Chapter 8 Master Budgeting
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Chapter 8 Master Budgeting Solutions to Questions 8-1 A budget is a detailed quantitative plan master budget usually also contains a budgeted for the acquisition and use of financial and other income statement, budgeted balance sheet, and resources over a given time period. Budgetary cash budget. control involves using budgets to increase the likelihood that all parts of an organization are 8-5 The level of sales impacts virtually every working together to achieve the goals set down other aspect of the firm’s activities. It in the planning stage. determines the production budget, cash collections, cash disbursements, and selling and 8-2 administrative budget that in turn determine the 1. Budgets encourage managers to think cash budget and budgeted income statement about and plan for the future. and balance sheet. 2. Budgets communicate financial goals throughout the organization. 8-6 No. Planning and control are different, 3. Budgets allocate resources within the although related, concepts. Planning involves organization where they can be used most developing goals and developing budgets to effectively. achieve those goals. Control, by contrast, 4. Budgets coordinate the plans and involves the means by which management activities of departmental managers. attempts to ensure that the goals set down at 5. Budgets uncover potential bottlenecks the planning stage are attained. before they occur. 6. Budgets can be compared to actual 8-7 Creating a “budgeting assumptions” tab results to improve the efficiency and simplifies the process of determining how effectiveness of operations and to evaluate and changes to a master budget’s underlying reward employees. assumptions impact all supporting schedules and the projected financial statements. 8-3 A perpetual budget is a 12-month budget that continuously rolls forward one 8-8 A self-imposed budget is one in which month (or quarter) at a time as the current persons with responsibility over cost control month (or quarter) is completed. This approach prepare their own budgets. This is in contrast to keeps managers continually focused one year a budget that is imposed from above. The major ahead. advantages of a self-imposed budget are: (1) It shows respect for the opinions of lower-level 8-4 A master budget represents a summary managers. (2) It leverages the knowledge of of all of management’s plans and goals for the lower-level managers to provide more accurate future, and outlines the way in which these estimates than those imposed by top managers plans are to be accomplished. The master who have less intimate knowledge of day-to-day budget is composed of a number of smaller, operations. (3) It increases the lower-level specific budgets encompassing sales, managers’ motivation to achieve their own self- production, raw materials, direct labor, imposed goals. (4) It empowers lower-level manufacturing overhead, selling and managers to take ownership of the budget and administrative expenses, and inventories. The to be accountable for deviations from it. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 8 1 Self-imposed budgets do carry with 8-10 The principal purpose of the cash them the risk of budgetary slack. The budgets budget is NOT to see how much cash the prepared by lower-level managers should be company will have in the bank at the end of the carefully reviewed to prevent too much slack. year. Although this is one of the purposes of the cash budget, the principal purpose is to provide 8-9 The direct labor budget and other information on probable cash needs during the budgets can be used to forecast workforce budget period, so that bank loans and other staffing needs. Careful planning can help a sources of financing can be anticipated and company avoid erratic hiring and laying off of arranged well in advance. employees. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2 Managerial Accounting, 17th Edition Chapter 8: Applying Excel The completed worksheet is shown below. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 8 3 Chapter 8: Applying Excel (continued) The completed worksheet, with formulas displayed, is shown below. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4 Managerial Accounting, 17th Edition Chapter 8: Applying Excel (continued) 1. When the budgeted unit sales in the second quarter are increased from 60,000 units to 75,000 units, the result is: Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 8 5 Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 6 Managerial Accounting, 17th Edition Chapter 8: Applying Excel (continued) The cash disbursements for raw materials have increased from $1,035,980 to $1,095,980 because the increased unit sales in the second quarter require additional purchases of raw materials. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 8 7 Chapter 8: Applying Excel (continued) 2. With the revised sales budget, the worksheet should look like this: Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8 Managerial Accounting, 17th Edition Chapter 8: Applying Excel (continued) a. The total expected cash collections for the year under this revised budget are $2,165,000. b. The total required production for the year under this revised budget is 335,000 units. c. The total cost of raw materials to be purchased for the year under this revised budget is $1,358,800. d. The total expected cash disbursements for raw materials for the year under this revised budget are $1,305,900. e. The production constraint of 90,000 units per quarter is a problem in the third quarter of Year 2 and may be a problem later in Year 3. This problem can be approached in a variety of ways. First, the excess capacity in the first and second quarters could be used to build up finished goods inventories beyond the usual levels. Second, management could investigate acquiring another of the milling machines. Third, improvement efforts can be focused on the milling machine; if these efforts are successful, the capacity of the milling machine can be increased and consequently the capacity of the entire plant can be increased. Fourth, management could investigate hiring another company with such a milling machine to do some of the work. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Solutions Manual, Chapter 8 9 The Foundational 15 1. The budgeted sales for July are computed as follows: Unit sales (a) .............................. 10,000 Selling price per unit (b) .............. $70 Total sales (a) × (b) .................... $700,000 2. The expected cash collections for July are computed as follows: July June sales: $588,000 × 60% ................... $352,800 July sales: $700,000 × 40% ................... 280,000 Total cash collections ................ $632,800 3. The accounts receivable balance at the end of July is: July sales (a) .............................. $700,000 Percent uncollected (b) ................ 60% Accounts receivable (a) × (b) ...... $420,000 4. The required production for July is computed as follows: July Budgeted sales in units .................. 10,000 Add desired ending inventory* ....... 2,400 Total needs ................................... 12,400 Less beginning inventory** ........... 2,000 Required production ...................... 10,400 *August sales of 12,000 units × 20% = 2,400 units. **July sales of 10,000 units × 20% = 2,000 units. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10 Managerial Accounting, 17th Edition The Foundational 15 (continued) 5. The raw material purchases for July are computed as follows: July Required production in units of finished goods ................. 10,400 Units of raw materials needed per unit of finished goods 5 Units of raw materials needed to meet production.......... 52,000 Add desired units of ending raw materials inventory* ....... 6,100 Total units of raw materials needed ............................... 58,100 Less units of beginning raw materials inventory** ............ 5,200 Units of raw materials to be purchased .......................... 52,900 *61,000 pounds × 10% = 6,100 pounds. **52,000 pounds × 10% = 5,200 pounds. 6. The cost of raw material purchases for July is computed as follows: Units of raw materials to be purchased (a) ........ 52,900 Unit cost of raw materials (b)............................ $2.00 Cost of raw materials to be purchased (a) × (b) $105,800 7. The estimated cash disbursements for materials purchases in July is computed as follows: July June purchases: $88,880