CH. 9 solutions 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. 9-18 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. 9-19 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.
9-20 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. EXERCISE 9-22 (25 MINUTES)
1. Cash collections in October:
Month of Sale Amount Collected in October July...... $150,000 $ 6,000 4% August...... 175,000 10% 17,500 September...... 200,000 15% 30,000 October...... 225,000 70% 157,500 Total...... $211,000
Notice that the amount of sales on account in June, $122,500 was not needed to solve the exercise.
2. Cash collections in fourth quarter from credit sales in fourth quarter.
Amount Collected Credit Month of Sale Sales Octobe Novemb Decemb r er er October...... $225,0 $157,5 $ $ 00 00 33,750 22,500 November...... 250,00 – 175,000 37,500 0 December...... 212,50 – – 0 148,750 Total...... $157,5 $208,75 00 208,750 0 Total collections in fourth quarter from credit sales in fourth quarter...... $575,00 0
3. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A SPREADSHEET SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E WEBSITE: www.mhhe.com/hilton8e.
EXERCISE 9-27 (30 MINUTES)
1. Budgeted cash collections for December: Month of Sale Collections in December November...... $400,000 $152,000 38% December...... 440,000 60% 264,000 Total cash collections...... $416,000
2. Budgeted income (loss) for December:
Sales revenue...... $440,000 Less: Cost of goods sold (75% of sales)...... 330,000 Gross margin (25% of sales)...... $110,000 Less:...... Operating expenses: Bad debts expense (2% of sales)...... $ 8,800 Depreciation ($432,000/12)...... 36,000 Other expenses...... 45,200 Total operating expenses...... 90,000 Income before taxes...... $ 20,000 EXERCISE 9-27 (CONTINUED)
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.
Cost of Goods Month Sales Sold Amount Purchased in December December...... $440,00 $330,00 $330,000 $66,000 0 0 20% January...... 400,000 300,000 300,000 240,000 80% Total December purchases...... $306,000
Therefore, the December 31 balance in accounts payable will be $306,000. EXERCISE 9-28 (20 MINUTES)
Memorandum
Date: Today
To: President, East Bank of Mississippi
From: I.M. Student and Associates
Subje Budgetary slack ct:
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 20x5. Yet the new accounts manager's projection is only 800 new accounts. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number. PROBLEM 9-32 (40 MINUTES)
1. Production and direct-labor budgets
SHADY SHADES, INC. BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 Month Januar Februar March Quarte y y Sales (units)...... 20,000 24,000 16,000 60,000 Add: Ending inventory*...... 32,0 25,00 27,0 27,00 00 0 00 Total needs...... 52,000 49,000 43,000 87,000 Deduct: Beginning inventory...... 32,0 32,00 25,0 32,00 00 0 00 Units to be produced...... 20,000 17,000 18,000 55,000 Direct-labor hours per unit...... 1 1 .75 Total hours of direct labor time needed...... 17,0 13,5 50,5 20,000 00 00
Direct-labor costs: Wages ($16.00 per DLH)†...... $320,0 $272,0 $216,0 $808,0 00 00 00 Pension contributions ($.50 per DLH)...... 10,000 8,500 6,750 25,250 Workers' compensation insurance ($.20 per DLH)...... 4,000 3,400 2,700 10,100 Employee medical insurance ($.80 per DLH)...... 16,000 13,600 10,800 40,400 Employer's social security (at 7%)...... 22,4 19,0 15,1 56,5 00 40 20 Total direct-labor cost...... $372,4 $316,5 $251,3 $940,3 00 40 70
*100 percent of the first following month's sales plus 50 percent of the second following month's sales. †DLH denotes direct-labor hour. PROBLEM 9-32 (CONTINUED)
2. Use of data throughout the master budget:
Components of the master budget, other than the production PROBLEM 9-42 (120 MINUTES)
1. Sales budget:
20x0 20x1 First Decem Januar Februa March Quarter ber y ry Total sales...... $800,0 $880,0 $968,0 $1,064, $2,912, 00 00 00 800 800 Cash sales*...... 200,00 220,00 242,00 266,200 728,200 0 0 0 Sales on account†... 600,00 660,00 726,00 798,600 2,184,6 0 0 0 00
*25% of total sales. †75% of total sales.
2. Cash receipts budget:
20x1 First Januar Februar March Quarter y y Cash sales...... $220,0 $242,0 $266,2 $ 00 00 00 728,200 Cash collections from credit sales made during current month*...... 66,000 72,600 79,860 218,460 Cash collections from credit sales made during preceding 1,787,4 month†...... 540,00 594,00 653,40 00 0 0 0 Total cash receipts...... $826,0 $908,6 $999,4 $2,734,0 00 00 60 60
*10% of current month's credit sales. †90% of previous month's credit sales. PROBLEM 9-42 (CONTINUED)
3. Purchases budget:
20x0 20x1 First Decemb Januar Februar March Quarter er y y Budgeted cost of $560,00 $616,0 $677,60 $745,36 $2,038,9 goods sold..... 0 00 0 0 60 Add: Desired ending inventory...... 308,000 338,80 372,680 372,680 372,680† 0 * Total goods needed...... $868,00 $954,8 $1,050, $1,118, $2,411,6 0 00 280 040 40 Less: Expected beginning inventory...... ††280,00 0 308,00 338,800 372,680 308,000** 0 Purchases...... $588,00 $646,8 $711,48 $745,36 $2,103,6 0 00 0 0 40
*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 $560,000 (where $560,000 = December cost of goods sold = December sales of $800,000 x 70%) PROBLEM 9-42 (CONTINUED)
4. Cash disbursements budget:
20x1 First Januar Februar March Quarter y y Inventory purchases: Cash payments for purchases during the current $258,7 $284,5 $298,1 $ month*...... 20 92 44 841,456 Cash payments for purchases during the preceding month†...... 352,80 388,08 426,88 1,167,7 0 0 8 68 Total cash payments for inventory purchases...... $611,5 $672,6 $725,0 $2,009,2 20 72 32 24
Other expenses: Sales salaries...... $ $ $ $ 42,000 42,000 42,000 126,000 Advertising and promotion 32,000 32,000 32,000 96,000 Administrative salaries..... 42,000 42,000 42,000 126,000 Interest on bonds**...... 30,000 -0- -0- 30,000 Property taxes**...... -0- 10,800 -0- 10,800 Sales commissions...... 8,800 9,680 10,648 29,128
Total cash payments for other ...... expenses $154,8 $136,4 $126,6 $ 00 80 48 417,928 Total cash disbursements..... $766,3 $809,1 $851,6 $2,427,1 20 52 80 52
*40% of current month's 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. PROBLEM 9-42 (CONTINUED)
5. Summary cash budget:
20x1 First January Februar March Quarter y Cash receipts [from req. $ $ $ $2,734,0 (2)]...... 826,000 908,60 999,46 60 0 0 Cash disbursements [from req. (4)]...... (766,32 (809,15 (851,68 (2,427,1 0) 2) 0) 52) Change in cash balance during period due to $ $ $147,7 $ operations...... 59,680 99,448 80 306,908 Sale of marketable securities 30,000 30,000 (1/2/x1)...... Proceeds from bank loan (1/2/x1)...... 200,000 200,000 Purchase of equipment...... (250,00 (250,000 0) ) Repayment of bank loan (3/31/x1)...... (200,00 (200,000 0) ) Interest on bank loan*...... (5,000) (5,000) Payment of dividends...... (100,00 0) (100,000 )
Change in cash balance during $ first quarter...... (18,092) Cash balance, 1/1/x1...... 70,000 Cash balance, 3/31/x1...... $ 51,908
*$200,000 10% per year 1/4 year = $5,000
6. Analysis of short-term financing needs:
Projected cash balance as of December 31, 20x0...... $ 70,000 Less: Minimum cash balance...... 50,000 Cash available for equipment purchases...... $ 20,000 Projected proceeds from sale of marketable securities 30,000 Cash available...... $ 50,000 Less: Cost of investment in equipment...... 250,000 Required short-term borrowing...... $(200,00 0) PROBLEM 9-42 (CONTINUED)
7. GLOBAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 20X1
Sales revenue...... $2,912,8 00 Less: Cost of goods sold...... 2,038,96 0 Gross margin...... $ 873,840 Selling and administrative expenses: Sales salaries...... $126,00 0 Sales commissions...... 29,128 Advertising and promotion...... 96,000 Administrative salaries...... 126,000 Depreciation...... 150,000 Interest on bonds...... 15,000 Interest on short-term bank loan...... 5,000 Property taxes...... 5,400 Total selling and administrative expenses... 552,528 Net income...... $ 321,312
8. GLOBAL ELECTRONICS COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1
Retained earnings, 12/31/x0...... $ 215,000 Add: Net income...... 321,312 Deduct: Dividends...... 100,000 Retained earnings, 3/31/x1...... $ 436,312 PROBLEM 9-42 (CONTINUED)
9. GLOBAL ELECTRONICS COMPANY BUDGETED BALANCE SHEET MARCH 31, 20X1
Cash...... $ 51,908 Accounts receivable*...... 718,740 Inventory...... 372,680 Buildings and equipment (net of accumulated 1,352,00 depreciation)†...... 0 Total assets...... $2,495,32 8
Accounts payable**...... $ 447,216 Bond interest payable...... 10,000 Property taxes payable...... 1,800 Bonds payable (10%; due in 20x6)...... 600,000 Common Stock...... 1,000,000 Retained earnings...... 436,312 Total liabilities and stockholders' equity...... $2,495,32 8
*Accounts receivable, 12/31/x0...... $ 540,000 Sales on account [req. (1)]...... 2,184,600 Total cash collections from credit sales [(req. (2)] ($218,460 + $1,787,400)...... (2,005,860) Accounts receivable, 3/31/x1...... $ 718,740
†Buildings and equipment (net), 12/31/x0...... $1,252,00 0 Cost of equipment acquired...... 250,000 Depreciation expense for first quarter...... (150,000) Buildings and equipment (net), 3/31/x1...... $1,352,00 0
**Accounts payable, 12/31/x0...... $ 352,800 Purchases [req. (3)]...... 2,103,640 Cash payments for purchases [req. (4)]...... (2,009,224) Accounts payable, 3/31/x1...... $ 447,216 PROBLEM 9-34 (25 MINUTES) 1. Tuition revenue budget: Current student 12,000 enrollment……………………. Add: 5% increase in student 6 body…………… 00 Total student 12,600 body………………………………. Less: Tuition-free 1 scholarships………………. 80 Tuition-paying 12,420 students………………………… Credit hours per student per x year……………. 30 Total credit 372,600 hours……………………………….. Tuition rate per x hour……………………………. $75 Forecasted tuition $27,945, revenue……………………. 000
2. Faculty needed to cover classes: Total student 12,60 body……………………………………. 0 Classes per student per year [(15 credit hours ÷ 3 credit hours) x 2 x semesters]…………………. 10 Total student class enrollments to be 126,0 covered…. 00 Students per ÷ class……………………………………. 25 Classes to be 5,040 taught…………………………………. Classes taught per ÷ professor………………………. 5 Faculty 1,0 needed………………………………………… 08
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 sales— the starting point in the budgeting process. PROBLEM 9-35 (25 MINUTES)
1. Sales budget
July August Septemb er Sales (in sets)...... 5,000 6,000 7,500 Sales price per set...... $60 $60 $60 Sales revenue...... $300,00 0 $360,000 $450,000
2. Production budget (in sets)
July August Septemb er Sales...... 5,000 6,000 7,500 Add: Desired ending inventory. 1,200 1,500 1,500 Total requirements...... 6,200 7,500 9,000 Less: Projected beginning 1,000 1,200 1,500 inventory...... Planned production...... 5,200 6,300 7,500
3. Raw-material purchases
July August Septemb er Planned production (sets)...... 5,200 6,300 7,500 Raw material required per set (board feet)...... 10 10 10 Raw material required for production 52,000 63,000 75,000 (board feet)...... Add: Desired ending inventory of raw 6,300 7,500 8,000 material (board feet)...... Total requirements...... 58,300 70,500 83,000 Less: Projected beginning inventory of 5,200 6,300 7,500 raw material (board feet)...... Planned purchases of raw material 53,100 64,200 75,500 (board feet)...... Cost per board foot...... $.60 $.60 $.60 Planned purchases of raw material $ 31,860 $ $ 45,300 (dollars)...... 38,520 PROBLEM 9-35 (CONTINUED)
4. Direct-labor budget
July August Septemb er Planned production (sets)...... 5,200 6,300 7,500 Direct-labor hours per set...... 1.5 1.5 1.5 Direct-labor hours required...... 7,800 9,450 11,250 Cost per hour...... $21 $21 $21 Planned direct-labor cost...... $163,80 0 $198,45 $236,250 0
5. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e. PROBLEM 9-36 (30 MINUTES)
1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the following month. December receivables of $108,000 equal 60% of December’s sales; thus, December sales total $180,000 ($108,000 ÷ .6). Since the selling price is $20 per unit, Dakota Fan sold 9,000 units ($180,000 ÷ $20).
2. Since the company expects to sell 10,000 units, sales revenue will total $200,000 (10,000 units x $20).
3. Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus, February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000 + $114,000), February sales ($196,000), and March sales ($200,000), the company will report revenue of $586,000.
4. Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).
5. Finished-goods inventories are maintained at 20% of the following month’s sales. January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20). Thus, the December 31 inventory is 1,900 units (9,500 x 20%).
6. February sales will total 9,800 units ($196,000 ÷ $20), 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 $3,500 ($15,000 minimum balance less ending cash balance of $11,500):
Cash balance, January $ 1………………………… 22,500 Add: January receipts ($108,000 + 184,0 $76,000).. 00 Subtotal………………………………… $206,5 ……… 00 Less: January 195,0 payments………………………… 00 Cash balance before $ financing…………………. 11,500 PROBLEM 9-37 (45 MINUTES)
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. PROBLEM 9-37 (CONTINUED)
2. a. Schedule b. Subsequent Schedule Sales Budget 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 Cost-of-Goods-Manufactured Budget Manufacturing-Overhead Budget Cost-of-Goods-Manufactured Budget Cost-of-Goods-Manufactured Cost-of-Goods-Sold Budget Budget Cost-of-Goods-Sold Budget Budgeted Income Statement (includes ending inventory in Budgeted Balance Sheet dollars)
Selling Expense Budget Budgeted Income Statement
Research and Development Budgeted Income Statement Budget Administrative Expense Budget Budgeted Income Statement
Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows
Capital Expenditures Budget Cash Receipts and Disbursements Budget Budgeted Balance Sheet Budgeted Statement of Cash Flows
Cash Receipts and Budgeted Balance Sheet Disbursements Budgeted Statement of Cash Budget Flows Budgeted Balance Sheet Budgeted Statement of Cash Flows Budgeted Statement of Cash Flows