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CHAPTER 9

Atkinson, Solutions Manual t/a Management Accounting, 6EChapter 10: Using Budgets for Planning and Coordination

Chapter 10

Using Budgets to for Planning and Coordination

QUESTIONS

10-1A budget is a quantitative model of the expected consequences of the organizations short-term operating activities. A budget typically expresses the expected money inflows and outflows in order to assess whether the planned operations will meet the organizations financial objectives.

10-2Flexible resources are those that vary with the activity level of the firm or organization. Those that do not change with the activity level are capacity-related (or committed or fixed resources).

10-3Yes, a spending plan is a budget since it provides a summary, in financial terms, of the students spending intentions.10-4In many ways the goal of a family budget is quite similar to the goal of a budget developed for an organization. In these settings, the goal is to help both families and organizations achieve their objectives by allocating their resources wisely. Organizational budgets usually differ from family budgets in sheer size (the dollar amounts proposed), scope (the number of operating units and their goals), and number of iterations (submission and resubmissions of budgets) before the final budget is determined.

10-5A production plan is an exhibit that identifies proposed production during an interval of time, such as a week or a month. A production plan in a courier company identifies the number of drivers and trucks needed and assigns drivers and trucks to routes.

10-6Financial budgets represent projected financial results for an organization. Such budgets include a statement of expected cash flows, projected balance sheet, and a projected income statement. These are often called pro forma financial statements. Operating budgets are plans used to guide the operations of the organization. Such plans include sales, capital spending, production, materials purchasing, labor hiring and training, and administrative and discretionary spending plans.

10-7You should not jump to the conclusion that the universitys hiring and training plan is likely to be more important because it hires skilled rather than unskilled labor. A number of factors determine the importance of a labor hiring and training plan in any organization. However, the two most important are likely the amount of employee turnover that requires replacement and the amount of ongoing retraining that the organization must provide. If the university has reached relatively stable employment, the labor hiring and training plan would be relatively unimportant since university faculty members are expected to attend to their own training. If the municipality is continuously hiring new employees or retraining existing employees to use equipment, it will have a continuous need for a hiring and training plan.

10-8The sales plan is based on the demand forecast. The numbers in the demand forecast must not be less than the numbers in the sales plan. Otherwise the sales plan is infeasible because it calls for selling more than customers will buy.

10-9A demand forecast is an estimate of the number of units that customers would be willing to buy under specified conditions. The intended sales in the sales plan, a crucial component of the master budget process, cannot exceed the numbers in the demand forecast. Thus, the demand forecast is used to develop the sales plan.

10-10Yes. Employee training does not have a physical relationship with the organizations activity level. (However, employee training should enhance performance potential, supporting achievement of an organizations strategy.)10-11A capital spending plan summarizes an organizations plans to acquire or sell long-term capital investments, such as buildings and equipment, that are needed to meet the organizations objectives.

10-12A capacity-related expenditure is any expenditure that an organization cannot avoid in the short-run. A payment on a long-term lease is a capacity-related expenditure.10-13This is a tricky question. If the cafeteria is committed to preparing a given amount of food for each student in the residence, whether the student shows up for meals or not, the food cost is a capacity-related (fixed) cost. However, if the cafeteria only prepares enough food for students who, on average, actually show up to eat, the food cost is a variable cost.

10-14A defining characteristic of a flexible resource is one where you only pay for what you use. Flexible resources can be acquired or disposed of in the short run based on the number of output units. We usually assume that materials costs are variable (flexible) because we can always carry materials until we use them. However, if an organization pays a set amount for materials, no matter how much it uses, the materials cost is a capacity-related (fixed) cost. A store that buys merchandise may consider merchandise, or materials costs, a capacity-related resource because it is unable to carry merchandise indefinitely or return unused merchandisebut this is stretching the idea of a capacity-related resource.

10-15A line of credit is a short-term financing arrangement made between an organization and a financial institution. A line of credit provides an organization with a ready supply of cash, up to a limit negotiated between the organization and its bank. We can think of a line of credit as a commitment from a financial institution to allow the debtor to borrow money on demand up to a specified maximum amount.

10-16Planners use budget information for the following purposes:

(1) Identify broad resource requirements. This helps develop plans to put needed resources in place.

(2) Identify potential problems. This helps to avoid problems or to deal with them systematically.

(3) Compare projected operating and financial results to actual results. These comparisons within an organization can be used to evaluate the efficiency of the organizations operating processes.

10-17Both what-if and sensitivity analyses use the same model to evaluate future alternatives. However, the approaches differ in their purposes. What-if-analysis is a process that uses a model to predict the results of varying that models key parameters or estimates. Sensitivity analysis is the process of selectively varying key estimates of a plan or a budget to identify over what range a decision option is preferred. In this way, sensitivity analysis enables planners to identify estimates critical to the decision under consideration. What-if-analysis relies on that model tested via sensitivity analysis.

10-18A variance is a difference between an actual amount and a planned (budgeted) amount. The oil pressure warning light comes on in a car when the oil pressure falls outside a specified planned or expected range.

10-19Analysis of reasons for the variance between actual and estimated job costs can help managers in several ways. If the managerial actions that led to actual costs being lower than the estimated costs are identified, similar cost savings can be realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in revising standards for future variance analyses and in bidding for jobs in the future.

10-20A flexible budget presents cost targets or forecasts for the organizations achieved level of activity.10-21The first level of variance analysis for a cost item focuses on the differences between actual and estimated (master budget) costs for the item. The second level of variance analysis decomposes the first-level variances into a flexible budget variance and a planning variance. The flexible budget variance is the difference between actual costs and flexible budget costs, which reflect the volume level achieved, rather than planned. The planning variance is the difference between flexible budget costs and master budget costs. For variable costs, the third level of variance analysis decomposes the flexible budget component of the second level variance into efficiency (use) and price (rate) variances.

10-22By classifying flexible budget variances into rate (price) and efficiency (quantity) variances, managers can better understand the factors causing those variances and correct the standards or institute changes that help reduce expenses.

10-23Yes. The labor efficiency variance will likely be favorable because fewer (actual) hours will be required for a job when experienced workers work on the job. The labor rate variance, however, will likely be unfavorable because experienced workers wages will be higher than those of less experienced workers.

10-24The purchase and use of cheaper, lower-quality materials is likely to result in a favorable material price variance, an unfavorable material quantity variance, and an unfavorable labor efficiency variance, but the labor rate variance is not likely to be affected.

10-25The first step isolates the effect of sales volume differences by computing sales mix variances and sales quantity variances, and the second step isolates the effect of sales price differences by computing sales price variances.

10-26An appropriation is a planned cash outflow or spending plan. In a government agency, it is an authorized spending limit. An example of an appropriation in a university is an authorization for a faculty to spend a specified amount of money on student entrance scholarships.

10-27A periodic budget is a budget that is prepared for a fixed interval of time, usually one year. After the period of time has elapsed, the budget is discarded.

10-28This is called incremental budgeting because spending allocations for this period are proportional adjustments of last periods spending allocations.

10-29This is called zero-based budgeting because each year the charities to which you donate must reestablish their need.

10-30Critics argue that the traditional budgeting process (1) reflects a top-down approach to organizing that is inconsistent with the need to be flexible and adapt to changing organization circumstances; (2) focuses on controls (such as meeting the target budget) rather than on helping the organization achieve its strategic objectives; and (3) causes resource allocations to be driven by political power in the organization rather than strategic needs.10-31The beyond budgeting approach differs in two fundamental ways from traditional budgeting. First, traditional budgets are based on fixed annual plans that tie managers to predetermined actions. In the Beyond Budgeting approach targets are developed based on stretch goals tied to peers, competitors, and key global benchmarks. These targets are reviewed and modified if necessary and managers are more motivated to achieve these goals since the goals represent measures that link directly to the competition rather than an internal artificial goal. Second, the Beyond Budgeting model provides a more decentralized way of managing. Rather than relying on traditional hierarchical and centralized management, managers are much more accountable to their teams and workgroups since the targets directly pertain to what they are doing. This provides everyone with a more direct sense of responsibility and is more motivating.

EXERCISES

10-32If the organization solicits the information from the sales force, salespeople will be motivated to understate sales potential in order to set low hurdles for commissionable sales. Other approaches include using estimates based on market surveys conducted by a drug industry association or other research group, and using statistical models to identify a relationship between future sales and current sales or trends in disease.

10-33The primary purpose of budgets is for planning. Problems are created when budgets are used after the fact for control. For example people whose performance will be compared to the budget targets may understate their potential in order to have achievable targets set. Therefore, tying plans to after-the-fact control compromises the integrity of the information gathering process. Some people have argued that information used for planning should not be used in after the fact control. (Standards for after the fact control could, instead, be based on independent benchmark information or improvements on previous performance.) Some organizations have designed incentive schemes that reward people jointly on their ability to improve performance and to meet budget projections.

10-34Wages paid to graders are controllable in the short-term if the wages are based purely on the number of hours worked. The wages paid to lecturers who are hired to teach for a semester are controllable in the intermediate-term because there is no commitment to the lecturers beyond the end of the semester. The wages paid to full-time faculty are only controllable in the long-term since most faculty members are on long-term or permanent contracts. Because of the nature of full-time staff teaching contracts, universities are notoriously inflexible as student demands for programs and courses change.

10-35Many organizations are run by the numbers. In these organizations managers are held accountable for financial results. Therefore, their interest tends to focus on projections of financial results and they judge the desirability of a set of operating strategies based on the financial results projected for those strategies.

10-36A consulting company is an organization that uses highly trained people to deliver complex and customized products to its customers. This organization might be experiencing a continuous need to hire and train personnel who can provide the services that customers require. A planning process allows this organization to anticipate the type and quantity of skills it will require and will allow it to develop a hiring and training plan that will provide the people it needs at a minimum cost.

10-37The vegetable canner acquires and packs its products over a very short period of time following the growing seasons. Therefore, inventory levels will be cyclical, building up after the growing season and declining until the end of the next growing season. The organization will have to plan to acquire the funds it needs to meet this need for a cyclical investment in inventory.

10-38The credit granting policy is an important component of the organizations selling strategies. Tightening or eliminating credit terms might reduce sales. On the other hand, tightening credit terms should speed cash collections and might decrease the bad debts expense and reduce the opportunity cost of the accounts receivable loans to customers. The organizations planners must balance the benefits of reduced bad debts expense and the opportunity costs of lending with the profit on lost sales that might result from reducing credit terms.

10-39A machine shop might accept and complete thousands of small jobs each year. Because of the problems and errors in determining profits from individual small jobs, this organization might want to compare its overall levels of efficiency with those of its competitors by comparing its projected financial results with those of its toughest competitors. Costs that are out of line with those of competitors would be flagged and plans developed to improve the performance of activities that created those costs.

10-40Units

Sales 40,000

Desired ending inventory 5,000

Needs 45,000

Beginning inventory 6,000

Purchases 39,000

10-41(a)

Production BudgetJanuaryFebruaryMarch

Sales of G12 50,000 60,000 54,000

Desired ending inventorya 15,000 13,500

Needs 65,000 73,500

Beginning inventoryb 12,500 15,000

Production 52,500 58,500

a 25% of next months sales. For January, 25% ( 60,000 = 15,000; for February, 25% ( 54,000 = 13,500

b 25% of current months sales. For January, 25% ( 50,000 = 12,500; for February, 25% ( 60,000 = 15,000

(b)

Purchases BudgetJanuaryFebruary

Units to be produced 52,500 58,500

Raw materials needed per unit 0.5 0.5

Total production needs 26,250 29,250

Desired ending inventorya 2,925 2,025

Total material needs 29,175 31,275

Beginning inventoryb 2,625 2,925

Total material purchases 26,550 28,350

a 10% of next months needs. For January, 10% ( 29,250 = 2,925; for February, 10% ( 20,250 = 2,025

b 10% of current months needs. For January, 10% ( 26,250 = 2,625; for February, 10% ( 29,250 = 2,925

10-42(a)Let Q ( sales level in units at which the costs are the same with both machines.

($44 ( Q) + $32,000 = ($40 ( Q) + $40,000

$4Q = 8,000

Q = 2,000 units

(b)Let R ( sales level in dollars at which the use of the new machine results in a 10% profit on sales ratio.

Let Q be the corresponding number of units, so that R ( $55 ( Q

10-43The most critical estimates are the demand estimates because they provide the basis upon which all the other plans are based. Other critical estimates are those relating to the consumption of each factor of production (such as raw materials, labor, and machine capacities) by each unit of production since these estimates will play an important role in estimating total resource requirements and estimating costs.

10-44No. Incremental budgeting does not ensure that resources are best allocated. Some university units (such as departments or colleges) may have major inefficiencies and budgetary slack where other units may have already made process improvements and have few inefficiencies and relatively little budgetary slack. Moreover, some units may be seriously underfunded relative to the trend in demand where other units may be overfunded relative to the trend in demand.

10-45(a)Because the quantity purchased differs from the quantity used, the material price variance uses the purchased quantity (PQ) instead of the quantity used (AQ).

Material price variance = (AP SP) PQ

= ($2.50 2.20) 12,000

= $3,600 U

(b)Material quantity variance = (AQ SQ) SP

= (10,500 (20 500)) $2.20

= $1,100 U

(c)

(d)Direct labor efficiency variance = (AH SH) SR

= (1,800 (4 500)) $10

= $2,000 F10-46(a)

(b)Direct material quantity variance = (AQ SQ) SP = (2,800 (5 500)) $2

= $600 U(c)A favorable labor efficiency variance of $100 for job 822 implies that (AH 2 500) $10 = 100. Therefore, .

(d) An unfavorable labor rate variance of $250 for job 822 implies that

(AR 10) 990 = 250. Therefore,

.

Finally, the actual direct labor costs incurred for Job 822 are: (rounded).

10-47(a)Material price variance = (AP SP) ( AQ

= ($97 100) ( 40,000

= $120,000 F

(b)

(c)Yes, the relationship with this new supplier should be maintained because it appears the supplier is providing materials of good quality for a price that is less than expected. However, as a precaution, the company could make sure the lower cost materials are not leading to the unfavorable labor efficiency variance in part (e).

(d)

(e) Direct labor efficiency variance = (AH SH) SR

= (5,000 (0.50 9,000)) $12

= $6,000 U10-48(a)Material price variance = (AP SP) ( AQ

Component X: 0.30 ( AQ = 160, so AQ = 533.3 units of X.

Component Y: 0.20 ( AQ = 120, so AQ = 600 units of Y.

Component Z: 0.50 ( AQ = 192, so AQ = 384 units of Z.

(b)Material quantity variance = (AQ SQ) ( SP

Component X: (533.3 (1 ( 220)) ( SP = 168, so SP = $0.536 per unit of X.

Component Y: (600 (2 ( 220)) ( SP = 100, so SP = $0.625 per unit of Y.

Component Z: (384 (3 ( 220)) ( SP = 84, so SP = $0.304 per unit of Z.

10-49Planned number of batches

Flexible budget number of batches PROBLEMS

10-50Borders Manufacturing Production Plan

MonthUnit salesProduction (rounded)

January8,742(8,742 ( .5) ( (9,415 ( .5) ( 9,079

February9,415(9,415 ( .5) ( (7,120 ( .5) ( 8,268

March7,120(7,120 ( .5) ( (8,181 ( .5) ( 7,651

April8,181(8,181 ( .5) ( (7,942 ( .5) ( 8,062

May7,942(7,942 ( .5) ( (9,681 ( .5) ( 8,812

June9,681(9,681 ( .5) ( (2,511 ( .5) ( 6,096

July2,511(2,511 ( .5) ( (2,768 ( .5) ( 2,640

August2,768(2,768 ( .5) ( (2,768 ( .5) ( 2,768

September2,768(2,768 ( .5) ( (2,283 ( .5) ( 2,526

October2,283(2,283 ( .5) ( (1,542 ( .5) ( 1,913

November1,542(1,542 ( .5) ( (1,980 ( .5) ( 1,761

December1,980(8,725 ( .5) ( (1,980 ( .5) ( 5,353

10-51Mira Vista Planters

JanFebMarAprMayJun

Demand8,692 5,765 8,134 34,400 558,729 832,251

Sales revenue ( $0.20)$1,738 $1,153 $1,627 $6,880 $111,746 $166,450

Planters

Beginning of month2111573

Added a00046814

Trained b (whole numbers)000711424

Laid off c100000

Ending11157387

Capacity d10,000 10,000 10,000 40,000 560,000 835,000

Wages e$1,600 $1,600 $1,600 $6,400 $89,600 $133,600

Training Costse0 0 0 2,800 45,600 9,600

Layoff Severance 400 0 0 0 0 0

Total Costs$2,000 $1,600 $1,600 $9,200 $135,200 $143,200

Profit($262)($447)$27 ($2,320)($23,454)$23,250

Demand8,6925,7658,13434,400558,729832,251

Beginning capacity20,00010,00010,00010,00050,000730,000

Difference 11,308 4,235 1,86624,400508,729102,251

a New planters needed00046814

5/3 number needed0.00.00.06.7113.323.3

b Planters trained000711424

c Planters laid off100000

dTrainees add to capacity for only 3 weeks of their first month. For April, the capacity is ((1 10,000) + (4 10,000 )) = 40,000.

eTrainees are hired at the beginning of the month and receive $400 for a week of training and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.

Mira Vista Planters

JulAugSepOctNovDec

Demand1,286,700 895,449 733,094 203,525 29,410 9,827

Sales revenue ( $0.20)$257,340 $179,090 $146,619 $40,705 $5,882 $1,965

Planters

Beginning of month871439074213

Added a5600000

Trained b (whole numbers)9400000

Laid off c0531653182

Ending14390742131

Capacity d1,290,000 900,000 740,000 210,000 30,000 10,000

Wages e$206,400 $144,000 $118,400 $33,600 $4,800 $1,600

Training Costse37,600 0 0 0 0 0

Layoff Severance 0 21,200 6,400 21,200 7,200 800

Total Costs$244,000 $165,200 $124,800 $54,800 $12,000 $2,400

Profit$13,340 $13,890 $21,819 ($14,095)($6,118)($435)

Demand1,286,700895,449733,094203,52529,4109,827

Beginning capacity870,0001,430,000900,000740,000210,00030,000

Difference416,700 534,551 166,906 536,475 180,590 20,173

aNew planters needed5600000

5/3 number needed93.30.00.00.00.00.0

bPlanters trained9400000

cPlanters laid off0531653182

dTrainees add to capacity for only 3 weeks of their first month. For April, the capacity is ((1 10,000) + (4 10,000 )) = 40,000.

eTrainees are hired at the beginning of the month and receive $400 for a week of training and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.

(a)Summing the profits for the 12 months, we see that if each months contract is accepted, the profit for the year is $25,195. Declining contracts in months with negative profit will only further decrease profit because of layoff costs, or the cost of training workers when demand increases dramatically.

(b)The number of people hired for training (239) is shown in the trained line and in footnote b.

(c)The number of people laid off (143) is shown in the laid off line and in footnote c.

10-52Strathfield Motel

Week

123456789101112

Units rented

per night464854606060555550453730

(a)Staff employed444444444332

Cleaning

capacity per

night606060606060606060454530

Excess capacity

per night141260005510080

(b)Linen contract

units606060606060606050505050

Excess linen

capacity per

night1412600055051320

10-53Homebush School Band Estimated Travel Expenses

MonthConcertsHotelFoodBusOtherTotal

September32,7001,4401,8006006,540

October43,6001,9202,4008008,720

November54,5002,4003,0001,00010,900

December87,2003,8404,8001,60017,440

January32,7001,4401,8006006,540

February43,6001,9202,4008008,720

March21,8009601,2004004,360

April54,5002,4003,0001,00010,900

May76,3003,3604,2001,40015,260

10-54Worthington Company

MonthRevenueCash SalesCredit

Card SalesAccount SalesTotal

January12,369,3482,473,870002,473,870

February15,936,2933,187,2595,999,1341,484,32210,670,715

March13,294,3092,658,8627,729,1023,767,75714,155,721

April19,373,6893,874,7386,447,7404,282,62514,605,103

May20,957,5664,191,5139,396,2394,701,46018,289,212

June18,874,7173,774,94310,164,4205,740,02519,679,388

July21,747,8394,349,5689,154,2385,873,56919,377,375

August14,908,5342,981,70710,547,7025,943,93019,473,339

September11,984,3982,396,8807,230,6395,504,19315,131,712

October18,894,5353,778,9075,812,4334,196,35613,787,696

November21,983,5454,396,7099,163,8494,422,80917,983,367

December20,408,3674,081,67310,662,0195,759,83120,503,523

10-55Masefield Dairy Ingredient Purchases

IngredientJuly*August*September*

Ingredient 1759,685668,699530,425

Ingredient 21,307,9591,141,857911,474

Ingredient 3914,870790,589641,667

Ingredient 4800,129687,840513,190

Ingredient 5515,301470,475365,560

Ingredient 61,366,3131,207,774998,986

*Details appear below.

July

ProductsTotal

IngredientsABCDEPurchases

1194,675 209,712 209,855 97,576 47,867 759,685

2389,350 - 629,565 97,576 191,468 1,307,959

3 - 104,856 419,710 390,304 - 914,870

4194,675 314,568 - 195,152 95,734 800,129

5 - 209,712 209,855 - 95,734 515,301

6584,025 104,856 629,565 - 47,867 1,366,313

August

Products Total

Ingredients A B C D E Purchases

1162,033 196,750 194,575 75,766 39,575 668,699

2324,066 - 583,725 75,766 158,300 1,141,857

3 - 98,375 389,150 303,064 - 790,589

4162,033 295,125 - 151,532 79,150 687,840

5 - 196,750 194,575 - 79,150 470,475

6486,099 98,375 583,725 - 39,575 1,207,774

September

Products Total

Ingredients A B C D E Purchases

1129,857 152,990 170,654 55,966 20,958 530,425

2259,714 - 511,962 55,966 83,832 911,474

3 - 76,495 341,308 223,864 - 641,667

4129,857 229,485 - 111,932 41,916 513,190

5 - 152,990 170,654 - 41,916 365,560

6389,571 76,495 511,962 - 20,958 998,986

10-56Nathaniels Motor Shop

WeekWork

HoursOvertimeTotal

WagesVariable

Support

125506,7506,375

2330157,2008,250

330006,7507,500

428506,7507,125

5325107,0508,125

628006,7507,000

726006,7506,500

830006,7507,500

9340257,5008,500

10355407,9508,875

10-57Country Club Road Nurseries

Cash Outflows

JanuaryFebruaryMarchAprilMayJune

Full-time staff151515151515

Full-time hours2,4002,4002,4002,4002,4002,400

Part-time hours4804808008002,4002,400

Cash outflows

Full-time wages$40,500 $40,500 $40,500 $40,500 $40,500 $40,500

Part-time wages4,800 4,800 8,000 8,000 24,000 24,000

Variable costs36,000 36,000 36,000 36,000 12,000 12,000

Capacity-

related costs55,000 55,000 55,000 55,000 55,000 55,000

Total outflows$136,300 $136,300 $139,500 $139,500 $131,500 $131,500

JulyAugustSept.OctoberNov.December

Full-time staff151515151515

Full-time hours2,4002,4002,4002,4002,4002,400

Part-time hours2,4002,4001,20060000

Cash outflows

Full-time wages$40,500 $40,500 $40,500 $40,500 $40,500 $40,500

Part-time wages24,000 24,000 12,000 6,000 0 0

Variable costs48,000 48,000 48,000 24,000 0 0

Capacity-

related costs55,000 55,000 55,000 55,000 55,000 55,000

Total outflows$167,500 $167,500 $155,500 $125,500 $95,500 $95,500

10-58(a)Cash inflows

From September sales: $1,000,000 ( 0.3$300,000

From October sales: 40,000 ( $32 ( 0.7896,000$1,196,000

Cash outflows

For September purchases: $880,000 ( 0.8704,000

For October purchases: 38,000 ( $20 ( 0.2152,000

Selling and admin.: $350,000 ( $20,000330,0001,186,000

Net cash flow10,000

Opening cash balance 40,000

Ending cash balance$50,000

(b)Sales40,000 ( $32 =$1,280,000

Cost of goods sold40,000 ( $20 =800,000

Gross margin40,000 ( $12 =480,000

Selling and administrative expenses350,000

Net income$130,000

10-59(a)Merchandise inventoryUnitsDollar value

Required for sales12,000$480,000

Desired ending inventory3,000120,000

Needs15,000600,000

Less beginning inventory2,00080,000

Budgeted purchases13,000$520,000

(b)Sales12,000 ( $60 =$720,000

Cost of goods sold12,000 ( $40 =480,000

Gross margin12,000 ( $20 =240,000

Selling and admin. expenses200,000

Net income$40,000

(c)Cash inflows

From Nov. sales: $600,000 ( .4$240,000

From Dec. sales: $720,000 ( .6432,000$672,000

Cash outflows

For Nov. purchases: $340,000 ( .5170,000

For Dec. purchases: $520,000 ( .5260,000

Selling and admin.: $200,000 ( $40,000160,000590,000

Net cash flow82,000

Opening cash balance30,000

Ending cash balance$112,000

10-60(a)With 2,000,000 medical claims Shadyside Insurance Company should employ 13.33 = ((2,000,000/150,000) ( 1) supervisors, 26.67 = ((2,000,000/150,000) ( 2) senior clerks, and 80 = ((2,000,000/150,000) ( 6) junior clerks. Assuming that the organization hires full-time people, clerical costs are a step variable cost (which means that they must round up to a full employee) and the budgeted number of people for this level of activity is 14 supervisors, 27 senior clerks, and 80 junior clerks. The total cost of this group would be $4,147,000 = (14 ( $42,000) + (27 ( $37,000) + (80 ( $32,000).

The actual cost to this group was $4,354,000 = (14 ( $42,000) + (30 ( $37,000) + (83 ( $32,000). The excess cost of $207,000 = 4,354,000 ( 4,147,000 was created by having 3 more senior clerks than budgeted and 3 more junior clerks than budgeted.

(b)The issue is why the clerical group is employing more people than it should be for the workload it faces. There are many possible reasons for this result, including training inefficiencies, continued growth requiring more people, an inappropriate standard, overestimating requirements when hiring took place, and processing inefficiencies. The report from the manager of this unit should identify the amount of the excess spending, its cause, and what will be done to correct the variance.

10-61(a)Let p be the unit sales price to earn a budgeted profit (before income taxes) of $200,000.

Sales (260,000 units)260,000p

Cost of goods sold:

Direct materials

300,000 130% 120%468,000

Direct labor

200,000 130% 115%299,000

Variable manufacturing support

60,000 130% 110%85,800

Fixed manufacturing support

40,000 105%42,000894,800

Gross margin260,000p 894,800

Selling expenses: 150,000 ( 108%162,000

Administrative expenses

100,000 106%106,000268,000

Profit (before income taxes)260,000p 1,162,800

Therefore, 260,000p 1,162,800 ( 200,000 or p ( $5.24.

(b)Let x be the number of units that must be sold at $5.00 to earn $200,000.

Sales (x units)5.00x

Cost of goods sold:

Direct materials

1.80x

Direct labor


0.33x

Fixed manufacturing support

40,000 105%

Gross margin

Selling expenses

150,000 + [(150,000 ( 8%) ( ]0.2x + 110,000

Administrative expenses: 100,000 106%

Profit (before income taxes)

Therefore, 1.52x 258,000 = 200,000 or x = 301,316 units.

(c)Sales: 220,000 units ( $5.24$1,152,800

Cost of goods sold:

Direct materials: 300,000 110% 120%$396,000

Direct labor: 200,000 110% 115%253,000


(60,000 110% 110%)72,600

Fixed manufacturing support42,000763,600

Gross margin389,200

Selling expenses

150,000 + [(150,000 ( 8%)(]$154,000

Administrative expenses: 100,000 106%106,000260,000

Profit (before income taxes)$129,200

10-62(a)Last months profit

Current months target profit

Let x be the maximum amount that can be spent on advertising.

($0.40 2,000,000) ($0.25 2,000,000) $(60,000 + x) = $135,000.

(b)Let y be the number of units to break even.

or .

Let p be the selling price to maintain the same breakeven point.

or p = $0.45 per bar. That is, if variable cost is increased by 5 cents per bar, then the sales price must also increase by 5 cents to maintain the same break-even point.

(c)Let z be the sales volume in units that would be needed at the new price for the company to earn the same profit as last month.

Therefore, or bars.

10-63(a)Old MachineNew Machine

Selling price per unit$18$20

Variable cost per unit$14$14

Contribution margin46

Monthly fixed costs$120,000$250,000

Breakeven points (in units)30,00041,667

(b)Let SP = selling price, Q = quantity, FC = fixed costs, and V=variable costs.

(c)

(d)The old machine represents a lower risk of making a loss because it has a lower breakeven point.

(e)

10-64(a)Deluxe racketsWithoutWith

Sales price per racket$40.00$36.00

Variable costs:

Manufacturing20.0020.00

Commission4.003.60

Contribution margin per racket16.0012.40

Sales (units)50,00065,000

Total contribution margin$800,000$806,000

Contribution margin lost

(Standard rackets)50,000*

Net impact on profits$800,000$756,000

*Contribution margin lost on Standard rackets = $(30 17 3) ( 5,000. Tennecos profits will decrease by $44,000 = ($800,000 $756,000).

(b)StandardDeluxeProTotal

Contribution margin per racket$10$16$20

Increased sales (units)2,0001,0001,000

Total increase in contribution

margin$20,000$16,000$20,000$56,000

The $56,000 increase in the contribution margin is greater than the incremental advertising expense of $50,000. Therefore, this decision is advisable.

(c)Yes. Assuming each line of rackets uses the same manufacturing support resources, it is in the best interest of the company to push high-priced rackets because they have higher unit contribution margins (in this case) than the lower-priced rackets.

10-65(a)Breakeven point in units = (fixed costs)/(contribution margin per unit) = $200,000/$125 = 1,600 units

Breakeven point in dollars = 1,600 $250 = $400,000

(b)Let X ( increase in sales in units per month to justify the additional expenditure. The contribution margin from the increase in sales must equal the additional advertising expenditure. That is, $125X = $22,500, or

.

Sales must increase by 180 units per month or $45,000 = $250 $18 in order to break even on the monthly expenditures.

(c)New contribution margin per unit =

Old contribution margin per unit Decrease in selling price

= $125 $25 = $100.

Total contribution margin

New fixed costs

Net income = $240,000 222,500 = $17,500.

10-66(a)Sales price:$35.00

Less variable costs:

Raw materials$16.00

Direct labor7.00

Manufacturing4.00

Selling1.6028.60

Contribution margin per 100 packets$6.40

Contribution margin per packet$0.0640

Total fixed cost$468,000

Break-even point: 468,000 ( 0.0640 = 7,312,500 packets

(b)Let X ( number of packets to earn $156,000 profits

(c)New contribution margin

Break-even point

(d)Let P ( selling price per 100 packets to maintain the same contribution margin ratio.

6.40 P = 35 (P 28.95)

(35 6.40) P = 1,013.25

P = $35.43 per 100 packets

10-67The budgeted direct materials cost is $630,000/90,000 = $7 per unit; the budgeted direct labor cost per unit is $247,500/90,000 = $2.75 per unit; the budgeted fixed costs equal $420,000. Below, these costs are used to prepare the flexible budget for the actual production level of 80,000 units.

Flexible

MasterPlanningFlexibleBudget

BudgetVarianceBudgetVarianceActual

90,000 units80,000 units80,000 units

Costs

DM$630,000$(70,000) F$560,000 $(10,000) F$550,000

DL247,500(27,500) F220,000 5,000 U225,000

FOH420,000$0 420,000(20,000) F400,000

Total$1,297,500$(97,500) F$1,200,000 $(25,000) F$1,175,000

10-68(a)Total direct material cost variance

= Actual direct material cost standard direct material cost

= $205,150 ($16 0.25 40,000)

= $205,150 $160,000

= $45,150 Unfavorable

(b)Total direct labor cost variance

= Actual direct labor cost standard direct labor cost

= ($9.50 8,240) ($10 0.20 40,000)

= $78,280 $80,000

= $1,720 Favorable

(c)Total variable support cost variance

= Actual variable support cost standard variable support cost

= $131,840 ($15 0.20 40,000)

= $131,840 $120,000


(d)Direct material price variance

= (AP SP) AQ

= $(15.780769 16) 13,000

= $2,850 Favorable

(e)Direct material quantity variance

= (AQ SQ) SP

= (13,000 0.25 40,000) 16

= (13,000 10,000) 16


(f)Direct labor rate variance

= (AR SR) AH

= $(9.50 10.00) 8,240

= $4,120 Favorable

ref SHAPE \* mergeformat

(g)Direct labor efficiency variance

= (AH SH) SR

= (8,240 0.20 40,000) $10

= (8,240 8,000) $10


(h)Variable support rate variance

= (AR SR) AH

= $(16 15) 8,240



(i)Variable support efficiency (use) variance

= (AH SH) SR

= (8,240 0.20 40,000) $15

= (8,240 8,000) $15


10-69(a)Total direct material cost variance

= Actual direct material cost standard direct material cost

= ($9.75 4,200) ($10 2 2,000)

= $40,950 $40,000

= $950 Unfavorable

(b)Total direct labor cost variance

= Actual direct labor cost standard direct labor cost

= ($11 2,000) ($10 1 2,000)

= $22,000 $20,000


(c)Total flexible support cost variance

= Actual flexible support cost standard flexible support cost

= $48,000 ($25 1 2,000)

= $48,000 $50,000

= $2,000 Favorable

(d)Direct material price variance

= (AP SP) AQ

= ($9.75 10) 4,200

= $ 0.25 4,200

= $1,050 Favorable

(e)Direct material quantity variance

= (AQ SQ) SP

= (4,200 2 2,000) $10

= 200 $10


(f)Direct labor rate variance

= (AR SR) AH

= $(11 10) 2,000



(g)Direct labor efficiency variance

= (AH SH) SR

= (2,000 1 2,000) $10

= 0 $10

= $0

(h)Variable support rate variance

= (AR SR) AH

= $(24 25) 2,000

= $2,000 Favorable

(i)Variable support efficiency (use) variance

= (AH SH) SR

= (2,000 1 2,000) $25

= 0 $25

= $0

10-70(a) (AP SP) AQ = $50

(AP AQ) (SP AQ) = $50

$2,000 ($2 AQ) = $50

AQ = 975 pounds

(b) (AH SH) SR = 100

(AH 15) (2 200 15) = 100

(c) (AR SR) AH = 60

AR AH = (SR AH) + 60

AR AH = (15 ) + 60

= $5,960

(d)= (AQ SQ) SP

= [975 (5 200)] 2

= $50 F

(e) (AH SH) SR = $60

(500 3 Q) $12 = $60 (see solution to part h, for AH)

36Q = 6,000 60

Q = = 165 units

(f) (AQ SQ) SP = 100[1,000 (165.28 S)] 3 = 100

495.84 S = 3,000 + 100

S = 6.252 pounds per unit

(g) (AP SP) AQ = 500

AP AQ = (3 1,000) 500

= $2,500

(h) (AR SR) AH = 200

(AR AH) (SR AH) = 200

5,800 (12 AH) = 200

AH = 500 hours

10-71(a)Direct material price variance

= (AP SP) AQ

= ($11.50 $12) 21,000

= $10,500 Favorable

Direct material quantity variance

= (AQ SQ) SP

= [21,000 (6,000 3)] $12

= 3,000 $12


(b)No, the contract should not be signed. Although the new supplier is offering the materials at only $11.50 per pound, the materials do not seem to hold up well in production, as shown by the large unfavorable direct material quantity variance.

(c)Direct labor rate variance

Direct labor efficiency variance

= (AR SR) AH

= (AH SH) SR

= $(16.00 $15.00) (160 40) = (160 40 1.2 6,000) $15


= (6,400 7,200) $15

= $12,000 Favorable

(d)Yes, the new labor mix should be continued. Although it increases the average hourly labor cost from $15 to $16, thereby causing a $6,400 unfavorable direct labor rate variance, this is more than offset by greater efficiency of labor time. Notice that the direct labor efficiency variance is $12,000 favorable. Thus, the new labor mix reduces overall labor costs.

10-72The total nursing labor variance for the fourth floor nursing unit of Mountain View Hospital for May is $1,745 unfavorable. Of this amount, $460 (favorable) is attributable to labor efficiency and $2,205 (unfavorable) to rate differences. The calculation of these amounts is presented below.

Labor classActual hours ( Actual rate

RN

LPN

Aide

Total$160,805

Labor classActual hours ( Standard rate

RN

LPN

Aide

Total$158,600

Labor classStandard hours ( Standard rate

RN

LPN

Aide

Total$159,060

LaborVariances

classLabor efficiencyLabor rateTotal

RN

LPN

Aide

Total

10-73(a)(i)Direct material price variance = (AP SP) AQ

= = ($19 $18) 14,250


(ii) Direct material quantity variance = (AQ SQ) SP= (14,250 8 1,900) $18

= (14,250 15,200) $18

= $17,100 Favorable

(iii) Direct labor rate variance = (AR SR) AH

= = $2,200 Favorable

(iv)Direct labor efficiency variance = (AH SH) SR

= (5,000 2.5 1,900) $8.00

= (5,000 4,750) $8.00


(b)These variances reflect tradeoffs made by Asahi USA. More expensive materials may have been acquired with the expectation of reducing materials waste. Less expensive labor may have been used that may have led to a lower level of labor efficiency. The overall total cost variances for materials and labor individually were favorable, indicating that the positive effects of these decisions outweigh their negative effects.

10-74We first compute percentages of total unit sales for each product line for planned and actual sales.

Planned Sales for FebruaryMuffinsSconesCarrot Bread

Units% TotalUnits% TotalUnits% TotalTotal

Unit Price$1.35$1.75$2.75

Unit Sales1,60026.67%3,40056.67%1,00016.67%6,000

Total$2,160$5,950$2,750$10,860

Actual Sales for FebruaryMuffinsSconesCarrot Bread

Units% TotalUnits% TotalUnits% TotalTotal

Unit Price$1.55$1.60$3.25

Unit Sales1,40019.44%4,50062.50%1,30018.06%7,200

Total$2,170$7,200$4,225$13,595

(a) The sales mix variance is computed as follows:

Actual total sales units of all products ( (actual sales mix percentage of this product planned sales mix percentage of this product) ( planned revenue per unit of this product

Muffins: 7,200 ( (19.44% 26.67%) ( $1.35 = $ 702, that is, $702 unfavorable. This means that because sales of muffins comprised less than the planned percentage of total sales, revenues of $702 were lost on this product.

Scones: 7,200 ( (62.50% 56.67%) ( $1.75 = $735 favorable. This means that because sales of scones comprised more than the planned percentage of total sales, revenues of $735 were gained on this product.

Carrot bread: 7,200 ( (18.06% 16.67%)( $2.75 = $275 favorable. This means that because sales of carrot bread comprised more than the planned percentage of total sales, revenues of $275 were gained on this product.

(b) The sales quantity variance for each product line is computed as follows:

(Actual total sales units of all products planned total sales units of all products) ( planned sales mix percentage of this product ( planned revenue per unit of this product.

Muffins: (7,200 6,000) ( 26.67% ( $1.35 = $432 favorable. This means that because of the overall increase in sales, if the muffins sales mix percentage had remained as planned, then an increase in sales revenue of $432 would have been realized on this product.

Scones: (7,200 6,000) ( 56.67% ( $1.75 = $1,190 favorable. This means that because of the overall increase in sales, if the scones sales mix percentage had remained as planned, then an increase in sales revenue of $1,190 would have been realized on this product.

Carrot bread: (7,200 6,000) ( 16.67% ( $2.75 = $550 favorable. This means that because of the overall increase in sales, if the carrot bread sales mix percentage had remained as planned, then an increase in sales revenue of $550 would have been realized on this product.

(c) The sales price variance for each product line is computed as follows:

Actual number of units sold ( (actual price per unit planned price per unit)

Muffins: 1,400 ( ($1.55 $1.35) = $280 favorable. This means that because the company sold the muffins at more than the planned price per unit, $280 of revenues was gained on the 1,400 units of muffins.

Scones: 4,500 ( ($1.60 $1.75) = $ 675, that is, $675 unfavorable. This means that because the company sold the scones at less than the planned price per unit, $675 of revenues was lost on the 4,500 units of scones.

Carrot bread: 1,300 ( ($3.25 $2.75) = $650 favorable. This means that because the company sold the carrot bread at more than the planned price per unit, $650 of revenues was gained on the 1,300 units of carrot bread.

Summary:

Carrot

MuffinsSconesBreadTotal

Price Variance$280-$675$650$255favorable

Sales Mix Variance-702735275308favorable

Sales Quantity Variance4321,1905502,172favorable

Total$10$1,250$1,475$2,735favorable

10-75Variance analysis is a form of exception reporting. That is, the focus is on what went wrong rather than what went right. An excessive preoccupation on negative results, rather than a balance between complimenting people for positive results and investigating negative results, can create a negative organization environment.

A variance is a signal that something unplanned happened. For variances to be signals, they must be reasonable in the sense of reflecting a reasonable level of performance. Some organizations believe in setting very tight standards, which, in turn, trigger a steady stream of unfavorable variances. Beyond being motivationally debilitating, a steady stream of negative variances reduces their value as a signal because they are always there.

As signals, variances should trigger an investigation to find out what caused the variance. They provide no information about cause, but rather reflect only the effect of the cause. In some organizations people become preoccupied with arguing about the nature and size of variances rather than focusing on finding the underlying cause of the variance.

Finally, superiors often use variances to check up on subordinates (people may use variances to check up on their own work.) Because of this, in many organizations, variances and the management accountants who produce the variances have a negative reputation. Many people believe that superiors use variances in accusatory and invasive ways rather than constructively to improve organization performance.

CASES

10-76(a)Rust Manufacturing Co.

BUDGET FOR ACE AND BELL

For the Year Ending December 31, 2011

AceBell

Sales (1)$8,000,000$2,000,000

Variable costs:

Direct materials (2)$1,600,000$300,000

Direct labor (3)2,000,000500,000

Variable mfg. support (4) 200,000 50,000

$3,800,000$850,000

Contribution margin$4,200,000$1,150,000

Fixed costs:

Depreciation (5)$140,000$60,000

Rent (6)78,00052,000

Other mfg. support (7)200,00050,000

Selling costs (8)120,00060,000

Gen. & admin. costs (9) 32,000 8,000

$570,000$230,000

Pretax operating profit$3,630,000$920,000

Supporting calculations:

(1)Ace: 200,000 units ( $40/unit ( $8M

Bell: 100,000 units ( $20/unit ( $2M

(2)Ace: 200,000 units ( $8/unit ( $1.6M

Bell: 100,000 units ( $3/unit ( $300K

(3)Ace: 200,000 units ( 2 hours ( $5/hour ( $2M

Bell: 100,000 ( 1 hour ( $5/hour ( $500K

(4)Ace: $2M ( 10% ( $200K

Bell: $500K ( 10% ( $50K

(5)Ace: $200K ( 70% ( $140K

Bell: $200K ( 30% ( $60K

(6)Ace: $130K ( 60% ( $78K

Bell: $130K ( 40% ( $52K

(7)Ace: ($500K $250K) = $200K

Bell: ($500K $250K) = $50K

(8)Ace: 200,000 units

Bell: 100,000 units

300,000 units

Ace:

Bell:

(9)Ace:

Bell:

(Note: M stands for millions and K stands for thousands.)

(b)AceBell

Contribution margin per unit$21.00$11.50

Pretax operating profit per unit$18.15$ 9.20

(c)Decrease in contribution from 10% decrease in production and sales:

Ace:

Bell:

(d)The above analysis relies on cost estimates based on allocation of other manufacturing support, selling support, and general and administrative costs between Ace and Bell that ignores the activities that result in these support costs and the relative demands placed by Ace and Bell for these manufacturing, selling, and administrative support activities. As a result, it is possible that the above costs misrepresent the true cost of operations for Ace and Bell.

10-77(a)Number of Deliveries

Number of Deliveries

RequiredDelivery

CapacityaOvertime

HoursRegular

WagescOvertime

CostTotal

CostUnit

Delivery Cost

70800$480$ 0$480$6.857

80800 480 0 480 6.000

90805b 480 90d 570 6.333

a5 workers ( 8 hours ( 2 per hour ( 80 deliveries

b (90 80) 2 = 5 hours

c $12 ( 5 ( 8 = $480

d $12 ( 1.5 ( 5 = $90

(b)Based on the old hiring policy


RequiredDelivery

CapacityOvertime

HoursRegular

HoursOvertime

CostTotal

CostUnit

Delivery Cost

Monday65800.0$480 $0 $480$7.385

Tuesday70800.0 480 0 480 6.857

Wednesday80800.0 480 0 480 6.000

Thursday85802.5 480 45 525 6.176

Friday95807.5 480135 615 6.474

Total$2,580

Based on the new hiring policy


RequiredDelivery

CapacityOvertime

HoursRegular

HoursOvertime

CostTotal

CostUnit

Delivery Cost

Monday65640.5$384$9 $393$6.046

Tuesday70643.0 38454 438 6.257

Wednesday80800.0 480 0 480 6.000

Thursday85802.5 48045 525 6.176

Friday95960.0 576 0 576 6.063

Total$2,412

The expected savings per week of the new hiring policy:

10-78Judds Reproductions (Calculations were performed in an Excel spreadsheet.)

(a)Original situation

Oct.Nov.Dec.Jan.Feb.Mar.Apr.May

Unit

production

and sales

- Chairs9009759501,0201,1911,1791,1951,200

- Tables175188201200237243250252

- Cabinets9010295109120119126122

Total

revenuea$499,500$547,800$541,900$580,200$667,500$668,700$690,800$686,400

Cash sales:

25% of

revenue 124,875 136,950 135,475145,050 166,875 167,175 172,700 171,600

Credit card

sales: 35%

of rev. 174,825 191,730 189,665 203,070 233,625 234,045 241,780 240,240

Exporter

sales: 40%

of rev. 199,800 219,120 216,760 232,080 267,000 267,480 276,320 274,560

Bad debts:

3% of

export sales$6,962$8,010$8,024$8,290$8,237

Cash sales

discounts:

5% of cash

sales 7,253 8,344 8,359 8,635 8,580

Cred. Card

fees: 3% of

credit card

sales 6,092 7,009 7,021 7,253 7,207

a Chair price is $200, table price is $900, and cabinet price is $1,800.

Judds Reproductions (Continued)

(a)Original situation (Continued

JuneJulyAug.Sept.Oct.Nov.Dec.Total

Unit

production

and sales

- Chairs1,2041,1941,1991,2221,2191,2071,192

- Tables255242253243248244255

- Cabinets125123121127126126119

Total

revenuea$695,300$678,000$685,300$691,700$693,800$687,800$682,100$8,107,600

Cash sales:

25% of

Revenue 173,825169,500 171,325 172,925173,450 171,950 170,525 2,026,900

Credit card

sales: 35%

of rev.243,355 237,300 239,855 242,095 242,830 240,730 238,735 2,837,660

Exporter

sales: 40%

of rev.278,120 271,200274,120 276,680 277,520 275,120 272,840 3,243,040

Bad debts:

3% of

export sales$8,344$8,136$8,224$8,300$8,326$8,254$8,185$97,291

- Cash sales

discounts:

5% of cash

sales 8,691 8,475 8,566 8,646 8,673 8,598 8,526 101,345

- Cred. card

fees: 3% of

credit card

sales 7,301 7,119 7,196 7,263 7,285 7,222 7,162 85,130

a Chair price is $200, table price is $900, and cabinet price is $1,800.Carpenter and helper hours Dec.Jan.Feb.Mar.Apr.MayJune

- Required carpenter hoursb1,5621,788.91,793.11,8591,8421,869.1

- Carpentersc991010111111

- Helpers: 1.5 ( number of

carpenters14141515171717

- Carpenter regular hours:

172 per carpenter1,5481,7201,7201,8921,8921,892

- Carpenter overtime hours1468.973.1000

- 5% of regular carpenter hrs,

must be > overtime hoursc77.4868694.694.694.6

- Helper regular hours:

172 per helper2,4082,5802,5802,9242,9242,924

- Helper overtime hours0103.35109.65000

Carpenter and helper hours JulyAug.Sept.Oct.Nov.Dec.

- Required carpenter hoursb1,820.61,838.11,858.31,863.61,848.81,828.3





172 per carpenter1,8921,8921,8921,8921,8921,892

- Carpenter overtime hours000000


must be > overtime hoursc94.694.694.694.694.694.6


172 per helper2,9242,9242,9242,9242,9242,924

- Helper overtime hours000000

b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.

c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours

available.Cash inflowsJan.Feb.Mar.Apr.MayJune

- From 3 months previous:

17% of export sales$33,966$37,250$36,849$39,454$45,390$45,472


50% of export sales109,560108,380116,040133,500133,740138,160

- From 1 month previous:

30% of export sales + 97% of

credit card sales249,003266,602306,716307,268317,423315,401

- From current month:

95% of cash sales137,798158,531158,816164,065163,020165,134

- Interest on cash balance:

3%/yr if previous mo. ending

bal > $50,0000000052

- Total cash inflows$530,327$570,764$618,422$644,286$659,573$664,218

Cash inflowsJulyAug.Sept.Oct.Nov.Dec.


17% of export sales$46,974$46,675$47,280$46,104$46,600$47,036


50% of export sales137,280139,060135,600137,060138,340138,760


30% of export sales + 97% of

credit card sales319,490311,541314,895317,836318,801316,044

- From current month: 95% of

cash sales161,025162,759164,279164,778163,353161,999


3%/yr if previous mo. ending

bal. > $50,000330120400680592889


Cash outflowsJan.Feb.Mar.Apr.MayJune

- Carpenter wages: $24 per

regular hr.; $36 per

overtime hr.$37,656$43,760$43,912$45,408$45,408$45,408

- Helper wages: $14 per


overtime hr.33,71238,29038,42340,93640,93640,936

- Supplies, etc.: $5 per

carpenter hr.7,8108,9458,9669,2959,2109,346

- Variable support costs:

$20 per carpenter hr.31,24035,77835,86237,18036,84037,382

- Maintenance costs: $15

per carpenter hr.23,43026,83426,89727,88527,63028,037

- Wood costs: $30 per unit

of woodd127,650146,610147,240152,550151,380153,570

- Factory rent: $150,000

per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000

- Administrative salaries:

$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs: $30,000

per month30,00030,00030,00030,00030,00030,000

- Advertising

expenditures:

$50,000 per mo.50,00050,00050,00050,00050,00050,000

- Shipping costse43,01549,47049,54551,18550,85051,510

- Variable selling costs: 6% of product list prices34,81240,05040,12241,44841,18441,718

- Interest on line of credit:

10%/yr based on last

months balance01,2429522737470

- Mach. purchases:

$5,000 ( no. of carpenters

(Jan. and July)45,00000000

- Total cash outflows$679,325$535,978$536,917$701,160$549,185$552,906

d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.

e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.

Cash outflowsJulyAug.Sept.Oct.Nov.Dec.

- Carpenter wages:

$24 per regular hr.;

$36 per overtime hr.$45,408$45,408$45,408$45,408$45,408$45,408

- Helper wages: $14 per


overtime hr.40,93640,93640,93640,93640,93640,936

- Supplies, etc.: $5 per

carpenter hr.9,1039,1919,2929,3189,2449,142


$20 per carpenter hr.36,41236,76237,16637,27236,97636,566

- Maintenance costs: $15

per carpenter hr.27,30927,57227,87527,95427,73227,425

- Wood costs: $30 per unit

of woodd149,250151,140152,130152,790151,470150,510

- Factory rent: $150,000

per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000


$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs: $30,000

per month30,00030,00030,00030,00030,00030,000

- Advertising

expenditures:

$50,000 per mo.50,00050,00050,00050,00050,00050,000

- Shipping costse50,24550,76551,27051,41550,97550,520

- Variable selling costs:

6% of product list prices40,68041,11841,50241,62841,26840,926



months balance000000

- Mach. purch.: $5,000 ( no. of carpenters (Jan.

and July)55,00000000




Cash flow analysisDec.Jan.Feb.Mar.Apr.MayJune

- Opening cash$50,000$50,000$50,000$50,000$50,000$70,806

- Net cash flow: Cash

inflows - cash outflows148,99834,78581,50556,873110,388111,312

- Cash before financing98,99884,785131,5056,873160,388182,118

- Opening line-of credit0148,998114,21332,70989,5820

- Line-of-credit increase148,9980056,87300

- Line-of-credit payment034,78581,505089,5820

- Line of credit closing

balance0148,998114,21332,70989,58200

- Ending cash: $50,000

minimum50,00050,00050,00050,00050,00070,806182,118

Cash flow analysisJulyAug.Sept.Oct.Nov.Dec.

- Opening cash$182,118$97,875$210,139$322,016$286,753$405,429


inflows - cash outflows84,243112,264111,87735,263118,677118,295

- Cash before financing97,875210,139322,016286,753405,429523,724

- Opening line-of credit000000

- Line-of-credit increase000000

- Line-of-credit payment000000


balance000000

- Ending cash: $50,000

minimum97,875210,139322,016286,753405,429523,724

Judds Reproductions

Projected Income Statement

For the Year Ended December 31, 2012

Original Situation

Revenue

Chairs$2,844,400

Tables2,629,800

Cabinets2,633,400 $8,107,600

Variable expenses

Carpenters534,000

Helpers478,849

Maintenance326,577

Variable support435,436

Selling486,456

Shipping600,765

Supplies108,859

Wood1,786,2904,757,232

Contribution margin$3,350,368

Fixed expenses

Administrative staff300,000

Depreciationa46,000

Factory rent600,000

Selling360,000

Other factory480,0001,786,000

Other expenses

Advertising costs600,000

Bad debts97,291

Cash sales discounts101,345

Credit card fees85,130

Net interest charges: $3,213 3,063150883,916

Income before taxes$680,452

aDepreciation:

Machinery, Jan. 1, 2012$360,000

Purchases: $45,000 in January and $55,000 in July 100,000

Depreciation expense: 10% of year-end balance (46,000)

Machinery, Dec. 31, 2012$414,000

Judds Reproductions

Projected Balance Sheet

December 31, 2012

Original Situation

Cash$523,724

Accounts receivablea727,737Bank loan$0

Machinery and

equipmentb414,000Owners

equity1,665,461

Total

Assets$1,665,461

Total liabilities and

owners equity$1,665,461

aAccounts receivable, December 31, 2012 balance = $727,737 = 97% of Dec. credit card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.

bMachinery, Jan. 1, 2012$360,000



Machinery, Dec. 31, 2012$414,000

(b)Cash sales to exporters lead to 5% ( 40% drop in sales across products (Multiply original sales quantities by 0.98 and round the result to the nearest unit.)


Unit production and sales

- Chairs9009759501,0001,1671,1551,1711,176

- Tables175188201196232238245247

- Cabinets9010295107118117123120

- Total revenuea$499,500$547,800$541,900$569,000$654,600$655,800$676,100$673,500

- Cash sales:

(25%+35%)/

95% of revenue$124,875$136,950$135,475$359,368$413,432$414,189$427,011$425,368

- Credit card

sales: 35% /95%

of rev.$174,825$191,730$189,665$209,632$241,168$241,611$249,089$248,132

- Exporter sales:

40% of rev. in

2011; all cash

in 2012$199,800$219,120$216,760$0$0$0$0$0

- Bad debts: 3%

of export sales$0$0$0$0$0

- Cash sales

discounts: 5% of

cash sales$17,968$20,672$20,709$21,351$21,268

- Cred. card fees:

3% of credit

card sales$6,289$7,235$7,248$7,473$7,444

a Chair price is $200, table price is $900, and cabinet price is $1,800.JuneJulyAug.Sept.Oct.Nov.Dec.Total

Unit production

and sales

- Chairs1,1801,1701,1751,1981,1951,1831,168

- Tables250237248238243239250

- Cabinets123121119124123123117

- Total revenuea$682,400$665,100$672,400$677,000$679,100$673,100$669,200$7,947,300

- Cash sales:

(25%+35%)/

95% of revenue$430,989$420,063$424,674$427,579$428,905$425,116$422,653$5,019,347

- Credit card

sales: 35%/95%

of rev.$251,411$245,037$247,726$249,421$250,195$247,984$246,547$2,927,953

- Exporter sales:

40% of rev. in

2011; all cash

in 2012$0$0$0$0$0$0$0$0

- Bad debts: 3%

of export sales$0$0$0$0$0$0$0$0

- Cash sales

discounts: 5%

of cash sales$21,549$21,003$21,234$21,379$21,445$21,256$21,133$250,967

- Cred. card fees:

3% of credit

card sales$7,542$7,351$7,432$7,483$7,506$7,440$7,396$87,839

a Chair price is $200, table price is $900, and cabinet price is $1,800.Carpenter and helper hours Dec.Jan.Feb.Mar.Apr.MayJune

- Required carpenter hoursb1,5321,754.81,7591,818.91,807.91,835





172 per carpenter1,5481,7201,7201,8921,8921,892

- Carpenter overtime hours034.839000


must be > overtime hoursc77.4868694.694.694.6


172 per helper2,4082,5802,5802,9242,9242,924



- Required carpenter hoursb1,786.51,8041,818.21,823.51,808.71,794.2





172 per carpenter1,8921,8921,8921,8921,8921,892

- Carpenter overtime hours000000




172 per helper2,9242,9242,9242,9242,9242,924

- Helper overtime hours000000





17% of export sales$33,966$37,250$36,849$0$0$0


50% of export sales109,560108,3800000

- From 1 month previous: 30% of

export sales + 97% of credit

card sales249,003203,343233,933234,362241,617240,688


95% of cash sales341,400392,760393,480405,660404,100409,440

- Interest on cash balance: 3%/yr if

previous mo. Ending bal. .> $50,00001516891,0329001,160




17% of export sales$0$0$0$0$0$0


50% of export sales000000

- From 1 month previous: 30% of

export sales + 97% of credit

card sales243,868237,686240,295241,938242,689240,545


95% of cash sales399,060403,440406,200407,460403,860401,520

- Interest on cash balance: 3%/yr if

previous mo. Ending bal.> $50,0001,4211,1731,4241,6841,5751,840



- Carpenter wages:


$36 per overtime hr.$37,152$42,533$42,684$45,408$45,408$45,408

- Helper wages:


$21 per overtime hr.33,71237,21637,34940,93640,93640,936

- Supplies, etc.:

$5 per carpenter hr.7,6608,7748,7959,0959,0409,175


$20 per carpenter hr.30,64035,09635,18036,37836,15836,700

- Maintenance costs:

$15 per carpenter hr.22,98026,32226,38527,28427,11927,525

- Wood costs:

$30 per unit of woodd125,190143,790144,420149,280148,560150,750

- Factory rent:

$150,000 per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000

- Administrative

salaries:

$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs:

$30,000 per month30,00030,00030,00030,00030,00030,000

- Advertising

expenditures:

$50,000 per mo.50,00050,00050,00050,00050,00050,000

- Shipping costse42,18548,51548,59050,09549,89550,555


- Interest on line of

credit: 10%/yr based

on last months balance000000

- Mach. purch.: $5,000 (

no. of carpenters (Jan.

and July)45,00000000





- Carpenter wages:


$36 per overtime hr.$45,408$45,408$45,408$45,408$45,408$45,408

- Helper wages:


$21 per overtime hr.40,93640,93640,93640,93640,93640,936

- Supplies, etc.:

$5 per carpenter hr.8,9339,0209,0919,1189,0448,971


$20 per carpenter hr.35,73036,08036,36436,47036,17435,884


$15 per carpenter hr.26,79827,06027,27327,35327,13126,913

- Wood costs:

$30 per unit of woodd146,430148,320148,860149,520148,200147,690

- Factory rent:

$150,000 per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000

- Administrative

salaries:

$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs:

$30,000 per month30,00030,00030,00030,00030,00030,000

- Advertising

expenditures:

$50,000 per mo.50,00050,00050,00050,00050,00050,000

- Shipping costse49,29049,81050,18050,32549,88549,565


- Interest on line of

credit: 10%/yr based on

last months balance000000

- Mach. purch.: $5,000 (

no. of carpenters (Jan.

and July)55,00000000





- Opening cash$50,000$110,270$325,632$462,833$409,846$513,938

- Net cash flow:

Cash inflows

cash outflows60,270215,362137,20152,987104,091104,294

- Cash before

financing110,270325,632462,833409,846513,938618,232

- Opening line-of

credit000000

- Line-of-credit

increase000000

- Line-of-credit

payment000000

- Line of credit

closing balance0000000

- Ending cash:

$50,000 min.50,000110,270325,632462,833409,846513,938618,232

Cash flow analysisJulyAug.Sept.Oct.Nov.Dec.

- Opening cash$618,232$519,151$619,471$723,658$679,865$785,826

- Net cash flow:

Cash inflows

cash outflows99,081100,321104,18643,792105,961103,385

- Cash before

financing519,151619,471723,658679,865785,826889,211

- Opening line-of

credit000000

- Line-of-credit

increase000000

- Line-of-credit

payment000000

- Line of credit

closing balance000000

- Ending cash:

$50,000 min.519,151619,471723,658679,865785,826889,211

Judds Reproductions



Cash Sales to Exporters

Revenue

Chairs$2,787,600

Tables2,576,700

Cabinets2,583,000 $7,947,300

Variable expenses

Carpenters531,041

Helpers476,701

Maintenance320,141


Selling476,838

Shipping588,890

Supplies106,714

Wood1,751,0104,678,189

Contribution margin

$3,269,111

Fixed expenses


Depreciationa46,000

Factory rent600,000

Selling360,000


Other expenses


Bad debts0



Net interest charges13,047925,759


aDepreciation:

Machinery, Jan. 1, 2012$360,000



Machinery, Dec. 31, 2012$414,000

Based on profitability, this change is not desirable.

Judds Reproductions


December 31, 2012

Cash Sales to Exporters

Cash$889,211

Accounts

receivablea239,151Bank

loan$0

Machinery and


equity$1,542,362

Total assets$1,542,362Total liabilities and


aAccounts receivable, December 31, 2012 balance = $239,151 = 97% of Dec. credit card sales.

B Machinery, Jan. 1, 2012$360,000



Machinery, Dec. 31, 2012$414,000

(c)Increased sales effort



- Chairs9009759501,3261,5481,5331,5541,560

- Tables175188201260308316325328

- Cabinets9010295142156155164159

- Total revenuea$499,500$547,800$541,900$717,060$824,220$826,500$853,575$848,730

- Cash sales:

25% of

revenue$124,875$136,950$135,475$179,265$206,055$206,625$213,394$212,183

- Credit card

sales: 35% of

rev.$174,825$191,730$189,665$250,971$288,477$289,275$298,751$297,056

- Exporter

sales: 40% of

rev.$199,800$219,120$216,760$286,824$329,688$330,600$341,430$339,492

- Bad debts:

3% of export

sales$8,605$9,891$9,918$10,243$10,185

- Cash sales

discounts: 5%

of cash sales$8,963$10,303$10,331$10,670$10,609

- Cred. card

fees: 3% of

credit card

sales$7,529$8,654$8,678$8,963$8,912

a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.JuneJulyAug.Sept.Oct.Nov.Dec.Total


- Chairs1,5651,5521,5591,5891,5851,5691,550

- Tables332315329316322317332

- Cabinets163160157165164164155

- Total

revenuea$859,940$837,805$845,975$854,240$856,900$849,585$843,410$10,017,940

- Cash sales:

25% of

revenue$214,985$209,451$211,494$213,560$214,225$212,396$210,853$2,504,485

- Credit card

sales: 35% of

rev.$300,979$293,232$296,091$298,984$299,915$297,355$295,194$3,506,279

- Exporter

sales: 40% of

rev.$343,976$335,122$338,390$341,696$342,760$339,834$337,364$4,007,176

- Bad debts:

3% of export

sales$10,319$10,054$10,152$10,251$10,283$10,195$10,121$120,215

- Cash sales

discounts: 5%

of cash sales$10,749$10,473$10,575$10,678$10,711$10,620$10,543$125,224

- Cred. card

fees: 3% of

credit card

sales$9,029$8,797$8,883$8,970$8,997$8,921$8,856$105,188

a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.Carpenter and helper hours Dec.Jan.Feb.Mar.Apr.MayJune

- Required carpenter hoursb2,032.42,325.22,333.22,418.12,3982,434





172 per carpenter2,0642,2362,2362,4082,4082,408

- Carpenter overtime hours089.297.210.1026




172 per helper3,0963,4403,4403,6123,6123,612

- Helper overtime hours047.859.815.15039


- Required carpenter hoursb2,368.32,388.12,415.62,4232,404.12,380





172 per carpenter2,4082,4082,4082,4082,4082,408

- Carpenter overtime hours007.61500




172 per helper3,6123,6123,6123,6123,6123,612






17% of export sales$33,966$37,250$36,849$48,760$56,047$56,202


50% of export sales109,560108,380143,412164,844165,300170,715


30% of export sales + 97%

of credit card sales249,003329,489378,729379,777392,218389,991


95% of cash sales170,302195,752196,294202,724201,573204,236


3%/yr if previous mo.

ending bal > $50,000000000




17% of export sales$58,043$57,714$58,476$56,971$57,526$58,088


50% of export sales169,746171,988167,561169,195170,848171,380


30% of export sales +

97% of credit card sales395,142384,971388,726392,523393,746390,384


95% of cash sales198,979200,919202,882203,514201,776200,310


3%/yr if previous mo.

ending bal > $50,000450163480428767



- Carpenter wages:


$36 per overtime hr.$49,536$56,875$57,163$58,156$57,792$58,728

- Helper wages:


$21 per overtime hr.43,34449,16449,41650,88650,56851,387

- Supplies, etc.:

$5 per carpenter hr.10,16211,62611,66612,09111,99012,170


$20 per carpenter hr.40,64846,50446,66448,36247,96048,680


$15 per carpenter hr.30,48634,87834,99836,27235,97036,510

- Wood costs:

$30 per unit of woodd166,080190,560191,580198,420197,070199,980

- Factory rent:

$150,000 per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000


$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs:

$30,000 per month30,00030,00030,00030,00030,00030,000

- Advertising expenditures:

$75,000 per mo.75,00075,00075,00075,00075,00075,000

- Shipping costse55,96064,30064,46066,57566,18567,060




months balance02,1372,1751,5291,924884

- Mach. purch.: $5,000 ( no.

of carpenters (Jan. and July)60,00000000





- Carpenter wages:


$36 per overtime hr.$57,792$57,792$58,066$58,332$57,792$57,792

- Helper wages:


$21 per overtime hr.50,56850,56850,80751,04150,56850,568

- Supplies, etc.:

$5 per carpenter hr.11,84211,94112,07812,11512,02111,900


$20 per carpenter hr.47,36647,76248,31248,46048,08247,600


$15 per carpenter hr.35,52535,82236,23436,34536,06235,700

- Wood costs:

$30 per unit of woodd194,160196,380197,760198,630196,950195,930

- Factory rent:

$150,000 per quarter150,00000150,00000

- Fixed costs:

$40,000 per month40,00040,00040,00040,00040,00040,000


$25,000 per month25,00025,00025,00025,00025,00025,000

- Selling costs:

$30,000 per month30,00030,00030,00030,00030,00030,000

- Advertising expenditures:

$75,000 per mo.75,00075,00075,00075,00075,00075,000

- Shipping costse65,35565,96566,65066,84566,28065,755

- Variable selling costs: 6% of

product list prices50,26850,75951,25451,41450,97550,605



months balance05240000

- Mach. purch.: $5,000 ( no.

of carpenters (Jan. and July)70,00000000





- Opening cash$50,000$50,000$50,000$50,000$50,000$50,000


inflows cash outflows-256,409-4,62577,572-47,399124,755124,149

- Cash before financing-206,40945,375127,5722,601174,755174,149

- Opening line-of credit0256,409261,034183,462230,861106,106

- Line-of-credit increase256,4094,625047,39900

- Line-of-credit payment0077,5720124,755106,106


balance0256,409261,034183,462230,861106,1060

- Ending cash:

$50,000 minimum50,00050,00050,00050,00050,00050,00068,042

- Cash flow analysisJulyAug.Sept.Oct.Nov.Dec.

- Opening cash$68,042$50,000$115,203$241,849$221,350$356,946

Net cash flow: Cash

inflows cash outflows-80,920128,081126,646-20,499135,596135,080

- Cash before financing-12,877178,081241,849221,350356,946492,026

- Opening line-of credit062,8770000

- Line-of-credit increase62,87700000

- Line-of-credit payment062,8770000


balance62,87700000

- Ending cash:

$50,000 minimum50,000115,203241,849221,350356,946492,026

Judds Reproductions



Increased Sales Effort

Revenue

Chairs$3,513,100

Tables3,249,000

Cabinets3,255,840 $10,017,940

Variable expenses

Carpenters685,816

Helpers598,885

Maintenance424,800


Selling601,076

Shipping781,390

Supplies141,600

Wood2,323,5006,123,467

Contribution margin$3,894,473

Fixed expenses


Depreciationa49,000

Factory rent600,000

Selling360,000


Other expenses


Bad debts120,215



Net interest charges7,2891,257,916


1,257,916

aDepreciation:

Machinery, Jan. 1, 2012$360,000



Machinery, Dec. 31, 2012$441,000

Based on profitability, this change is highly desirable.

Judds Reproductions


December 31, 2012

Increased Sales Effort

Cash$492,026

Accounts receivablea899,539Bank loan$0

Machinery and


equity$1,832,565

Total

assets$1,832,565Total liabilities and


aAccounts receivable, December 31, 2012 balance = $899,539 = 97% of Dec. credit card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.

bMachinery, Jan. 1, 2012$360,000


Depreciation expense: 10% of year-end balance(49,000)

Machinery, Dec. 31, 2012$441,000

(d)Criteria other than profitability may be important to a company. For example, the option in part (b) provides a stronger cash position for the company so that the company is able to invest in growth opportunities, if desired. Correspondingly, accounts receivable are greatly reduced. This option will, as desired, eliminate bad debt. In the long run, however, sales to exporters may decrease even further if Judd insists on cash payment, reducing profit even further.

The option in part (c) increases sales and profit dramatically but creates cash flow problems for the company; net interest charges will increase to $7,289 from $150. Along with the profit increase, accounts receivable increase substantially.10-79(Note: Small discrepancies in totals are due to rounding.)

Peterborough FoodFlexible Budget Cost Analysis

Master budgetPlanning

varianceFlexible

budgetFlexible

budget

varianceActual

Line 1

Production units945,000255,0001,200,00001,200,000

Line 2

Production units1,175,000(230,000)945,0000945,000

Line 1

Number of batches18951240(40)200

Line 2

Number of batches235(46)18921210

Unit-related costs

Line 1Materials$1,417,500382,500$1,800,000(131,400)$1,668,600

Line 1Packaging42,52511,47554,000(576)53,424

Line 1Labor221,13059,6702

Documents

AKMy_6e_ch10_SM