Chapter 7 Solutions: 7-5

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2 Chapter 7 Solutions: A llocation ratios: Traditional Gel Machine hours Square feet No. of employees Cost assignment: Power: ( $90,000) $ 22,500 ( $90,000) $ 67,500 General Factory: ( $300,000) 180,000 ( $300,000) 120,000 Personnel: ( $120,000) 67,500 ( $120,000) 52,500 Direct costs 137, ,500 Total $407,500 $462, Departmental overhead rates: Traditional: $407,500/8,000 = $50.94* per MHr Gel: $462,500/24,000 = $19.27* per MHr

5 Chapter 7 Solutions: Assume the support department costs are allocated in order of highest to lowest cost: General Factory, Personnel, and Maintenance. Power Factory Personnel Traditional Gel Square feet No. employees Machine hours Power Factory Personnel Traditional Gel Direct costs $ 90,000 $ 300,000 $120,000 $137,500 $222,500 General Factory: (0.15)($300,000) 45,000 (45,000) (0.10)($300,000) (30,000) 30,000 (0.45)($300,000) (135,000) 135,000 (0.30)($300,000) (90,000) 90,000 Personnel: (0.20)($150,000) 30,000 (30,000) (0.45)($150,000) (67,500) 67,500 (0.35)($150,000) (52,500) 52,500 Power: (0.25)($165,000) (41,250) 41,250 (0.75)($165,000) (123,750) 123,750 Total $ 0 $ 0 $ 0 $381,250 $488, Traditional: $381,250/8,000 = $47.66* per MHr Gel: $488,750/24,000 = $20.36* per MHr *Rounded

7 Chapter 7 Solutions: Maintenance Personnel Assembly Painting Square footage Number of employees P = 60, M M = 200, P P = 60, (200, P) M = 200, (102,041) P = 60, , P M = 200, , P = 100,000 M = 210,204 P = 102,041

8 Chapter 7 Solutions: Concluded Allocate Allocate Total after Direct Cost Maintenance a Personnel b Allocation Maintenance... $ 200,000 $(210,204) $ 10,204 $ 0 Personnel... 60,000 42,041 (102,041) 0 Assembly... 43,000 84,082 24, ,572 Painting... 74,000 84,082 67, ,429 $ 377,000 $ 377,001* *Difference due to rounding error. a (0.20 $210,204) = $42,041 b (0.10 $102,041) = $10,204 (0.40 $210,204) = $84,082 (0.24 $102,041) = $24,490 (0.40 $210,204) = $84,082 (0.66 $102,041) = $67, Departmental rates: Assembly: $151,572/25,000 = $6.06 per direct labor hour Painting: $225,429/40,000 = $5.64 per direct labor hour

10 Chapter 7 Solutions: Direct method: Proportion of: Pottery Retail Machine hours Number of employees Power: (0.375 $100,000)... $ 37,500 (0.625 $100,000)... $ 62,500 Human resources: (0.429 $205,000)... 87,945 (0.571 $205,000) ,055 Direct costs... 80,000 50,000 $ 205,445 $229,555

11 Chapter 7 Solutions: Concluded 2. Sequential method: Human Power Resources Pottery Retail Machi ne hours Number of employees Direct costs... $ 100,000 $ 205,000 $ 80,000 $ 50,000 Human resources: (0.125 $205,000)... 25,625 (25,625) (0.375 $205,000)... (76,875) 76,875 (0.500 $205,000)... (102,500) 102,500 P ower: (0.375 $125,625)... (47,109) 47,109 (0.625 $125,625)... (78,516) 78,516 $ 0 $ 0 $ 203,984 $ 231,016

12 Chapter 7 Solutions: Reciprocal method: Human Power Resources Pottery Retail Machine hours Number of employees HR = $205, P P = $100, HR HR = $205, ($100, HR) P = $100, ($230,769) HR = $205,000 + $20, HR P = $100, , HR = $225,000 P = $128,846 HR = $230,769 Pottery Retail Human resources: (0.375 $230,769)... $ 86,538 (0.500 $230,769)... $115,385 Power: (0.300 $128,846)... 38,654 (0.500 $128,846)... 64,423 Direct costs... 80,000 50,000 $ 205,192 $229,808

14 Chapter 7 Solutions: Henderson ($431,800/$2,540,000)($182,500)* = $31,025 Boulder City ($508,000/$2,540,000)($182,500) = 36,500 Kingman ($381,000/$2,540,000)($182,500) = 27,375 Flagstaff ($635,000/$2,540,000)($182,500) = 45,625 Glendale ($584,200/$2,540,000)($182,500) = 41,975 *($26)(3,750) + $85,000 = $182,500.

15 Chapter 7 Solutions: Share of accounting department fixed costs based on 2009 sales: Henderson ($337,500/$2,250,000)($85,000) = $12,750 Boulder City ($450,000/$2,250,000)($85,000) = 17,000 Kingman ($360,000/$2,250,000)($85,000) = 13,600 Flagstaff ($540,000/$2,250,000)($85,000) = 20,400 Glendale ($562,500/$2,250,000)($85,000) = 21,250 Variable Cost + Fixed Cost = Total Henderson ($26)(1,475) = $38,350 + $12,750 = $51,100 Boulder City ($26)(400) = 10, ,000 = 27,400 Kingman ($26)(938) = 24, ,600 = 37,988 Flagstaff ($26)(562) = 14, ,400 = 35,012 Glendale ($26)(375) = 9, ,250 = 31, The method in Requirement 2 is better because it ties cost allocated to the driver that causes the cost. Thus, managers would be more likely to use accounting department time efficiently. The method in Requirement 1 assigns accounting costs on the basis of a variable, which may not be causally related. Also, a motel with stable sales from year to year may still experience wild fluctuations in allocated cost due to changing sales patterns of other motels.

17 Chapter 8 Solutions: Ivans Company Purchase Budget for Fabric For the Fourth Quarter, 20XX October November December Total Units to be produced 40,000 80,000 50, ,000 DM per unit (yd.) Production needs 4,000 8,000 5,000 17,000 Desired end. inventory (yd.) 1, Total needs 5,200 8,750 5,900 17,900 Less: Beginning inventory 600 1, DM to be purchased (yd.) 4,600 7,550 5,150 17,300 Cost per yard $3.50 $3.50 $3.50 $3.50 Total purchase cost $ 16,100 $ 26,425 $ 18,025 $ 60,550

18 Chapter 8 Solutions: Concluded 2. Ivans Company Purchase Budget for Polyfiberfill For the Fourth Quarter, 20XX October November December Total Units to be produced 40,000 80,000 50, ,000 DM per unit (oz.) Production needs 120, , , ,000 Desired end. inventory (oz.) 72,000 45,000 54,000 54,000 Total needs 192, , , ,000 Less: Beg. inventory 36,000 72,000 45,000 36,000 DM to be purchased (oz.) 156, , , ,000 Cost per ounce $0.05 $0.05 $0.05 $0.05 Total purchase cost $ 7,800 $ 10,650 $ 7,950 $ 26,400

19 Chapter 8 Solutions: Ivans Company Direct Labor Budget For the Fourth Quarter, 20XX October November December Total Units to be produced 40,000 80,000 50, ,000 Direct labor time per unit (hrs.) Total hours needed 8,000 16,000 10,000 34,000 Wage per hour $10.50 $10.50 $10.50 $10.50 Total direct labor cost $ 84,000 $168,000 $105,000 $357,000

21 Chapter 8 Solutions: Cash Budget For the Month of October, 20XX Beginning cash balance... $ 1,980 Collections: Cash sales... 10,000 Credit sales: October ($65,000 50%)... 32,500 September ($90,000 30%)... 27,000 August ($80,000 15%)... 12,000 Total cash available... $ 83,480 Less disbursements: Inventory purchases: October ($75,000 70% 40%)... $21,000 September ($110,000 70% 60%)... 46,200 Salaries and wages... 2,000 Rent... 2,700 Taxes... 5,000 Other operating expenses Owner withdrawal... 4,000 Advertising ,200 Ending cash balance... $ 1, The ending cash balance does not meet the desired level of $2,000. To quickly adjust the expected ending cash balance, the owner could consider withdrawing less for his own salary or decreasing discretionary expenses such as certain items in Other Operating Expenses.

23 Chapter 8 Solutions: Sales revenue: Pessimistic Expected Optimistic Sleepeze... $ 2,250,000 $ 3,000,000 $ 3,600,000 Plushette... 3,000,000 4,200,000 5,040,000 Ultima... 1,800,000 5,000,000 6,000,000 Total sales... $ 7,050,000 $ 12,200,000 $ 14,640, Pessimistic Expected Optimistic Salaries... $ 130,000 $ 130,000 $ 130,000 Depreciation... 20,000 20,000 20,000 Office supplies & other... 21,000 21,000 21,000 Advertising: Sleepeze & Plushette.. 20,000 20,000 20,000 Ultima... 90, , ,000 Commissions , , ,200 Shipping: Sleepeze , , ,000 Plushette , , ,000 Ultima , , ,000 Total... $ 1,713,500 $ 2,382,000 $ 2,725,200

25 Chapter 8 Solutions: Activity - based budget: Research: Salary $ 30,000 Internet connection... 1,920 $ 31,920 Shipping: Salaries..... $ 24,500 Telephone... 2,500 Ship sleepeze ,000 Ship plushette ,000 Ship ultima ,000 1,752,000 Jobbers: Salaries..... $ 18,750 Telephone... 2,500 Commissions , ,250 Basic ads: Salaries..... $ 16,000 Advertising... 20,000 36,000 Ultima ads: Salaries..... $ 20,750 Advertising , ,750 Manage office: Salaries..... $ 20,000 Depreciation... 20,000 Internet Other office supplies... 13,600 54,080 Total $ 2, 382,000

26 Chapter 8 Solutions: Clearly, shipping is the most costly activity, followed by ultima advertising and commissions to jobbers. It would be worthwhile to investigate shipping costs to see if those could be reduced, for example, by getting bids from several shippers. It is unlikely that ultima advertising should be reduced the first year. It is a very different, and expensive, model, and consumers may need to be educated as to its benefits. Another method of selling to retail stores might be worth investigating. For example, the use of a salaried sales staf

28 Chapter 8 Solutions: Schedule 1: Sales budget January February March Total Units... 20,000 25,000 30,000 75,000 Unit selling price... $90 $90 $90 $90 Sales... $ 1,800,000 $ 2,250,000 $ 2,700,000 $6,750, Schedule 2: Production budget January February March Total Sales (Schedule 1)... 20,000 25,000 30,000 75,000 Desired ending inventory... 17,500 21,000 21,000 21,000 Total needs... 37,500 46,000 51,000 96,000 Less: Beginning inventory... 13,000 17,500 21,000 13,000 Units to be produced... 24,500 28,500 30,000 83,000

29 Chapter 8 Solutions: Schedule 3: Direct materials purchases budget January February Part 714 Part 502 Part 714 Part 502 Units to be produced... 24,500 24,500 28,500 28,500 Dir. mat. per unit Production needs ,500 73, ,500 85,500 Desired EI... 62,500 37,500 75,000 45,000 Total needs , , , ,500 Less: BI... 50,000 30,000 62,500 37,500 Dir. mat. to purchase ,000 81, ,000 93,000 Cost per unit... $4 $3 $4 $3 Total cost... $ 540,000 $243,000 $ 620,000 $ 279,000 March Total Part 714 Part 502 Part 714 Part 502 Units to be produced... 30,000 30,000 83,000 83,000 Dir. mat. per unit Production needs ,000 90, , ,000 Desired EI... 75,000 45,000 75,000 45,000 Total needs , , , ,000 Less: BI... 75,000 45,000 50,000 30,000 Dir. mat. to purchase ,000 90, , ,000 Cost per unit... $4 $3 $4 $3 Total cost... $ 600,000 $270,000 $ 1,760,000 $ 792,000

30 Chapter 8 Solutions: Schedule 4: Direct labor budget January February March Total Units to be produced (Schedule 2)... 24,500 28,500 30,000 83,000 Direct labor time per unit (hrs.) Total hours needed... 49,000 57,000 60, ,000 Wages per hour... $15 $15 $15 $15 Total dir. labor cost... $ 735,000 $ 855,000 $ 900,000 $2,490, Schedule 5: Overhead budget January February March Total Budgeted direct labor hours (Schedule 4)... 49,000 57,000 60, ,000 Variable overhead rate... $3.90 $3.90 $3.90 $3.90 Budgeted var. overhead... $ 191,100 $ 222,300 $234,000 $ 647,400 Budget fixed overhead , , , ,000 Total overhead... $ 396,100 $ 427,300 $439,000 $1,262,400

31 Chapter 8 Solutions: Schedule 6: Selling and administrative expense budget January February March Total Planned sales (Schedule 1)... 20,000 25,000 30,000 75,000 Variable selling & administrative expense per unit... $3.75 $3.75 $3.75 $3.75 Total variable expense... $ 75,000 $ 93,750 $112,500 $281,250 Fixed selling & administrative expense: Salaries... $ 30,000 $ 30,000 $ 30,000 $ 90,000 Depreciation... 5,000 5,000 5,000 15,000 Other... 10,000 10,000 10,000 30,000 Total fixed expenses... $ 45,000 $ 45,000 $ 45,000 $135,000 Total selling & administrative exp... $ 120,000 $138,750 $157,500 $416,250

32 Chapter 8 Solutions: Schedule 7: Ending finished goods inventory budget Unit cost computation: Direct materials Part 714 (5 $4) = $ 20 Part 502 (3 $3) = 9... $29.00 Direct labor (2 $15) Overhead: Variable (2 $3.90) Fixed (2 $3.705)* Total unit cost... $74.21 * Total fixed OH / Total DLH = $615,000/166,000 = $3.705 per DLH Units Cost per Unit Total Amount Finished goods... 21,000 $74.21 $1,558,410

33 Chapter 8 Solutions: Schedule 8: Cost of goods sold budget Direct materials used (Schedule 3): Part 714 (415,000 $4.00)... $1,660,000 Part 502 (249,000 $3.00) ,000 $ 2,407,000 Direct labor used (Schedule 4)... 2,490,000 Overhead (Schedule 5)... 1,262,400 Budgeted manufacturing costs... $ 6,159,400 Add: Beginning finished goods (13,000 $74.21)*. 964,730 Goods available for sale... $ 7,124,130 Less: Ending finished goods (Schedule 7)... 1,558,410 Budgeted cost of goods sold... $ 5,565,720 *Assumes that these units cost the same as current quarter s production. 9. Schedule 9: Budgeted income statement Sales (Schedule 1)... $6,750,000 Less: Cost of goods sold (Schedule 8)... 5,565,720 Gross margin... $1,184,280 Less: Selling and administrative expense (Schedule 6) ,250 Income before taxes... $ 768,030

34 Chapter 8 Solutions: Schedule 10: Cash budget January February March Total Beg. balance... $ 162,900 $ 33,800 $ 0 $ 162,900 Cash receipts... 1,800,000 2,250,000 2,700,000 6,750,000 Cash available... $1,962,900 $ 2,283,800 $ 2,700,000 $ 6,912,900 Less disbursements: Purchases... $ 783,000 $ 899,000 $ 870,000 $2,552,000 DL payroll , , ,000 2,490,000 Overhead* , , , ,400 Marketing & admin.* , , , ,250 Land... 90,000 90,000 Total... $1,929,100 $ 2,305,050 $ 2,261,500 $ 6,495,650 Ending balance... $ 33,800 $ (21,250) $ 438,500 $ 417,250 Borrowed/repaid ,250 (21,250) 0 Interest paid (213) (213) Ending balance... $ 33,800 $ 0 $ 417,037 $ 417,037 *Excludes depreciation, which is a noncash expense.

35 Corporate Profiles Next Week Major Oil and Gas Companies from Around the World Total (France) Chevron (USA) British Petroleum (UK) Petrobras (Brazil)

36 Corporate Profiles Tonight: Major Automobile Manufacturing Companies BMW Ford Toyota Fiat 36

I Team-based approach to budgeting

I Team-based approach to budgeting I-21.03 Team-based approach to budgeting The electronic spreadsheet version of this problem includes a template based upon the existing budget as displayed within Chapter 21 of the textbook. You may find