EXERCISES. b. The four-month budgets do not change with any identified activity level; thus, they are static budgets.

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1 Ex (FIN MAN); Ex. 6 1 (MAN) a. EXERCISES E 1 CANDACE THOMPSON 2 Cash Budget 3 For the Four Months Ending December 31, September October November December 5 Estimated cash receipts from: 6 Part-time job $ 1,000 $1,000 $1,000 $1,000 7 Deposit Total cash receipts $ 1,000 $1,000 $1,000 $1,500 9 Estimated cash payments for: 10 Season football tickets $ Additional entertainment 270 $ 270 $ 270 $ Tuition 4, Rent Food Deposit Total cash payments $ [5,315 $ 695 $ 695 $ Cash increase (decrease) $(4,315) $ 305 $ 305 $ 805 Cash balance at beginning of 18 month 6,500 2,185 2,490 2, Cash balance at end of month $ 2,185 $2,490 $2,795 $3,600 b. The four-month budgets do not change with any identified activity level; thus, they are static budgets. c. While Thompson s budget might first appear satisfactory, Thompson must earn enough cash in order to pay for the spring semester tuition. Her present budget shows that she will be $400 short of the tuition amount ($4,000 $3,600) by the time she needs to pay her spring tuition. Thus, Thompson will likely need to adjust the plan before the fall term even begins. Some possibilities would be to rent a lower cost apartment or to get a roommate. Other considerations include increasing her part-time job hours and reducing her monthly entertainment and food allowance, or making up the income difference with additional hours during Christmas break. Thompson might also see about scholarship opportunities to reduce the tuition payment. The budget gives Thompson time to adjust her plans to future events. In this case, Thompson can see that her present plan will not provide sufficient cash, thus giving her four months to adjust. If Thompson did not budget but went ahead with the original plan, she would be $400 short at the end of December with no time left to adjust. 240

2 Ex (FIN MAN); Ex. 6 2 (MAN) 1 NET VISION 2 Flexible Selling and Administrative Expenses Budget 3 For the Month Ending January 31, Total sales $100,000 $125,000 $150,000 5 Variable cost: 6 Sales commissions $ 10,000 $ 12,500 $ 15,000 7 Advertising expense 18,000 22,500 27,000 8 Miscellaneous selling expense 4,000 5,000 6,000 9 Office supplies expense 3,000 3,750 4, Miscellaneous administrative expense 2,000 2,500 3, Total variable cost $ 37,000 $ 46,250 $ 55, Fixed cost: 13 Miscellaneous selling expense $ 2,800 $ 2,800 $ 2, Office salaries expense 18,000 18,000 18, Miscellaneous administrative expense 2,200 2,200 2, Total fixed cost $ 23,000 $ 23,000 $ 23, Total selling and administrative expenses $ 60,000 $ 69,250 $ 78,

3 Ex (FIN MAN); Ex. 6 3 (MAN) a. 1 CRAMER COMPANY MACHINING DEPARTMENT 2 Flexible Production Budget 3 For the Three Months Ending March 31, January February March 5 Units of production 90, , , Wages $432,000 $480,000 $528,000 8 Utilities 37,800 42,000 46,200 9 Depreciation 60,000 60,000 60, Total $529,800 $582,000 $634, Supporting calculations: 13 Units of production 90, , , Hours per unit Total hours of production 27,000 30,000 33, Wages per hour $16.00 $16.00 $ Total wages $432,000 $480,000 $528, Total hours of production 27,000 30,000 33, Utility cost per hour $1.40 $1.40 $ Total utilities $ 37,800 $ 42,000 $ 46,200 Depreciation is a fixed cost, so it does not flex with changes in production. Since it is the only fixed cost, the variable and fixed costs are not classified in the budget. b. January February March Total flexible budget... $529,800 $582,000 $634,200 Actual cost , , ,000 Excess of actual cost over budget... $ (15,200) $ (13,000) $ (14,800) The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought. The department is spending more than would be expected. The flexible budget is a superior budgeting approach in this situation since wages and utility costs vary with production. Thus, the budget for these costs should adjust (flex) to the actual level of production. Actual costs can rightfully be compared to the flexible budget, because both numbers are based on actual volumes. 242

4 Ex (FIN MAN); Ex. 6 4 (MAN) 1 STEELCASE INC. FABRICATION DEPARTMENT 2 Flexible Production Budget 3 October (assumed data) 5 Units of production 12,000 15,000 18, Variable cost: 8 Direct labor $ 82,800 1 $ 103,500 2 $ 124, Direct materials 1,110, ,387, ,665, Total variable cost $ 1,192,800 $1,491,000 $1,789, Fixed cost: 13 Supervisor salaries $ 160,000 $ 160,000 $ 160, Depreciation 25,000 25,000 25, Total fixed cost $ 185,000 $ 185,000 $ 185, Total department cost $ 1,377,800 $1,676,000 $1,974, ,000 18/60 $ ,000 18/60 $ ,000 18/60 $ , $ , $ , $1.85 Ex (FIN MAN); Ex. 6 5 (MAN) A B C 1 RITE WEIGHT, INC. 2 Production Budget 3 For the Month Ending May 31, Units 5 Small Scale Large Scale 6 Expected units to be sold 60, ,000 7 Plus desired inventory, May 31, ,100 2,500 8 Total 61, ,500 9 Less estimated inventory, May 1, 2013 (1,500) (2,300) 10 Total units to be produced 59, ,

5 Ex (FIN MAN); Ex. 6 6 (MAN) a. 1 AUDIO MECHANICS, INC. 2 Sales Budget 3 For the Month Ending September 30, Unit Sales Volume Unit Selling Price Product and Area Total Sales 5 Model DL: 6 East Region 1,850 $145 $268,250 7 West Region 1, ,300 8 Total 3,390 $491,550 9 Model XL: 10 East Region 820 $210 $172, West Region , Total 1,530 $321, Total revenue from sales $812,850 b. A B C 1 AUDIO MECHANICS, INC. 2 Production Budget 3 For the Month Ending September 30, Units 5 Model DL Model XL 6 Expected units to be sold 3,390 1,530 7 Plus desired inventory, September 30, Total 3,665 1,578 9 Less estimated inventory, September 1, 2012 (250) (60) 10 Total units to be produced 3,415 1,

6 Ex (FIN MAN); Ex. 6 7 (MAN) 1 PEREZ AND FORD, CPAs 2 Professional Fees Earned Budget 3 For the Year Ending December 31, Billable Hourly Total Hours Rate Revenue 5 Audit Department: 6 Staff 19,200 $120 $2,304,000 7 Partners 6, ,736,000 8 Total 25,400 $4,040,000 9 Tax Department: 10 Staff 12,300 $120 $1,476, Partners 4, ,148, Total 16,400 $2,624, Small Business Accounting Department: 14 Staff 4,900 $120 $ 588, Partners 1, , Total 6,800 $1,120, Total professional fees earned $7,784,000 Ex (FIN MAN); Ex. 6 8 (MAN) A B C 1 PEREZ AND FORD, CPAs 2 Professional Labor Cost Budget 3 For the Year Ending December 31, Staff Partners 5 Audit Department hours 19,200 6,200 6 Tax Department hours 12,300 4,100 7 Small Business Accounting Department hours 4,900 1,900 8 Total hours 36,400 12,200 9 Average compensation per hour $40.00 $ Total professional labor cost $1,456,000 $1,830,

7 Ex (FIN MAN); Ex. 6 9 (MAN) E 1 ROMANO S FROZEN PIZZA INC. 2 Direct Materials Purchases Budget 3 For the Month Ending June 30, Dough Tomato Cheese Total 5 Units required for production: 6 12 pizza 4, , , pizza 14, , ,750 6 Plus desired inventory, 8 June 30, Total 19,420 12,720 16,005 Less estimated inventory, 10 June 1, Total units to be purchased 18,840 12,510 15, Unit price $1.10 $2.60 $2.80 Total direct materials to be 13 purchased $20,724 $32,526 $43,904 $97, , lb , lb , lb , lbs , lb , lbs. 246

8 Ex (FIN MAN); Ex (MAN) 1 COCA-COLA ENTERPRISES WAKEFIELD PLANT 2 Direct Materials Purchases Budget 3 For the Month Ending March 31, (assumed data) 5 Concentrate 2-Liter Bottles Carbonated Water 6 Materials required for production: 7 Coke 572* lbs. 143,000 btls. 286,000 ltrs. 8 Sprite 312* 104, ,000 9 Total materials 884 lbs. 247,000 btls. 494,000 ltrs. 10 Direct materials unit price $90 $0.10 $0.08 Total direct materials to be 11 purchased $79,560 $ 24,700 $ 39,520 Coke Sprite *Production in liters (bottles 2 liters/bottle) , ,000 Divide by ,860 2,080 Multiply by concentrate pounds per 100 liters Concentrate pounds required for production

9 Ex (FIN MAN); Ex (MAN) 1 SAFE RIDE TIRE COMPANY 2 Direct Materials Purchases Budget 3 For the Year Ending December 31, Rubber Steel Belts Total 5 Pounds required for production: 6 Passenger tires 1,080,000 lbs ,000 lbs. 2 7 Truck tires 1,120, ,000 4 Plus desired inventory, 8 December 31, ,000 10,000 9 Total 2,240,000 lbs. 386,000 lbs. Less estimated inventory, 10 January 1, ,000 8, Total units purchased 2,194,000 lbs. 378,000 lbs. 12 Unit price $3.60 $4.50 Total direct materials to be 13 purchased $7,898,400 $1,701,000 $9,599, Rubber: 36,000 units 30 lbs. per unit = 1,080,000 lbs Steel belts: 36,000 units 6 lbs. per unit = 216,000 lbs Rubber: 16,000 units 70 lbs. per unit = 1,120,000 lbs Steel belts: 16,000 units 10 lbs. per unit = 160,000 lbs. Ex (FIN MAN); Ex (MAN) A B C 1 ACE RACKET COMPANY 2 Direct Labor Cost Budget 3 For the Month Ending May 31, Forming Assembly Department Department 5 Hours required for production: 6 Junior Pro Striker 2, , Total 2,905 4,820 9 Hourly rate $18.00 $ Total direct labor cost $ 52,290 $ 72, Junior: 0.30 hr. 1,400 = 420 hrs hr. 1,400 = 560 hrs Pro Striker: 0.35 hr. 7,100 = 2,485 hrs hr. 7,100 = 4,260 hrs. 248

10 Ex (FIN MAN); Ex (MAN) A B C 1 EXECUTIVE INN, INC. 2 Direct Labor Cost Budget 3 For a Weekday or a Weekend Day 4 Weekday Weekend Day 5 Room occupancy 6 Room capacity Occupied percent (occupancy) 90% 60% 8 (a) Rooms occupied Housekeeping 10 (b) Number of minutes to clean a room Total minutes [(a) (b)] 5,400 3, Total hours (Total minutes/60 min.) Labor rate per hour $12.00 $ (c) Housekeeping daily labor budget $ 1,080 $ Restaurant staff 16 Base restaurant staff Incremental 60 room blocks [(a)/60] Total staff Hours per day Total hours Labor rate per hour $10.00 $ (d) Restaurant staff daily labor budget $ 720 $ Total daily labor budget [(c) + (d)] $ 1,800 $ 1,

11 Ex (FIN MAN); Ex (MAN) a. A B C 1 LEVI STRAUSS & CO. 2 Production Budget 3 March (assumed data) 5 Dockers 501 Jeans 6 Expected units to be sold 20,500 44,200 7 Plus March 31 desired inventory 480 2,390 8 Total units 20,980 46,590 9 Less March 1 estimated inventory 980 1, Total units to be produced 20,000 45,000 b. E F 1 LEVI STRASS & CO. 2 Direct Labor Cost Budget 3 March (assumed data) 5 Inseam Outerseam Pockets Zipper Total 6 Dockers 36, , , , Jeans 54, , , , Total minutes 90, ,500 52,500 51,000 Total direct labor hours 9 (/60 minutes) 1,500 1, Direct labor rate $13 $13 $15 $15 11 Total direct labor cost $19,500 $23,725 $13,125 $12,750 $69, (20,000/10 pairs) 18 min. = 36,000 min (20,000/10 pairs) 21 min. = 42,000 min. 15 3( 20,000/10 pairs) 6 min. = 12,000 min (20,000/10 pairs) 12 min. = 24,000 min (45,000/10 pairs) 12 min. = 54,000 min (45,000/10 pairs) 15 min. = 67,500 min (45,000/10 pairs) 9 min. = 40,500 min (45,000/10 pairs) 6 min. = 27,000 min. 250

12 Ex (FIN MAN); Ex (MAN) A B C 1 BLONDIE CANDY COMPANY 2 Factory Overhead Cost Budget 3 For the Month Ending July 31, Variable factory overhead costs: 5 Manufacturing supplies $12,000 6 Power and light 41,000 7 Production supervisor wages 126,000 8 Production control wages 29,000 9 Materials management wages 34, Total variable factory overhead costs $242, Fixed factory overhead costs: 12 Factory insurance $25, Factory depreciation 20, Total fixed factory overhead costs 45, Total factory overhead costs $287,000 Note: Advertising expenses, sales commissions, and executive officer salaries are selling and administrative expenses. 251

13 Ex (FIN MAN); Ex (MAN) 1 DOVER CHEMICAL COMPANY 2 Cost of Goods Sold Budget 3 For the Month Ending April 30, Finished goods inventory, April 1 $ 18, Work in process inventory, April 1 $ 12,100 6 Direct materials: 7 Direct materials inventory, April 1 $ 15,800 8 Direct materials purchases 2,340, Cost of direct materials available for use $2,355, Less direct materials inventory, April 30 16, Cost of direct materials placed in production $2,339, Direct labor 240, Factory overhead 375, Total manufacturing costs 2,954, Total work in process during the period $2,966, Less work in process inventory, April 30 13, Cost of goods manufactured 2,953, Cost of finished goods available for sale $2,972, Less finished goods inventory, April 30 17, Cost of goods sold $2,954, $9,800 + $8, ,000 barrels $78 per barrel 24 3 $9,400 + $7,

14 Ex (FIN MAN); Ex (MAN) 1 ORIENTAL CERAMICS INC. 2 Cost of Goods Sold Budget 3 For the Month Ending June 30, Finished goods inventory, June 1, 2012 $ 10,680 5 Work in process inventory, June 1, 2012 $ 3,200 6 Direct materials: 7 Direct materials inventory, June 1, 2012 $ 8,570 8 Direct materials purchases 174,980 9 Cost of direct materials available for use $183, Less direct materials inventory, June 30, , Cost of direct materials placed in production $172, Direct labor 177, Factory overhead 99, Total manufacturing costs 448, Total work in process during the period $452,190 Less work in process inventory, 16 June 30, , Cost of goods manufactured 450, Cost of finished goods available for sale $461,110 Less finished goods inventory, 19 June 30, , Cost of goods sold $449,

15 Ex (FIN MAN); Ex (MAN) 1 PET MART WHOLESALE INC. 2 Schedule of Collections from Sales 3 For the Three Months Ending May 31, March April May 5 Receipts from cash sales: 6 Cash sales (10% current month s sales) $ 9,000 $ 15,000 $ 24,000 7 March sales on account: 8 Collected in March ($81, %) 40,500 9 Collected in April ($81,000 35%) 28, Collected in May ($81,000 15%) 12, April sales on account: 12 Collected in April ($135, %) 67, Collected in May ($135,000 35%) 47, May sales on account: 15 Collected in May ($216, %) 108, Total cash collected $49,500 $110,850 $191, $90,000 90% = $81, $150,000 90% = $135, $240,000 90% = $216,

16 Ex (FIN MAN); Ex (MAN) 1 OFFICE UNIVERSE SUPPLIES INC. 2 Schedule of Collections from Sales 3 For the Three Months Ending October 31, August September October 5 Receipts from cash sales: 6 Cash sales (25% current month s sales) $ 30,000 $ 37,500 $ 55,000 7 July sales on account: 8 Collected in August (Accounts Receivable balance) 80,000 9 August sales on account: 10 Collected in August ($90, %) 18, Collected in September ($90,000 80%) 72, September sales on account: 13 Collected in September ($112, %) 22, Collected in October ($112,500 80%) 90, October sales on account: 16 Collected in October ($165, %) 33, $128,000 $132,000 $178, $120,000 75% = $90, $150,000 75% = $112, $220,000 75% = $165,

17 Ex (FIN MAN); Ex (MAN) 1 SAGE LEARNING SYSTEMS INC. 2 Schedule of Cash Payments for Selling and Administrative Expenses 3 For the Three Months Ending December 31, October November December 5 October expenses: 6 Paid in October ($58, %) $35,100 7 Paid in November ($58,500 40%) $23,400 8 November expenses: 9 Paid in November ($66, %) 39, Paid in December ($66,200 40%) $26, December expenses: 12 Paid in December ($79, %) 47, Total cash payments $35,100 $63,120 $73, $67,500 $9, $75,200 $9, $88,100 $9,000 Note: Insurance, property taxes, and depreciation are expenses that do not result in cash payments in October, November, or December. 256

18 Ex (FIN MAN); Ex (MAN) 1 SELECT PHYSICAL THERAPY INC. 2 Schedule of Cash Payments for Operations 3 For the Three Months Ending September 30, July August September 5 Payments of prior month s expense 1 $ 28,000 $ 33,810 $ 39,630 6 Payment of current month s expense 2 78,890 92, ,130 7 Total payment $106,890 $126,280 $141, $28,000, given as Accrued Expenses Payable, July 1 10 $33,810 = ($117,000 $3,500 $800 ) 30% 11 $39,630 = ($136,400 $3,500 $800) 30% 12 2 $78,890 = ($117,000 $3,500 $800) 70% 13 $92,470 = ($136,400 $3,500 $800) 70% 14 $102,130 = ($150,200 $3,500 $800) 70% Note: Insurance and depreciation are expenses that do not result in cash payments in July, August, and September. Ex (FIN MAN); Ex (MAN) E 1 MED-TEK INC. 2 Capital Expenditures Budget 3 For the Four Years Ending December 31, Building $5,500,000 $3,500,000 $3,600, Equipment 1,200,000 $150, ,000 7 Information systems 675, Total $5,500,000 $4,700,000 $825,000 $4,500, $9,000,000 40% = $3,600, $1,200, = $675,

CHAPTER 21 (FIN MAN); CHAPTER 6 (MAN) BUDGETING

CHAPTER 21 (FIN MAN); CHAPTER 6 (MAN) BUDGETING Number Objective Description Difficulty Time AACSB IMA SS GL EO21(6)-1 21-1 Easy 5 min Analytic Budget Preparation EO21(6)-2 21-1 Easy 5 min Analytic Budget