planned cash receipts and disbursements.
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Managerial Accounting, 7/e
2008 The McGraw-Hill Companies,

9- 1
Flowchart for Review Question 9-4

Sales Budget:
Gasoline, Related
Products, and
Services
Sales
Budget
Operational
Budgets
Ending
Inventory
Budget:
Gasoline
Materials Budget:
Gasoline and
Related Products
Labor
Budget
Overhead
Budget
Selling and
Administrative
Expense
Budget
Cash
Budget
Budgeted
Income
Statement
Budgeted
Financial
Statements
Budgeted
Balance Sheet
Budgeted
Statement of
Cash Flows
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9-2

Solutions Manual
9.7 Application of activity-based costing to the budgeting process yields activity-based

budgeting (ABB). Under ABB, the first step is to specify the products or services to
be produced and the customers to be served. Then the activities necessary to
produce these products and services are determined. Finally the resources needed
to perform the specified activities are determined. ABB differs from traditional
budgeting in the emphasis that it places on activities and its use of activity-based
costing data in the budgeting process.
9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this
approach the information needed to construct a budget is gathered via the Internet
from individuals and subunits located throughout the enterprise. The Internet also is
used to disseminate the resulting budget schedules and information to authorized
users throughout the enterprise.
9-9
The city of Boston could use budgeting for planning purposes in many ways. For
example, the city's personnel budget would be important in planning for required
employees in the police and fire departments. The city's capital budget would be
used in planning for the replacement of the city's vehicles, computers,
administrative buildings, and traffic control equipment. The city's cash budget would
be important in planning for cash receipts and disbursements. It is important for any
organization, including a municipal government, to make sure that it has enough
cash on hand to meet its cash needs at all times.
9.10The budget director, or chief budget officer, specifies the process by which budget data
will be gathered, collects the information, and prepares the master budget. To
communicate budget procedures and deadlines to employees throughout the
organization, the budget director often develops and disseminates a budget manual.
9-11
The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to
take. The budget manual also states who should receive each schedule when the
master budget is complete.
9-12
A company's board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval,
the board of directors can wield considerable influence on the overall direction the
organization takes. Since the budget is used as a resource-allocation mechanism,
the board of directors can emphasize some programs and curtail or eliminate others
by allocating funds through the budgeting process.
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9- 3
9-13
Under zero-base budgeting, the budget for virtually every activity in the organization
is initially set to zero. To receive funding during the budgeting process, each activity
must be justified in terms of its continued usefulness. The zero-base budgeting
approach forces management to rethink each phase of an organization's operations
before allocating resources.
9-14
A master budget is based on many assumptions and predictions of unknown

parameters. For example, the sales budget is built on an assumption about the
nature of demand for goods or services. The direct-material budget requires an
estimate of the direct-material price and the quantity of material required per unit of
production. Many other assumptions are used throughout the rest of the budgeting
process.
9-15
The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
slack. Building budgetary slack into the budget is called padding the budget. A
significant problem caused by budgetary slack is that the budget ceases to be an
accurate portrayal of likely future events. Cost estimates are often inflated, and
revenue estimates are often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-16
An organization can reduce the problem of budgetary slack in several ways. First, it
can avoid relying on the budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary projections but also to
provide accurate projections.
9-17
The idea of participative budgeting is to involve employees throughout an

organization in the budgetary process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling that "this is the budget you
imposed on us." When employees feel that they were part of the budgeting process,
they are more likely to strive to achieve the budget.
9-18
This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge in
their minds about running their business. They feel that they do not need to spend a
great deal of time on the budgeting process, because they can essentially run the
business by feel. This approach can result in several problems. First, if the person
who is running the business is sick or traveling, he or she is not available to make
decisions and implement plans that could have been clarified by a budget. Second,
the purposes of budgeting are important to the effective running of an organization.
Budgets facilitate communication and coordination, are useful in resource
allocation, and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process.
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9-4

Solutions Manual
9-19
In developing a budget to meet your college expenses, the primary steps would be to
project your cash receipts and your cash disbursements. Your cash receipts could
come from such sources as summer jobs, jobs held during the academic year,
college funds saved by relatives or friends for your benefit, scholarships, and
financial aid from your college or university. You would also need to carefully project
your college expenses. Your expenses would include tuition, room and board, books
and other academic supplies, transportation, clothing and other personal needs, and
money for entertainment and miscellaneous expenses.
9-20
Firms with international operations face a variety of additional challenges in

preparing their budgets.
A multinational firm's budget must reflect the translation of foreign currencies

into U.S. dollars. Almost all the world's currencies fluctuate in their values
relative to the dollar, and this fluctuation makes budgeting for those translations
difficult.
It is difficult to prepare budgets when inflation is high or unpredictable. Some

foreign countries have experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such high inflation rates is
difficult and complicates a multinational's budgeting process.
The economies of all countries fluctuate in terms of consumer demand,

availability of skilled labor, laws affecting commerce, and so forth. Companies
with foreign operations face the task of anticipating such changing conditions in
their budgeting processes.
9-21
The five phases in a product's life cycle are as follows:

(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) Distribution and customer service
It is important to budget these costs as early as possible in order to ensure that the
revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well before
they are actually incurred.
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9- 5
SOLUTIONS TO EXERCISES
EXERCISE 9-22 (20 MINUTES)
1.
Sales...........................................................
Cash receipts:
From cash sales....................................
From sales on account.........................
Total cash receipts....................................
a
$90,000
= $80,000 .5
$30,000
= $60,000 .5
$36,000
($40,000 .6) + ($30,000 .4)
$39,000
($45,000 .6) + ($30,000 .4)
2.
May
$60,000
June
$90,000a
$ 40,000b
36,000d
$ 76,000
$ 30,000c
34,000
$ 64,000
$ 45,000
39,000e
$ 84,000
= $45,000 2
$40,000
April
$80,000
Accounts payable, 12/31/x0.........................................................................300,000 euros

Purchases of goods and services on account during 20x1......................
1,200,000 euros
Payments of accounts payable during 20x1..............................................
(1,100,000) euros*
Accounts payable, 12/31/x1.........................................................................400,000 euros
*1,100,000 euros
= 300,000 euros + 1,200,000 euros 400,000 euros
3.
Accounts receivable, 12/31/x0.....................................................................

Sales on account during 20x1.....................................................................
Collections of accounts receivable during 20x1........................................
Accounts receivable, 12/31/x1.....................................................................
4.
Accumulated depreciation, 12/31/x0........................................................... $ 810,000

Depreciation expense during 20x1.............................................................
150,000
Accumulated depreciation, 12/31/x1........................................................... $ 960,000
5.
Retained earnings, 12/31/x0........................................................................ $2,050,000

Net income for 20x1.....................................................................................
400,000
Dividends paid in 20x1................................................................................. -0-_
Retained earnings, 12/31/x1........................................................................ $2,450,000
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9-6
340,000y
900,000y
(780,000y)
460,000y

Solutions Manual

Answers will vary widely, depending on the governmental unit selected and the budgetary
items on which the student focuses. In the past, students have expressed surprise at the
proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social
Security and Medicare), interest expense, and the military.
1.
Production (in units) required for the year:

Sales for the year...........................................................................................
Add: Desired ending finished-goods inventory on December 31..............
Deduct: Beginning finished-goods inventory on January 1......................
Required production during the year...........................................................
2.
480,000
50,000
80,000
450,000
Purchases of raw material (in units), assuming production of 500,000 finished units:
Raw material required for production (500,000 2)...................................
Add: Desired ending inventory on December 31........................................
Deduct: Beginning inventory on January 1.................................................
Required raw-material purchases during the year......................................
1,000,000
45,000
35,000
1,010,000

1.
Cash collections in October:

Month of Sale
July...............................................................
August.........................................................
September...................................................
October........................................................
Total.............................................................
Amount Collected in October

$ 2,400
$60,000 4%
7,000
70,000 10%
12,000
80,000 15%
63,000
90,000 70%
$84,400
Notice that the amount of sales on account in June, $49,000 was not needed to solve
the exercise.
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9- 7
EXERCISE 9-25 (CONTINUED)

2.
Cash collections in fourth quarter from credit sales in fourth quarter.

Amount Collected
Month of Sale
October............................................
November........................................
December.........................................
Total.................................................
Total collections in fourth quarter
from credit sales in fourth
quarter.........................................
Credit
Sales
$ 90,000
100,000
85,000
October
$ 63,000
November
$13,500
70,000
December
$ 9,000
15,000
$ 63,000
$83,500
59,500
$ 83,500
$230,000
3. Spreadsheet is shown on this chapters solutions manual opening screen.

1.
The total required production is 655,720 units, computed as follows:

Budgeted Sales
(in units)
June
July
August
September
October
200,000 (given)
210,000 (200,000 1.05)
220,500 (210,000 1.05)
231,525 (220,500 1.05)
Planned Ending Inventory

(in units)
160,000 (200,000 80%)
185,220 (231,525 80%)
Sales in units:
July................................................................................................................
August...........................................................................................................
September.....................................................................................................
Total for third quarter...................................................................................
Add: Desired ending inventory, September 30..........................................
Subtotal.........................................................................................................
Deduct: Desired ending inventory, June 30...............................................
Total required production............................................................................
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9-8
200,000
210,000
220,500
630,500
185,220
815,720
160,000
655,720

Solutions Manual

2.
Assumed production during third quarter (in units).................................

Raw-material requirements per unit of product (in pounds)....................
Raw material required for production in third quarter (in pounds)..........
Add: Desired ending raw-material inventory, September 30
(2,400,000 25%).................................................................................
Subtotal.........................................................................................................
Deduct: Ending raw-material inventory, June 30.......................................
Raw material to be purchased during third quarter (in pounds)..............
Cost per pound of raw material...................................................................
Total raw-material purchases during third quarter....................................
600,000
4
2,400,000
600,000
3,000,000
700,000
2,300,000
$1.15
$2,645,000

1.
BINGHAMTON FILM CORPORATION

EXPECTED CASH COLLECTIONS
AUGUST
Month
June...................................................
July....................................................
August...............................................
Total...............................................
2.
Sales
$60,000
78,000
66,000
Percent
9%
20%
70%
Expected
Collections
$ 5,400
15,600
46,200
$67,200
BINGHAMTON FILM CORPORATION

EXPECTED CASH DISBURSEMENTS
AUGUST
July purchases to be paid in August............................................................
Less: 2% cash discount................................................................................
Net...............................................................................................................
Cash disbursements for expenses...............................................................
Total............................................................................................................
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Inc.
$ 54,000
1,080
$ 52,920
14,400
$ 67,320

9- 9

3.
BINGHAMTON CORPORATION
EXPECTED CASH BALANCE
AUGUST 31
Balance, August 1..........................................................................................
Add: Expected collections............................................................................
Less: Expected disbursements....................................................................
Expected balance......................................................................................
$22,000
67,200
67,320
$21,880

Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject: Budgetary slack

Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x2. Yet the new accounts manager's projection is only 700 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
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9-10

Solutions Manual

1.
Total Sales in January 20x2
$100,000
$130,000
$160,000
Cash receipts in January, 20x2
From December sales on account............
From January cash sales..........................
From January sales on account...............
Total cash receipts.....................................
$ 7,125*
75,000
20,000**
$ 102,125
$ 7,125
97,500
26,000
$130,625
$ 7,125
120,000
32,000
$159,125
*$7,125 = $190,000 .25 .15
$75,000 = $100,000 .75

**$20,000 = $100,000 .25 .80
2.
Operational plans depend on various assumptions. Usually there is uncertainty about

these assumptions, such as sales demand or inflation rates. Financial planning helps
management answer "what if" questions about how the budget will look under various
sets of assumptions.

1.
Budgeted cash collections for December:

Month of Sale
November.............................................................
December..............................................................
Total cash collections..........................................
2.
Collections in December
$ 76,000
$200,000 38%
132,000
220,000 60%
$208,000
Budgeted income (loss) for December:

Sales revenue.......................................................................
Less: Cost of goods sold (75% of sales)............................
Gross margin (25% of sales)...............................................
Less: Operating expenses:..................................................
Bad debts expense (2% of sales)..............................
Depreciation ($216,000/12)........................................
Other expenses..........................................................
Total operating expenses..........................................
Income before taxes.............................................................
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$220,000
165,000
$55,000
$4,400
18,000
22,600
45,000
$10,000
9- 11

3.
Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
December....................
January.......................
Total December
purchases................
Sales
$220,000
200,000
Cost of
Goods
Sold
$165,000
150,000
Amount Purchased in December

$ 33,000
$165,000 20%
120,000
150,000 80%
$153,000
Therefore, the December 31 balance in accounts payable will be $153,000.

1.
Direct professional labor budget for the month of June:

Office visits per month = 48,000/12 = 4,000
Professional services in June:
One-hour visits (20% 4,000 1 hr.)...................................
Half-hour visits (80% 4,000 1/2 hr.)................................
Total direct professional labor..............................................
Hourly rate for dental associates..........................................
Total direct professional labor cost......................................
McGraw-Hill/Irwin
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9-12
800 hours
1,600 hours
2,400 hours
$ 60
$144,000

Solutions Manual

2.
Cash collections during June:

Half-hour visits (4,000 80%)...............................................
Billing rate..............................................................................
Total billings for half-hour visits...........................................
One-hour visits (4,000 20%)...............................................
Billing rate..............................................................................
Total billings for one-hour visits...........................................
Total billings during month...................................................
Percentage of month's billings collected
during June........................................................................
Collections during June........................................................
Total collections in June ($18,400 + $165,600)....................
May
3,200
$40
$128,000
800
$70
$ 56,000
$184,000
June
3,200
$40
$128,000
800
$70
$ 56,000
$184,000
10%
$ 18,400
90%
$165,600
$184,000
3. Overhead and administrative expense budget for June:

Patient registration and records (4,000 visits $2.00 per visit). . .
Other overhead and administrative expenses
(2,400 hours $5.00 per hour)...................................................
Total overhead and administrative expenses.................................
$ 8,000
12,000
$20,000
4. Spreadsheet is shown on this chapters solutions manual opening screen.
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9- 13
SOLUTIONS TO PROBLEMS
PROBLEM 9-32 (40 MINUTES)
1.
Production and direct-labor budgets

SPIFFY SHADES CORPORATION
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units).....................................................
Add: Ending inventory*...................................
Total needs.......................................................
Deduct: Beginning inventory..........................
Units to be produced.......................................
Direct-labor hours per unit..............................
Total hours of direct labor
time needed.................................................
Direct-labor costs:
Wages ($16.00 per DLH).............................
Pension contributions
($.50 per DLH).........................................
Workers' compensation
insurance ($.20 per DLH)........................
Employee medical insurance
($.80 per DLH).........................................
Employer's social security
(at 7%)......................................................
Total direct-labor cost.....................................
January
10,000
16,000
26,000
16,000
10,000
1
Month
February
12,000
12,500
24,500
16,000
8,500
1
March
8,000
13,500
21,500
12,500
9,000
.75
Quarter
30,000
13,500
43,500
16,000
27,500
10,000
8,500
6,750
25,250
$160,000
$136,000
$108,000
$404,000
5,000
4,250
3,375
12,625
2,000
1,700
1,350
5,050
8,000
6,800
5,400
20,200
11,200
$186,200
9,520
$158,270
7,560
$125,685
28,280
$470,155
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
DLH denotes direct-labor hour.
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9-14

Solutions Manual
PROBLEM 9-32 (CONTINUED)

2.
Use of data throughout the master budget:

Components of the master budget, other than the production budget and the directlabor budget, that would also use the sales data include the following:
Sales budget
Cost-of-goods-sold budget
Selling and administrative expense budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the production data include the following:
Direct-material budget
Manufacturing-overhead budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor-hour data include the following:
Manufacturing-overhead budget (for determining the overhead application rate)

Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor cost data include the following:
Manufacturing-overhead budget (for determining the overhead application rate)

Cash budget
Budgeted income statement
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9- 15

3. Manufacturing overhead budget:
SPIFFY SHADES CORPORATION
MANUFACTURING OVERHEAD BUDGET
Month
Shipping and handling...............

Purchasing, material handling,
and inspection............................
Other overhead...........................
Total manufacturing overhead...
January
February
March
Quarter
$ 20,000
$ 24,000
$16,000
$ 60,000
30,000
70,000
$120,000
25,500
59,500
$109,000
27,000
47,250
$90,250
82,500
176,750
$319,250

1.
2.
Tuition revenue budget:

Current student enrollment.
Add: 5% increase in student body
Total student body.
Less: Tuition-free scholarships.
Tuition-paying students
Credit hours per student per year.
Total credit hours..
Tuition rate per hour.
Forecasted tuition revenue.
8,000
400
8,400
120
8,280
x 30
248,400
x $75
$18,630,000
Faculty needed to cover classes:

Total student body.
Classes per student per year [(15 credit hours 3
credit hours) x 2 semesters].
Total student class enrollments to be covered.
Students per class.
Classes to be taught.
Classes taught per professor.
Faculty needed
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9-16
8,400
x 10
84,000
25
3,360
5
672

Solutions Manual

3.
Possible actions might include:

Hire part-time instructors
Use graduate teaching assistants
Increase the teaching load for each professor
Increase class size and reduce the number of sections to be offered
Have students take an Internet-based course offered by another university
Shift courses to a summer session
4.
No. While the number of faculty may be a key driver, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.

1.
Schedule of cash collections:

January
Collection of accounts receivable:
$55,000 x 20%...
Collection of January sales ($150,000):
60% in January; 35% in February ..
Collection of February sales ($180,000):
60% in February; 35% in March..
Collection of March sales ($185,000):
60% in March; 35% in April..
Sale of equipment.
Total cash collections
2.
February
March
$ 11,000
90,000
$101,000
$ 52,500
108,000
$ 63,000
$160,500
111,000
5,000
$179,000
Schedule of cash disbursements:

January
Payment of accounts payable...
Payment of January purchases ($90,000):
70% in January; 30% in February..
Payment of February purchases ($100,000):
70% in February; 30% in March..
Payment of March purchases ($140,000):
70% in March; 30% in April..
Cash operating costs..
Total cash disbursements...
McGraw-Hill/Irwin
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February
March
$ 22,000
63,000
31,000
$116,000
$ 27,000
70,000
$ 30,000
24,000
$121,000
98,000
45,000
$173,000

9- 17
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9-18

Solutions Manual

3.
Schedule of cash needs:

January
February
March
Beginning cash balance. $ 20,000

Total receipts.
101,000
Subtotal. $121,000
Less: Total disbursements
116,000
Cash excess (deficiency) before financing $ 5,000
Financing:
Borrowing to maintain $20,000 balance..
15,000
Loan principal repaid
Loan interest paid..
Ending cash balance $ 20,000
$ 20,000
160,500
$180,500
121,000
$ 59,500
$ 44,300
179,000
$223,300
173,000
$ 50,300
(15,000)
(200)*
$ 44,300
$ 50,300
* $15,000 x 8% x 2/12
1.
Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $216,000 equal 60% of Decembers sales;
thus, December sales total $360,000 ($216,000 .6). Since the selling price is $40
per unit, Badlands sold 9,000 units ($360,000 $40).
2.
Since the company expects to sell 10,000 units, sales revenue will total $400,000
(10,000 units x $40).
3.
Badlands collected 40% of Februarys sales in February, or $156,800. Thus,

Februarys sales total $392,000 ($156,800 .4). Combining January sales ($152,000 +
$228,000), February sales ($392,000), and March sales ($400,000), the company will
report revenue of $1,172,000.
4.
Sixty percent of Marchs sales will be outstanding, or $240,000 ($400,000 x 60%).
5.
Finished-goods inventories are maintained at 20% of the following months sales.

January sales total $380,000 ($152,000 + $228,000), or 9,500 units ($380,000 $40).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).
McGraw-Hill/Irwin
Inc.

9- 19

6.
February sales will total 9,800 units ($392,000 $40), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
12/31/x0 inventory + X January 20x1 sales = 1/31/x1 inventory
1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560
7.
Financing required is $7,000 ($30,000 minimum balance - $23,000 ending balance):

Cash balance, January 1 $ 45,000
Add: January receipts ($216,000 + $152,000)..
368,000
Subtotal $413,000
Less: January payments 390,000
Cash
balance
before $ 23,000
financing.
McGraw-Hill/Irwin
Inc.
9-20

Solutions Manual

1.
The cash budget for Alpha-Tech for the second quarter of 20x5 is presented below.
Supporting calculations follow.
ALPHA-TECH
Cash Budget
For the Second Quarter of 20x5

Beginning balance.................................................
Collections:a
February sales.................................................
March sales......................................................
April sales.........................................................
May sales..........................................................
Add: Total receipts.................................................
Total cash available...............................................
Disbursements:
Accounts payableb...........................................
Wagesc..............................................................
General and administratived............................
Property taxes..................................................
Income taxese...................................................
Deduct: Total disbursements................................
Cash balance..........................................................
Cash borrowed.......................................................
Cash repaid
Ending balance......................................................
April
May
$ 500,000 $ 500,000
4,000,000
5,400,000
3,600,000
6,900,000
$9,400,000 $10,500,000
$9,900,000 $11,000,000
$4,155,000 $ 4,735,000
3,450,000
3,750,000
900,000
900,000
June
$ 1,230,000
4,600,000
7,500,000
$12,100,000
$13,330,000
$ 5,285,000
4,200,000
900,000
340,000
1,280,000
$9,785,000 $ 9,385,000 $10,725,000
$ 115,000 $ 1,615,000 $ 2,605,000
385,000
(385,000)
$ 500,000 $ 1,230,000 $ 2,605,000
60% of sales in first month after sale; 40% of sales in second month after sale.
See next page.
c
30% of current month sales.
d
(Total, less property taxes and depreciation) divided by 12.
e
40% $3,200,000.
b
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9- 21

b
Accounts payable:
Total*
Cost of goods sold:
February....
$4,000,000
March.........
3,600,000
March.........
3,600,000
April...........
4,600,000
April...........
4,600,000
May............
5,000,000
May............
5,000,000
June...........
5,600,000
Percentage
February
.30
.70
.30
.70
.30
.70
.30
.70
$1,200,000
2,520,000
$3,720,000
4,300,000
4,300,000
4,880,000
4,880,000
5,420,000
April
May
June
$1,080,000
3,220,000
$1,380,000
3,500,000
$3,720,000
Payments:
February....
March.........
March.........
April...........
April...........
May............
March
$4,300,000
.25
.75
.25
.75
.25
.75
$4,880,000
$1,500,000
3,920,000
$5,420,000
$ 930,000
3,225,000
$1,075,000
3,660,000
$
$4,155,000
$4,735,000
$1,220,000
4,065,000
$5,285,000
*For cost of goods sold, this amount is equal to 40% of sales. For payments, this amount is
equal to the cost of goods sold.
2.
Cash budgeting is important for Alpha-Tech because as sales grow, so will

expenditures for inputs. Since these expenditures generally precede cash receipts,
the company must plan for possible financing to cover the gap between payments
and receipts. The cash budget shows the probable cash position at certain points in
time, allowing the company to plan for borrowing, as Alpha-Tech must do in April.
Cash budgeting also facilitates the control of excess cash. The company may be
losing investment opportunities if excess cash is left idle. The cash budget alerts
management to periods when there will be excess cash available for investment,
thus facilitating financial planning and cash control.
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Solutions Manual

1.
The use of alternative accounting methods to manipulate reported earnings is unethical

because it violates the Standards of Ethical Conduct for Management Accountants. The
competence standard is violated because of failure to comply with technical standards
and lack of appropriate analysis. The integrity standard is violated because this action
induces people to carry out duties unethically due to extreme management pressure,
subverts the attainment of an organization's objectives, and discredits the profession.
The objectivity standard is violated because of failure to communicate information fully
and fairly.
2.
Yes, costs related to revenue should be expensed in the period in which the revenue is
recognized. Perishable supplies are purchased for use in the current period, will not
provide benefits in future periods, and should be matched against the revenue
recognized in the current period. The accounting treatment for the supplies was not in
accordance with generally accepted accounting principles.
3.
Gary Wood's actions were appropriate. Upon discovering the change in the method of
accounting for supplies, Wood brought the matter to the attention of his immediate
superior, Kern. Upon learning of the arrangement with Pristeel, Wood told Kern the
action was improper and requested that the accounts be corrected and the arrangement
discontinued. Wood clarified the situation with a qualified and objective peer (advisor)
before disclosing Kern's arrangement with Pristeel to TCCs president, Kern's
immediate superior. Contact with levels above the immediate superior should be
initiated only with the superior's knowledge, assuming the superior is not involved. In
this case, the superior is involved. Thus, Wood has acted appropriately by approaching
North without Kern's knowledge.
McGraw-Hill/Irwin
Inc.

9- 23

1.
Sales budget
Sales (in sets)..............................................
Sales price per set......................................
Sales revenue..............................................
2.
May
12,000
$50
$600,000
June
15,000
$50
$750,000
April
10,000
2,400
12,400
2,000
10,400
May
12,000
3,000
15,000
2,400
12,600
June
15,000
3,000
18,000
3,000
15,000
Production budget (in sets)

Sales............................................................
Add: Desired ending inventory..................
Total requirements......................................
Less: Projected beginning inventory........
Planned production....................................
3.
April
10,000
$50
$500,000
Raw-material purchases
Planned production (sets).............................
Raw material required per set
(board feet).................................................
Raw material required for production
(board feet).................................................
Add: Desired ending inventory of raw
material (board feet)..................................
Total requirements.........................................
Less: Projected beginning inventory of
raw material (board feet)...........................
Planned purchases of raw material
(board feet).................................................
Cost per board foot........................................
Planned purchases of raw material
(dollars)......................................................
McGraw-Hill/Irwin
Inc.
9-24
April
10,400
10
May
12,600
10
June
15,000
10
104,000
126,000
150,000
12,600
116,600
15,000
141,000
16,000
166,000
10,400
12,600
15,000
106,200
$.50
128,400
$.50
151,000
$.50
$ 53,100
$ 64,200
$ 75,500

Solutions Manual

4.
Direct-labor budget
Planned production (sets).............................
Direct-labor hours per set.............................
Direct-labor hours required...........................
Cost per hour.................................................
Planned direct-labor cost..............................
5.
April
10,400
1.5
15,600
$20
$312,000
May
12,600
1.5
18,900
$20
$378,000
June
15,000
1.5
22,500
$20
$450,000
Spreadsheet is shown on this chapters solutions manual opening screen.

1.
Empire Chemical Companys production budget (in gallons) for the three products
for 20x2 is calculated as follows:
Sales for 20x2.............................................
Add: Inventory, 12/31/x2
(.08 20x3 sales)...................................
Total required.............................................
Deduct: Inventory, 12/31/x1
(.08 20x2 sales).................................
Required production in 20x2.....................
2.
Yarex
60,000
Darol
40,000
Norex
25,000
5,200
65,200
2,800
42,800
2,400
27,400
4,800
60,400
3,200
39,600
2,000
25,400
The companys conversion cost budget for 20x2 is shown in the following schedule:
Conversion hours required:
Yarex (60,400 .07)....................................
Darol (39,600 .10)....................................
Norex (25,400 .16)...................................
Total hours.................................................
4,228
3,960
4,064
12,252
Conversion cost budget (12,252 $20)....
$245,040
McGraw-Hill/Irwin
Inc.

9- 25

3.
Since the 20x1 usage of Islin is 100,000 gallons, the firms raw-material purchases
budget (in dollars) for Islin for 20x2 is as follows:
Quantity of Islin required for production in 20x2 (in gallons):
Yarex (60,400 1).....................................................................
Darol (39,600 .7)....................................................................
Norex (25,400 .5)...................................................................
Subtotal..........................................................................................
Add: Required inventory, 12/31/x2 (100,820 .10)......................
Subtotal..........................................................................................
Deduct: Inventory, 1/1/x2 (100,000 .10)......................................
Required purchases (gallons).......................................................
Purchases budget (100,902 gallons $5 per gallon)..................
4.
60,400
27,720
12,700
100,820
10,082
110,902
10,000
100,902
$504,510
The company should continue using Islin, because the cost of using Philin is $76,316
greater than using Islin, calculated as follows:
Change in material cost from substituting Philin for Islin:
20x2 production requirements:
Philin (100,820 $5 1.2)........................................................
Islin (100,820 $5)...................................................................
Increase in cost of raw material....................................................
Change in conversion cost from substituting Philin for Islin:
Philin (12,252 $20 .9)..........................................................
Islin (12,252 $20)...................................................................
Decrease in conversion cost........................................................
Net increase in production cost...................................................
$604,920
504,100
$100,820
$220,536
245,040
$(24,504)
$ 76,316

1.
Sales budget for 20x0:
Light coils................................................................
Heavy coils..............................................................
Projected sales........................................................
McGraw-Hill/Irwin
Inc.
9-26
Units
60,000
40,000
Price
$65
$95
Total
$3,900,000
3,800,000
$7,700,000

Solutions Manual

2.
Production budget (in units) for 20x0:
Projected sales..............................................................................
Add: Desired inventories,
December 31, 20x0....................................................................
Total requirements.........................................................................
Deduct: Expected inventories, January 1, 20x0..........................
Production required (units)...........................................................
3.
25,000
85,000
20,000
65,000
9,000
49,000
8,000
41,000
Raw-material purchases budget (in quantities) for 20x0:

Raw Material
Copper
Wire
Sheet
Metal
Light coils (65,000 units projected
to be produced).................................................
Heavy coils (41,000 units projected
to be produced).................................................
Production requirements........................................
Add: Desired inventories, December 31, 20x0......
Total requirements..................................................
Deduct: Expected inventories,
January 1, 20x0..................................................
Purchase requirements (units)...............................
4.
Light Coils Heavy Coils

60,000
40,000
Platforms
260,000
130,000
__
205,000
465,000
36,000
501,000
123,000
253,000
32,000
285,000
41,000
41,000
7,000
48,000
32,000
469,000
29,000
256,000
6,000
42,000
Raw-material purchases budget for 20x0:
Raw Material
Required
Raw Material
(units)
Sheet metal.............................................................
469,000
Copper wire............................................................
256,000
Platforms................................................................
42,000
Total........................................................................
McGraw-Hill/Irwin
Inc.
Anticipated
Purchase
Price
$8
5
3
Total
$3,752,000
1,280,000
126,000
$5,158,000

9- 27

5.
Direct-labor budget for 20x0:
Projected
Production
(units)
Light coils.....................................
65,000
Heavy coils...................................
41,000
Total..............................................
6.
Hours
per
Unit
2
3
Total
Hours
130,000
123,000
Rate
$15
20
Total
Cost
$1,950,000
2,460,000
$4,410,000
Manufacturing overhead budget for 20x0:
Purchasing and material handling.......................

Depreciation, utilities, and inspection..................
Shipping.................................................................
General manufacturing overhead.........................
Cost Driver
Quantity
Cost
Driver
Rate
725,000 lb.a
106,000 coils b
100,000c
253,000 hr. d
$.25
$4.00
$1.00
$3.00
Total manufacturing overhead..............................
Budgeted
Cost
$181,250
424,000
100,000
759,000
$1,464,250
725,000 = 469,000 + 256,000 (from req. 3)

106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)
b
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Solutions Manual

1.
The benefits that can be derived from implementing a budgeting system include the
following:
The preparation of budgets forces management to plan ahead and to establish

goals and objectives that can be quantified.
Budgeting compels departmental managers to make plans that are in congruence

with the plans of other departments as well as the objectives of the entire firm.
The budgeting process promotes internal communication and coordination.

Budgets provide directions for day-to-day control of operations, clarify duties to
be performed, and assign responsibility for these duties.
Budgets help in measuring performance and providing incentives.

Budgets provide a vehicle for resource allocation.
McGraw-Hill/Irwin
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9- 29

2.
a. Schedule
Sales Budget
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget (units)
Production Budget
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Direct-Material Budget
Cost-of-Goods-Manufactured Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget (includes

ending inventory in dollars)

Budgeted Balance Sheet
Selling Expense Budget
Research and Development Budget
Administrative Expense Budget

Budgeted Statement of Cash Flows
Capital Expenditures Budget
Cash Receipts and Disbursements Budget

Cash Receipts and Disbursements

Budget

McGraw-Hill/Irwin
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Solutions Manual

1.
The revised operating budget for Toronto Business Associates for the
fourth quarter is presented below. Supporting calculations follow:
TORONTO BUSINESS ASSOCIATES
REVISED OPERATING BUDGET
FOR THE FOURTH QUARTER OF 20X1
Revenue:
Consulting fees:
Computer system consulting.........................................................
Management consulting.................................................................
Total consulting fees...............................................................
Other revenue.........................................................................................
Total revenue...................................................................................
$478,125
468,000
$946,125
10,000
$956,125
Expenses:
Consultant salary expenses*.................................................................
Travel and related expenses..................................................................
General and administrative expenses...................................................
Depreciation expense.............................................................................
Corporate expense allocation................................................................
Total expenses.................................................................................
Operating income..........................................................................................
$510,650
57,875
93,000
40,000
75,000
$776,525
$179,600
*$510,650 = $245,000 + $265,650. (See supporting calculations.)
McGraw-Hill/Irwin
Inc.

9- 31

Supporting calculations:
Schedule of projected revenues for the fourth quarter of 20x1:

Computer
System
Management
Consulting Consulting
Third Quarter:
Revenue............................................................................
Hourly billing rate.............................................................
Billable hours....................................................................
Number of consultants....................................................
Hours per consultant.......................................................
Fourth-quarter planned increase..........................................
Billable hours per consultant...............................................
Number of consultants..........................................................
Billable hours.........................................................................
Billing rate..............................................................................
Projected revenue..................................................................
McGraw-Hill/Irwin
Inc.
9-32
$421,875
$75
5,625
15
375
50
425
15
6,375
$75
$478,125
$315,000
$90
3,500
10
350
50
400
13
5,200
$90
$468,000

Solutions Manual
Schedules of projected salaries, travel, general and administrative, and allocated

corporate expenses:
Compensation:
Existing consultants:
Annual salary...........................................................
Quarterly salary.......................................................
Planned increase (10%)..........................................
Total fourth-quarter salary per consultant............
Number of consultants...........................................
Total.................................................................................
New consultants at old salary (3 $12,500).................
Total salary......................................................................
Benefits (40%).................................................................
Total compensation.................................................
Travel expenses:
Computer system consultants (425 hrs. 15).............
Management consultants (400 hrs. 13)......................
Total hours...............................................................
Rate per hour*................................................................
Total travel expense................................................
General and administrative ($100,000 93%)...................
Corporate expense allocation ($50,000 150%)...............
*Third-quarter travel expense
hours
$45,625 9,125
Computer
System
Consulting
Management
Consulting
$ 46,000
$ 11,500
1,150
$ 12,650
15
$ 189,750
-0$ 189,750
75,900
$ 265,650
$ 50,000
$ 12,500
1,250
$ 13,750
10
$137,500
37,500
$175,000
70,000
$245,000
6,375
5,200
11,575
$5
$ 57,875
$ 93,000
$ 75,000
= rate
= $5.00
9,125 = (350 10) + (375 15)
2.
An organization would prepare a revised operating budget when the assumptions

underlying the original budget are no longer valid. The assumptions may involve
factors outside or inside the company. Changes in assumptions involving external
factors may include changes in demand for the company's products or services,
changes in the cost of various inputs to the company, or changes in the economic or
political environment in which the company operates. Changes in assumptions
involving internal factors may include changes in company goals or objectives.
McGraw-Hill/Irwin
Inc.

9- 33
McGraw-Hill/Irwin
Inc.
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Solutions Manual

1.
Sales budget:
Box C
500,000
$.90
$450,000
Sales (in units)

Sales price per unit
Sales revenue
2.
Box P
500,000
$1.30
$650,000
$1,100,000
Production budget (in units):
Sales......................................................................................
Add: Desired ending inventory...........................................
Total units needed................................................................
Deduct: Beginning Inventory..............................................
Production requirements.....................................................
3.
Total
Box C
500,000
5,000
505,000
10,000
495,000
Box P
500,000
15,000
515,000
20,000
495,000
Raw-material budget:
PAPERBOARD
Production requirement (number of boxes)...........
Raw material required per box (pounds)................
Raw material required for
production (pounds)............................................
Add: Desired ending
raw-material inventory.........................................
Total raw-material needs.........................................
Deduct: Beginning raw-material inventory............
Raw material to be purchased.................................
Price (per pound).....................................................
Cost of purchases (paperboard).............................
McGraw-Hill/Irwin
Inc.
Box C
495,000
.3
Box P
495,000
.7
Total
148,500
346,500
495,000
5,000
500,000
15,000
485,000
$.20
$ 97,000

9- 35

CORRUGATING MEDIUM
Production requirements (number of boxes).........
Raw material required per box (pounds)................
Raw material required for
production (pounds)............................................
Add: Desired ending
raw-material inventory.........................................
Total raw-material needs.........................................
Deduct: Beginning raw-material inventory............
Raw material to be purchased.................................
Price (per pound).....................................................
Cost of purchases (corrugating medium)..............
Total cost of raw-material purchases
($97,000 + $25,250)...............................................
4.
Box P
495,000
.3
Total
99,000
148,500
247,500
10,000
257,500
5,000
252,500
$.10
$ 25,250
$122,250
Direct-labor budget:
Box C
495,000
.0025
1,237.5
Production requirements (number of boxes)

Direct labor required per box (hours).....................
Direct labor required for production (hours)
Direct-labor rate.......................................................
Total direct-labor cost..............................................
5.
Box C
495,000
.2
Box P
495,000
.005
2,475
Total
3,712.5
$12
$44,550
Manufacturing-overhead budget:
Indirect material...........................................................................................
Indirect labor................................................................................................
Utilities..........................................................................................................
Property taxes..............................................................................................
Insurance......................................................................................................
Depreciation.................................................................................................
Total overhead..............................................................................................
McGraw-Hill/Irwin
Inc.
9-36
$ 10,500
50,000
25,000
18,000
16,000
29,000
$ 148,500

Solutions Manual

6.
Selling and administrative expense budget:

$ 75,000
15,000
90,000
26,000
4,000
$ 210,000
Salaries and fringe benefits of sales personnel........................................

Advertising...................................................................................................
Management salaries and fringe benefits..................................................
Clerical wages and fringe benefits.............................................................
Miscellaneous administrative expenses....................................................
Total selling and administrative expenses.................................................
7.
Budgeted income statement:

Sales revenue [from sales budget, req. (1)]...............................................
Less: Cost of goods sold:
Box C: 500,000 $.21*............................................................... $105,000
Box P: 500,000 $.43* .............................................................. 215,000
Gross margin................................................................................................
Selling and administrative expenses..........................................................
Income before taxes.....................................................................................
Income tax expense (40%)...........................................................................
Net income....................................................................................................
$1,100,000
320,000
$ 780,000
210,000
$ 570,000
228,000
$ 342,000
*Calculation of manufacturing cost per unit:

(a)
Predetermined overhead rate
budgeted manufacturing overhead

volume of direct -labor hours
$148,500
= (495,000)(.0025) (495,000)(.005)
$148,500
= 3,712.5 hours $40 per hour
McGraw-Hill/Irwin
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9- 37

(b)
Calculation of manufacturing cost per unit:

Box C
Direct material:
Paperboard
.3 lb. $.20 per lb.........................................
.7 lb. $.20 per lb.........................................
Corrugating medium
.2 lb. $.10 per lb.........................................
.3 lb. $.10 per lb.........................................
Direct labor:
.0025 hr. $12 per hr....................................
.005 hr. $12 per hr......................................
Applied manufacturing overhead:
.0025 hr. $40 per hr....................................
.005 hr. $40 per hr......................................
Manufacturing cost per unit.....................................
Box P
$.06
$.14
.02
.03
.03
.06
.10
___
$.21
.20
$.43

1.
Strategic planning identifies the overall objective of an organization and generally

considers the impact of external factors such as competitive forces, market demand,
and technological changes when identifying overall objectives. Budgeting is the
quantitative expression of plans evolving from strategic planning. The time horizon
for budgeting is generally a year, or an operating cycle, and greater attention is
focused on internal factors than on external factors.
McGraw-Hill/Irwin
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Solutions Manual

2.
For each of the financial objectives established by the board of directors and
president of Healthful Foods, Inc., the calculations to determine whether John
Winslows budget attains these objectives are presented in the following table.
CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS, INC.
Objective
Increase sales by 12%
($850,000 1.12 = $952,000)
Increase before-tax income by 15%
($105,000 1.15 = $120,750)
Maintain long-term debt at or below
16% of assets
($2,050,000 .16 = $328,000)
Maintain cost of goods sold at or below
70% of sales
($947,750 .70 = $663,425)
3.
Attained/
Not Attained
Not attained
Calculations
($947,750$850,000)/$850,000 = 11.5%
Attained
($120,750$105,000)/$105,000 = 15%
Attained
$308,000/$2,050,000 = 15% (rounded)
Not attained
$669,500/$947,750 = 70.6% (rounded)
The accounting adjustments contemplated by John Winslow are unethical because

they will result in intentionally overstating income by understating the cost of goods
sold. The specific standards of ethical conduct for management accountants
violated by Winslow are as follows:
Competence. By making the accounting adjustments, Winslow violated the
competency standard by not preparing financial statements in accordance with
technical standards.
Integrity. Winslow violated the integrity standard by engaging in an activity that
prejudiced his ability to carry out his duties ethically, and by engaging in an activity
that appears to be a conflict of interest.
Credibility. By overstating the inventory and reclassifying certain costs, Winslow
has violated the credibility standard. He has failed to communicate information fairly
and objectively and has failed to disclose all relevant information that would
influence the users understanding of the report.
McGraw-Hill/Irwin
Inc.

9- 39

1.
Sales budget:
20x0
Total sales........................
Cash sales*......................
Sales on account............
December
$400,000
100,000
300,000
20x1
January
$440,000
110,000
330,000
February
$484,000
121,000
363,000
March
$532,400
133,100
399,300
First
Quarter
$1,456,400
364,100
1,092,300
*25% of total sales.
75% of total sales.

2.
Cash receipts budget:

20x1
Cash sales.............................................
Cash collections from credit
sales made during current
month*...............................................
sales made during preceding
month................................................
Total cash receipts...............................
January
$110,000
February
$121,000
March
$133,100
First
Quarter
$ 364,100
33,000
36,300
39,930
109,230
270,000
$413,000
297,000
$454,300
326,700
$499,730
893,700
$1,367,030
*10% of current month's credit sales.
90% of previous month's credit sales.
McGraw-Hill/Irwin
Inc.
9-40

Solutions Manual

3.
Purchases budget:
20x0
December
Budgeted cost of
goods sold.................. $280,000
Add: Desired
ending inventory........ 154,000
Total goods
needed......................... $434,000
Less: Expected
beginning
inventory.....................140,000
Purchases........................ $294,000
20x1
February
March
First
Quarter
$308,000
$338,800
$372,680
$1,019,480
169,400
186,340
186,340*
186,340
$477,400
$525,140
$559,020
$1,205,820
154,000
$323,400
169,400
$355,740
186,340
$372,680
154,000**
$1,051,820
January
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
The desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
50% x $280,000 (where $280,000 = December cost of goods sold = December sales of
$400,000 x 70%)
McGraw-Hill/Irwin
Inc.

9- 41

4.
Cash disbursements budget:

20x1
First
Quarter
January
February
$129,360
$142,296
$149,072
$ 420,728
176,400
194,040
213,444
583,884
$305,760
$336,336
$362,516
$1,004,612
Other expenses:
Sales salaries...................................
Advertising and promotion.............
Administrative salaries...................
Interest on bonds**.........................
Property taxes**...............................
Sales commissions.........................
$21,000
16,000
21,000
15,000
-04,400
$21,000
16,000
21,000
-05,400
4,840
$21,000
16,000
21,000
-0-05,324
$ 63,000
48,000
63,000
15,000
5,400
14,564
Total cash payments for other

expenses..........................................
Total cash disbursements....................
$ 77,400
$383,160
$ 68,240
$404,576
$ 63,324 $ 208,964
$425,840 $1,213,576
Inventory purchases:
Cash payments for purchases
during the current month*........
Cash payments for purchases
during the preceding
month........................................
Total cash payments for
inventory purchases.......................
March
*40% of current months purchases [see requirement (3)].
60% of the prior month's purchases [see requirement (3)].

**Bond interest is paid every six months, on January 31 and July 31. Property taxes also
are paid every six months, on February 28 and August 31.
McGraw-Hill/Irwin
Inc.
9-42

Solutions Manual

5.
Summary cash budget:

20x1
January
Cash receipts [from req. (2)]................ $ 413,000
Cash disbursements
[from req. (4)]................................... (383,160)
Change in cash balance
during period due to operations.... $ 29,840
Sale of marketable securities
(1/2/x1)..............................................
15,000
Proceeds from bank loan
(1/2/x1)..............................................
100,000
Purchase of equipment........................ (125,000)
Repayment of bank loan
(3/31/x1)............................................
Interest on bank loan*..........................
Payment of dividends...........................
February
$ 454,300
March
$ 499,730
First
Quarter
$1,367,030
(404,576)
(425,840)
(1,213,576)
$ 49,724
$ 73,890
$ 153,454
15,000
100,000
(125,000)
(100,000)
(2,500)
(50,000)
Change in cash balance during

first quarter......................................
Cash balance, 1/1/x1.............................
Cash balance, 3/31/x1...........................
(100,000)
(2,500)
(50,000)
$(9,046)
35,000
$ 25,954
*$100,000 10% per year 1/4 year = $2,500

6.
Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0.......................................
Less: Minimum cash balance.......................................................................
Cash available for equipment purchases....................................................
Projected proceeds from sale of marketable securities.............................
Cash available................................................................................................
Less: Cost of investment in equipment.......................................................
Required short-term borrowing....................................................................
McGraw-Hill/Irwin
Inc.
$ 35,000
25,000
$ 10,000
15,000
$ 25,000
125,000
$(100,000)

9- 43

7.
INTERCOASTAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
Sales revenue.........................................................................
Less: Cost of goods sold......................................................
Gross margin.........................................................................
Selling and administrative expenses:
Sales salaries....................................................................
Sales commissions..........................................................
Advertising and promotion..............................................
Administrative salaries....................................................
Depreciation.....................................................................
Interest on bonds.............................................................
Interest on short-term bank loan.....................................
Property taxes..................................................................
Total selling and administrative expenses..........................
Net income.............................................................................
8.
$1,456,400
1,019,480
$ 436,920
$63,000
14,564
48,000
63,000
75,000
7,500
2,500
2,700
276,264
$ 160,656

BUDGETED STATEMENT OF RETAINED EARNINGS
Retained earnings, 12/31/x0........................................................................
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
Retained earnings, 3/31/x1..........................................................................
McGraw-Hill/Irwin
Inc.
9-44
$ 107,500
160,656
50,000
$ 218,156

Solutions Manual

9.

BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash................................................................................................................
Accounts receivable*....................................................................................
Inventory........................................................................................................
Buildings and equipment (net of accumulated depreciation)...................
Total assets....................................................................................................
$ 25,954
359,370
186,340
676,000
$1,247,664
Accounts payable**.......................................................................................
Bond interest payable...................................................................................
Property taxes payable..................................................................................
Bonds payable (10%; due in 20x6)...............................................................
Common Stock..............................................................................................
Retained earnings..........................................................................................
Total liabilities and stockholders' equity.....................................................
$ 223,608
5,000
900
300,000
500,000
218,156
$ 1,247,664
*Accounts receivable, 12/31/x0.....................................................................

Sales on account [req. (1)]............................................................................
Total cash collections from credit sales [req. (2)]
($109,230 + $893,700)................................................................................
Accounts receivable, 3/31/x1........................................................................
$ 270,000
1,092,300
(1,002,930)
$ 359,370
Buildings and equipment (net), 12/31/x0....................................................

Cost of equipment acquired.........................................................................
Depreciation expense for first quarter.........................................................
Buildings and equipment (net), 3/31/x1.......................................................
$ 626,000
125,000
(75,000)
$ 676,000
**Accounts payable, 12/31/x0.......................................................................

Purchases [req. (3)].......................................................................................
Cash payments for purchases [req. (4)]......................................................
Accounts payable, 3/31/x1............................................................................
$ 176,400
1,051,820
(1,004,612)
$ 223,608
McGraw-Hill/Irwin
Inc.

9- 45
SOLUTIONS TO CASES
CASE 9-46 (60 MINUTES)
1.
Yes, City Raquetball Club (CRC) should be better able to plan its cash receipts with
the new membership plan and fee structure. The cash flows should be more
predictable and certain because the large, prepaid membership fee becomes the only
factor affecting cash receipts. The hourly court fees, which were dependent upon a
variable that could fluctuate daily, are eliminated.
2.
a.
Factors that CRCs management should consider before adopting the new
membership plan and fee structure include:
Costs associated with the plan changeover

Public acceptance of the new proposal
The expected number of memberships by classes that can be sold for each
plan at the specified rates
The anticipated rate of return for excess cash or cost of borrowing funds in
periods of cash shortages
b.
3.
Financial analyses conducted by CRC could include a forecast of projected cash

inflows and outflows by months, an income statement including interest revenue
and expense, a cost-volume-profit analysis, and a cash management plan for
excess cash or cash shortages.
Because CRC's cash flows should be more predictable, management should be better
able to plan for and control cash disbursements. In addition, management should be
better able to plan for short-term investments when excess cash occurs or to arrange
for short-term financing when there are cash shortages.
The collection and billing function is also simplified with the new membership
plan and fee structure. There would be only a one-time cash receipt rather than
multiple transactions.
McGraw-Hill/Irwin
Inc.
9-46

Solutions Manual

1.
Some of the operational and behavioral benefits that are generally attributed to a
participatory budgeting process are as follows:
Utilization of the best knowledge of activities in a specific area, because the
participants are close to daily operations.
Goals that are more realistic and acceptable.
Improved communication and group cohesiveness.
A sense of commitment and willingness to be held accountable for the budget.
2.
Four deficiencies in Patricia Eklunds participatory policy for planning and

performance evaluation, along with recommendations of how the deficiencies can be
corrected:
Deficiencies
Recommendations
The setting of constraints on fixed Rewards should be based on meeting

expenditures includes uncontrollable fixed budget and/or organizational goals or
costs, thereby mitigating the positive effects objectives.
of participatory budgeting.
The arbitrary revision of approved budgets The contingency budget should be separate,
defeats the participatory process.
over and above each departments original
submission.
The division manager holds back a Managers should be involved in the revision
percentage of each budget for discretionary of budgets. Managers could submit a
use.
budget with programs at different levels of
funding.
Evaluation based on budget performance Divisional
constraints
could
be
must be accompanied with intrinsic rewards. communicated at a budget kick-off
meeting; however, individual limits of
controllable expenses should be set by each
manager.
McGraw-Hill/Irwin
Inc.

9- 47

1.
Sales budget:
20x0
4th
Quarter
1st
Quarter
2nd
Quarter
20x1
3rd
Quarter
S frame unit
sales.....................
50,000
S sales price...... $10
55,000
$10
60,000
$10
65,000
$10
70,000
x $10
250,000
$10
S frame sales
revenue................
$ 500,000
$ 550,000
$ 600,000
$ 650,000
$ 700,000
$2,500,000
L frame unit
sales.....................
40,000
L sales price...... $15
45,000
$15
50,000
$15
55,000
$15
60,000
$15
210,000
$15
L frame sales
revenue................
$ 600,000
$ 675,000
$ 750,000
$ 825,000
$ 900,000
$3,150,000
Total sales
revenue................ $1,100,000
$1,225,000
$1,350,000
$1,475,000
$1,600,000
$5,650,000
$ 440,000
$ 490,000
$ 540,000
$590,000
$640,000
$2,260,000
660,000
735,000
810,000
885,000
960,000
3,390,000
Cash sales*...........
Sales on
account...............
4th
Quarter
Entire
Year
*40% of total sales.
60% of total sales.
McGraw-Hill/Irwin
Inc.
9-48

Solutions Manual
CASE 9-48 (CONTINUED)

2.
Cash receipts budget:
1st
Quarter
Cash sales..........................................
$ 490,000
sales made during current
quarter*............................................588,000
sales made during previous
quarter............................................
132,000
Total cash receipts.............................
$1,210,000
2nd
Quarter
$ 540,000
20x1
3rd
Quarter
$ 590,000
4th
Quarter
$ 640,000
Entire
Year
$2,260,000
648,000
708,000
768,000
2,712,000
147,000
$1,335,000
162,000
$1,460,000
177,000
$1,585,000
618,000
$5,590,000
*80% of current quarter's credit sales.
20% of previous quarter's credit sales.
McGraw-Hill/Irwin
Inc.

9- 49

3.
Production budget:
20x0
4th
Quarter
S frames:
Sales (in units).................
Add: Desired ending
inventory........................
Total units needed...............
Less: Expected
beginning inventory.........
Units to be produced..........
L frames:
Sales (in units).................
Add: Desired ending
inventory........................
Total units needed...............
Less: Expected
beginning inventory.........
Units to be produced..........
McGraw-Hill/Irwin
Inc.
9-50
1st
Quarter
2nd
Quarter
20x1
3rd
Quarter
4th
Quarter
Entire
Year
50,000
55,000
60,000
65,000
70,000 250,000
11,000
61,000
12,000
67,000
13,000
73,000
14,000
79,000
15,000 15,000
85,000 265,000
10,000
51,000
11,000
56,000
12,000
61,000
13,000
66,000
14,000 11,000
71,000 254,000
40,000
45,000
50,000
55,000
60,000 210,000
9,000
49,000
10,000
55,000
11,000
61,000
12,000
67,000
13,000 13,000
73,000 223,000
8,000
41,000
9,000
46,000
10,000
51,000
11,000
56,000
12,000 9,000
61,000 214,000

Solutions Manual

4.
Direct-material budget:*
20x0
4th
Quarter
Metal strips:
S frames to be
produced........................ 51,000
Metal quantity per
unit (ft.)........................... 2
Needed for S frame
production.....................102,000
L frames to be
produced........................ 41,000
Metal quantity per
unit (ft.)........................... 3
Needed for L frame
production.....................123,000
Total metal needed
for production; to
be purchased (ft.).......... 225,000
Price per foot................. $1
Cost of metal strips to
be purchased:................$225,000
1st
Quarter
20x1
3rd
4th
Quarter
Quarter
2nd
Quarter
Entire
Year
56,000
61,000
66,000
71,000
254,000
112,000
122,000
132,000
142,000
508,000
46,000
51,000
56,000
61,000
214,000
138,000
153,000
168,000
183,000
642,000
250,000
$1
275,000
$1
300,000
$1
325,000
$1
1,150,000
$1
$250,000
$275,000
$300,000
$325,000
$1,150,000
*Direct-material budget continued on next page.
McGraw-Hill/Irwin
Inc.

9- 51

20x0
4th
Quarter
Glass sheets:....................
S frames to be
produced........................ 51,000
Glass quantity per
unit (sheets)................... .25
Needed for S frame
production.....................12,750
L frames to be
produced........................ 41,000
Glass quantity per
unit (sheets)................... .5
Needed for L frame
production.....................20,500
Total glass needed
for production
(sheets).......................... 33,250
Add: Desired ending
inventory........................ 7,400
Total glass needs............. 40,650
Less: Expected
beginning inventory......6,650
Glass to be
purchased...................... 34,000
Price per glass
sheet............................... $8
Cost of glass to be
purchased......................$272,000
Total raw-material
purchases (metal
and glass)......................$497,000
McGraw-Hill/Irwin
Inc.
9-52
1st
Quarter
2nd
Quarter
20x1
3rd
Quarter
4th
Quarter
Entire
Year
56,000
61,000
66,000
71,000
254,000
.25
.25
.25
.25
.25
14,000
15,250
16,500
17,750
63,500
46,000
51,000
56,000
61,000
214,000
.5
.5
.5
.5
.5
23,000
25,500
28,000
30,500
107,000
37,000
40,750
44,500
48,250
170,500
8,150
45,150
8,900
49,650
9,650
54,150
10,400
58,650
10,400
180,900
7,400
8,150
8,900
9,650
7,400
37,750
41,500
45,250
49,000
173,500
$8
$8
$8
$8
$8
$302,000
$332,000
$362,000
$392,000
$1,388,000
$552,000
$607,000
$662,000
$717,000
$2,538,000

Solutions Manual

5. Cash disbursements budget:*
Raw-material purchases:
Cash payments for
purchases during
the current quarter..........
Cash payments for
purchases during the
preceding quarter**..........
raw-material purchases...
Direct labor:
Frames produced
(S and L)............................
Direct-labor hours per
frame.................................
Direct-labor hours to be
used..................................
Rate per direct-labor
hour...................................
direct labor.......................
1st
Quarter
2nd
Quarter
201
3rd
Quarter
$441,600
$ 485,600
$ 529,600
$ 573,600
$2,030,400
99,400
110,400
121,400
132,400
463,600
$541,000
$ 596,000
$ 651,000
$ 706,000
$2,494,000
102,000
112,000
122,000
132,000
468,000
.1
.1
.1
.1
.1
10,200
11,200
12,200
13,200
46,800
$20
$20
$20
$20
$20
$204,000
$ 224,000
$ 244,000
$ 264,000
$ 936,000
4th
Quarter
Entire
Year
*Cash disbursements budget continued on next page.
80% of current quarters purchases

**20% of previous quarters purchases
McGraw-Hill/Irwin
Inc.

9- 53

2001
1st
Quarter
Manufacturing overhead:
Indirect material.................... $ 10,200
Indirect labor.........................
40,800
Other...................................... 31,000
manufacturing
overhead........................... $ 82,000
Cash payments for selling
and administrative
expenses...........................
Total cash disbursements........
McGraw-Hill/Irwin
Inc.
9-54
$100,000
$927,000
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
Year
$ 11,200
44,800
36,000
$ 12,200 $ 13,200
48,800
52,800
41,000 46,000
$ 46,800
187,200
154,000
$92,000
$ 102,000
$ 112,000
$ 388,000
$ 100,000
$1,012,000
$ 100,000
$1,097,000
$ 100,000
$1,182,000
$ 400,000
$4,218,000

Solutions Manual

6.
Summary cash budget:
Cash receipts [from req. (2)]..........

Less: Cash disbursements
[from req. (5)]..............................
Change in cash balance due to
operations...................................
Payment of dividends.....................
Proceeds from bank loan (1/2/x1). .
Purchase of equipment..................
Quarterly installment on loan
principal......................................
Quarterly interest payment*...........
Change in cash balance during
the period....................................
Cash balance, beginning of period
Cash balance, end of period..........
1st
Quarter
$1,210,000
2nd
Quarter
$1,335,000
20x1
3nd
Quarter
$1,460,000
927,000
1,012,000
1,097,000
1,182,000
4,218,000
$ 283,000
(50,000)
1,000,000
(1,000,000)
$ 323,000
(50,000)
$ 363,000
(50,000)
$ 403,000
(50,000)
$1,372,000
(200,000)
1,000,000
(1,000,000)
(250,000)
(25,000)
(250,000)
(18,750)
(250,000)
(12,500)
(250,000)
(6,250)
(1,000,000)
(62,500)
$ (42,000)
95,000
$ 53,000
$ 4,250
53,000
$ 57,250
$ 50,500
57,250
$ 107,750
$ 96,750
107,750
$ 204,500
$ 109,500
95,000
$ 204,500
4th
Quarter
$1,585,000
Entire
Year
$5,590,000
*$1,000,000 10% = $25,000

$750,000 10% = $18,750
$500,000 10% = $12,500
$250,000 10% = $6,250
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.

9- 55

7.
FRAME-IT COMPANY
BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, 1/1/x1.................................................
Add: Purchases of raw material [req. (4)]................................
Raw material available for use.................................................
Deduct: Raw-material inventory, 12/31/x1
([req. (4)] 10,400 $8)...........................................................
Raw material used
Direct labor [req. (5)].......................................................................
Manufacturing overhead:
Indirect material.........................................................................
Indirect labor.............................................................................
Other overhead..........................................................................
Depreciation..............................................................................
Total manufacturing overhead.................................................
Cost of goods manufactured..........................................................
Add: Finished-goods inventory, 1/1/x1..........................................
Cost of goods available for sale....................................................
Deduct: Finished-goods inventory, 12/31/x1.................................
Cost of goods sold..........................................................................
$ 59,200
2,538,000
$2,597,200
83,200
$2,514,000
936,000
$ 46,800
187,200
154,000
80,000
468,000 *
$3,918,000
167,000
$4,085,000
235,000 **
$3,850,000
*In the budget, budgeted and applied manufacturing overhead are equal. The applied
manufacturing overhead may be verified independently as follows:
Total number of frames produced............................................
Direct-labor hours per frame................................................
Total direct-labor hours............................................................
Predetermined overhead rate per hour................................
Total manufacturing overhead applied....................................
468,000
.1
46,800
$10
$468,000
See next page.

**See next page.
See next page.
McGraw-Hill/Irwin
Inc.
9-56

Solutions Manual
The cost of goods manufactured may be verified independently as follows:

Frames produced...................................................................
Manufacturing cost per unit..............................................
Total manufacturing cost......................................................
Grand total (S frames and L frames)....................................
S Frames
L Frames
254,000
214,000
$7
$10
$1,778,000
$2,140,000
$3,918,000
**The finished-goods inventory on 12/31/x1 may be verified independently as follows:

Projected inventory on 12/31/x1...........................................
Manufacturing cost per unit..................................................
Cost of ending inventory.......................................................
Total cost of ending inventory (S and L)..............................
S Frames
L Frames
15,000
13,000
$7 $10
$ 105,000
$ 130,000
$235,000
The cost of goods sold may be verified independently as follows:

Frames sold...........................................................................
Manufacturing cost per unit..................................................
Cost of goods sold................................................................
Total cost of goods sold (S and L).......................................
8.
S Frames
L Frames
250,000
210,000
$7
$10
$1,750,000
$2,100,000
$3,850,000
FRAME-IT COMPANY
BUDGETED INCOME STATEMENT
Sales revenue.......................................................................
Less: Cost of goods sold....................................................
Gross margin........................................................................
Selling and administrative expenses..................................
Interest expense...................................................................
Net income............................................................................
McGraw-Hill/Irwin
Inc.
$5,650,000
3,850,000
$1,800,000
$400,000
62,500
462,500
$1,337,500

9- 57

9.
FRAME-IT COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
10.
$3,353,800
1,337,500
200,000
$4,491,300
FRAME-IT COMPANY
BUDGETED BALANCE SHEET
DECEMBER 31, 20X1
$ 204,500
192,000
Cash..............................................................................................................
Accounts receivable*...................................................................................
Inventory:
Raw material.........................................................................................
Finished goods......................................................................................
Plant and equipment (net of accumulated depreciation)**.......................
Total assets...................................................................................................
83,200
235,000
8,920,000
$9,634,700
Accounts payable......................................................................................
Common stock.............................................................................................
Retained earnings........................................................................................
Total liabilities and stockholders' equity....................................................
$ 143,400
5,000,000
4,491,300
$9,634,700
*Fourth-quarter sales on account 20% = $960,000 20%
10,400 units $8
**$8,000,000 + $1,000,000 $80,000
Fourth-quarter purchases on account 20% = $717,000 20%
McGraw-Hill/Irwin
Inc.
9-58

Solutions Manual
FOCUS ON ETHICS (See page 377 in the text.)

Is padding the budget unethical? Some accountants argue that budget padding is a
vicious cycle: budgets are padded by lower-level managers because they believe top
management will cut the budget, and budgets are cut by top management because they
believe the submitted budget has been padded by lower-level managers. This situation
contains an unfortunate array of elements, which raise serious obstacles to effective
cost management. It is regrettable that the budget process is intermingled with the
employee incentive scheme via the bonus system in this way, since it is hindering
transparent cost management. However, given the situation, there are several possible
scenarios for the division controller to deal with.
In cutting expenses, top corporate managers may be revealing one of two things. They
may be more focused on the use of the budget data to drive incentives than as accurate
cost control tools, and thus may cut budgeted expenses specifically to provide a
stretch goal for the division. Alternatively, top management may believe that the
budget has been padded by the division, possibly based on previous budget
submissions, and thus believe they are handing back a more accurate expense budget
than was submitted to them.
No matter what the situation, the controller should make every effort to provide accurate
cost forecasts for the budgeting purpose. To do otherwise would be to compromise his
or her own integrity and authority within the organization. Further, inaccurate
information creates a poor basis for cost management. If greater stretch goals are
required by top management, then the divisional team could establish these for
themselves. If there is doubt at corporate level about the accuracy of the forecasts, then
it should be dispelled. For example, the controller could provide supporting
documentation with the budget to validate the estimates and to discourage top
corporate managers from cutting the expense budget.
McGraw-Hill/Irwin
Inc.

9- 59

Budgeting for College Expenses

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Budgeting for College Expenses

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CHAPTER 9

Profit Planning, Activity-Based Budgeting, and

A budget facilitates communication and coordination by making each manager

An example of using the budget to allocate resources in a university is found in the

A master budget, or profit plan, is a comprehensive set of budgets covering all

Operational budgets specify how an organization's operations will be carried out to

2008 The McGraw-Hill Companies,

Flowchart for Review Question 9-4

2008 The McGraw-Hill Companies,

9.7 Application of activity-based costing to the budgeting process yields activity-based

2008 The McGraw-Hill Companies,

A master budget is based on many assumptions and predictions of unknown

The idea of participative budgeting is to involve employees throughout an

2008 The McGraw-Hill Companies,

Firms with international operations face a variety of additional challenges in

A multinational firm's budget must reflect the translation of foreign currencies

It is difficult to prepare budgets when inflation is high or unpredictable. Some

The economies of all countries fluctuate in terms of consumer demand,

The five phases in a product's life cycle are as follows:

2008 The McGraw-Hill Companies,

($40,000 .6) + ($30,000 .4)

($45,000 .6) + ($30,000 .4)

Accounts payable, 12/31/x0.........................................................................300,000 euros

Accounts receivable, 12/31/x0.....................................................................

Accumulated depreciation, 12/31/x0........................................................... $ 810,000

Retained earnings, 12/31/x0........................................................................ $2,050,000

2008 The McGraw-Hill Companies,

EXERCISE 9-23 (30 MINUTES)

Production (in units) required for the year:

EXERCISE 9-25 (25 MINUTES)

Cash collections in October:

Amount Collected in October

2008 The McGraw-Hill Companies,

EXERCISE 9-25 (CONTINUED)

Cash collections in fourth quarter from credit sales in fourth quarter.

3. Spreadsheet is shown on this chapters solutions manual opening screen.

The total required production is 655,720 units, computed as follows:

Planned Ending Inventory

2008 The McGraw-Hill Companies,

EXERCISE 9-26 (CONTINUED)

Assumed production during third quarter (in units).................................

EXERCISE 9-27 (20 MINUTES)

BINGHAMTON FILM CORPORATION

BINGHAMTON FILM CORPORATION

2008 The McGraw-Hill Companies,

EXERCISE 9-27 (CONTINUED)

EXERCISE 9-28 (20 MINUTES)

President, East Bank of Mississippi

I.M. Student and Associates

Subject: Budgetary slack

2008 The McGraw-Hill Companies,

EXERCISE 9-29 (20 MINUTES)

*$7,125 = $190,000 .25 .15

$75,000 = $100,000 .75

Operational plans depend on various assumptions. Usually there is uncertainty about

EXERCISE 9-30 (30 MINUTES)

Budgeted cash collections for December:

Budgeted income (loss) for December:

EXERCISE 9-30 (CONTINUED)

Projected balance in accounts payable on December 31:

Amount Purchased in December

Therefore, the December 31 balance in accounts payable will be $153,000.

EXERCISE 9-31 (25 MINUTES)