Solution manual cost accounting 14e by carter ch16

The real distinc-tion between a capital and revenue expendi-ture is not the immediate charging of the expenditure to income, as opposed to its gradual amortization, but the length of t

CHAPTER 16

DISCUSSION QUESTIONS

16-1

Q16-1 A capital expenditure is an expenditure

intended to benefit future periods It is

nor-mally associated with the acquisition or

improvement of plant assets The real

distinc-tion between a capital and revenue

expendi-ture is not the immediate charging of the

expenditure to income, as opposed to its

gradual amortization, but the length of time

required for its recovery in cash Recoveries

of revenue expenditures, such as product

costs, are expected to take place in a matter

of weeks or, at the most, months The

finan-cial recovery of capital expenditures is

meas-ured in terms of years.

Q16-2 Purposes of a research and development

pro-gram are:

(a) A planned search for new knowledge

per-taining to the industry without reference

to a specific application.

(b) Creation of a new product or

improve-ment of an existing product.

(c) Invention of a new or improved process or

machinery to make a finished product or

component.

Reasons for a research and development

program are:

(a) To protect the sales dollar, that is, to meet

competition Improving the quality of

per-formance of products or achieving cost

savings in either operating or capital

expenditures falls into this category.

(b) To do research to promote new sales

dollars, either by entering a new market

or by significantly expanding an existing

market.

(c) To investigate problems with respect to

environmental protection, safety, working

conditions, etc.

Q16-3 Budgetary procedures for research and

development expenditures are designed to:

(a) force management to think about planned

expenditures;

(b) coordinate research and development

plans with the immediate and long-range

plans of the company;

(c) force the research and development staff

to consider major nonfinancial aspects of the program, such as personnel, equip- ment, and facilities requirements.

Q16-4 A cash budget involves detailed estimates of

anticipated cash receipts and disbursements for a specified period of time It is designed to assist management in coordinating cash flow from operations as a basis for financial plans and control The cash budget provides a sys- tematic approach to the synchronization of cash resources with needs It assists man- agement in making intelligent decisions con- cerning capital expenditures, dividend policies, investments, and other financial matters, and often exerts a cautionary influence on any of the above plans Periodic reports comparing actual with planned receipts and disburse- ments permit effective and continuous con- trol of cash by signaling significant deviations from the financial plans for the period.

Q16-5 (a) Nonmanufacturing businesses must plan

for the future just as carefully as facturing concerns Seasonal patterns in revenues and expenditures must be pro- vided for, and required equipment replacement and expansions must be budgeted.

manu-(b) Not-for-profit organizations generally operate on relatively fixed incomes that are received at one time Such receipt patterns are common for organizations that rely on tax dollars for support These funds must be allocated throughout the year in order to maintain operations Careful budget plans are a necessity for such allocations.

Q16-6 PPBS stands for Planning, Programming,

Budgeting System, and is an analytical tool focused on the output or final results rather than input or initial dollars expended The out- put is directly relatable to planned goals or objectives.

Q16-7 Zero-base budgeting (ZBB) is a planning and

budgeting tool using cost-benefit analysis of

projects and functions to improve an

organiza-tion’s resource allocation Budget requests

consist of decision packages that are

ana-lyzed, evaluated, and ranked in a priority order

based on cost-benefit analysis Management

can then evaluate possible activities for the

coming period, selecting those that will best

achieve organizational goals.

Traditional budgeting tends to concentrate

on the differential change from the prior year,

assuming that existing activities are essential,

must be continued, are currently performed in

a cost-efficient and optimum manner, and will

be cost-effective in the coming year Costs are

developed more on a line-item rather than an

activity basis ZBB organizes all budget costs

in the form of activities and/or operations

(decision packages) and evaluates the

effec-tiveness of each decision package as if it

were a new activity.

Q16-8 (a) Zero-base budgeting requires managers

to justify their entire budget requests It

places the burden of proof on the

man-ager to justify why any money at all

should be budgeted It does this by

start-ing with the assumption that zero will be

spent on each activity, so the budgeting

process begins with a base of zero.

(b) The two kinds of alternatives considered

for each activity are (1) different ways of

performing the activity and (2) different

levels of effort in performing the activity.

(c) A decision package includes an analysis

of an activity’s cost and purpose,

alterna-tive courses of action, measures of

per-formance of the activity, consequences of

not performing the activity, and the

activ-ity’s benefits.

(d) A package identifies and describes one

activity in sufficient detail so that it can

be evaluated and compared with other

activities.

(e) Success in the implementation of

zero-base budgeting requires the following:

1 Linkage of zero-base budgeting with

short- and long-range planning

2 Sustained support and commitment

from executive management

3 Innovation by managers in

develop-ing decision packages

4 Acceptance of zero-base budgeting

by persons who must perform the budgeting work

Q16-9 Prospective information should be provided in

external financial statements when it will enhance the reliability of the user’s predic- tions.

Q16-10 PERT is particularly appropriate as a

sched-uling and controlling technique for projects consisting of a large number of tasks, some

of which cannot be started until others are complete, and some of which can be under- taken concurrently.

Conceptually, the reference is to a work of interdependent activities which, as a group, require considerable time to com- plete There is usually substantial set-up time (and cost) associated with analyzing, defining, and estimating each discrete proj- ect activity; thus, the benefit is in projects requiring a considerable amount of time and consisting of a relatively complex network PERT allows the user to update and revise scheduled activities and thereby determine the effects of changes on the overall project.

net-It is particularly appropriate when the timing

of individual activities and the project tion date are critical to success.

comple-Q16-11 Slack is computed by subtracting the

earli-est expected time from the latearli-est allowable time The earliest expected time is the earli- est time that an activity can be expected to start, because of its relationship to pending activities The latest allowable time is the latest time that an activity may begin and not delay completion of the project Slack is determinable only in relation to an entire path through the network

Q16-12 PERT/cost is really an extension of PERT.

With time-options available, it seems able to assign cost to time and activities, thereby providing total financial planning and control by functional responsibility Q16-13 Computer support offers distinct advantages

advis-to PERT users PERT is a oriented technique and is therefore ideally suited to the high-speed response of com- puters for deriving the critical path, slack times, and costs, and for storing and report- ing results to management Revisions to all schedule elements, whether during the ini- tial estimating phase or during the active project phase, can be updated and the revised results promptly reported.

mathematically-Computer support is helpful in dealing with large, complex networks of interdependencies

and when project control requires timely

progress reporting against the updated

plan Most program packages offer a

vari-ety of reporting features and formats,

including graphic network display as well

as printed reports at various summary

lev-els Current reporting provides information

to project managers, enabling quick

reac-tion to deviareac-tions.

Q16-14 The traditional budget focuses on one set of

assumptions The probabilistic budget vides for evaluating several sets of assump- tions, including the probability of each and a composite expected value, range, and stan- dard deviation for each budget element.

pro-EXERCISES E16-1

Beginning cash balance $ 6,000 $20,500 $26,500 Budgeted cash receipts:

Collect accounts receivable:

November credit sales:

($60,000 × 10%) $ 6,000 December credit sales:

($70,000 × 60%) 42,000 ($70,000 × 10%) $ 7,000 January credit sales:

($50,000 × 25%) 12,500 ($50,000 × 60%) 30,000 ($50,000 × 10%) $ 5,000 February credit sales:

($60,000 × 25%) 15,000 ($60,000 × 60%) 36,000 March credit sales:

($70,000 × 25%) 17,500 Total cash receipts $60,500 $52,000 $58,500 Cash available during month $66,500 $72,500 $85,000 Budgeted cash disbursements:

Pay accounts payable:

December purchases:

($20,000 × 80%) $16,000 January purchases:

($15,000 × 20%) 3,000 ($15,000 × 80%) $12,000 February purchases:

($25,000 × 20%) 5,000 ($25,000 × 80%) $20,000 March purchases:

Payroll 21,000 22,000 23,000 Miscellaneous cash expenses 6,000 7,000 6,000 Debt retirement 26,000 Total cash disbursements $46,000 $46,000 $79,000 Ending cash balance $20,500 $26,500 $ 6,000

E16-2 Finished Goods

Units required to meet sales budget 9,000 10,000 12,000 Add desired ending inventory (20% of

following month’s sales) 2,000 2,400 2,200 Total units required 11,000 12,400 14,200 Less estimated beginning inventory

(20% of current month’s sales) 1,800 2,000 2,400 Planned production 9,200 10,400 11,800

Materials

Units required to meet planned production

(planned production × 3) 27,600 31,200 35,400 Add desired ending inventory (40% of following

month’s production requirements) 12,480 14,160

Total materials required 40,080 45,360

Less estimated beginning inventory (40% of

current month’s requirements) 11,040 12,480

E16-3 Par production budget:

Units required to meet sales budget 50,000 30,000 Add desired ending inventory 3,000 3,000 Total units required 53,000 33,000 Less beginning inventory 5,000 3,000 Planned production 48,000 30,000 Tee purchases budget:

Units required for production:

48,000 × 3 144,000 30,000 × 3 90,000 Add desired ending inventory 14,000 11,000

Less beginning inventory 20,000 14,000 Units to be purchased 138,000 87,000 Cash disbursements in July for purchases of Tee:

Cash Budget For July Cash balance, July 1 $ 5,000 Cash receipts:

June sales ($30,000 × 48%) $14,400

July sales ($40,000 × 50%) 20,000 34,400 Cash available $39,400 Cash disbursements:

*Calculation of June income tax:

(2) Alternate paths and times and the critical path and the expected project time:

1-2-3-5-6-7 = 10 weeks

1-2-3-4-5-6-7 = 10 weeks

(3) The two activities in question are 3-4 and 4-5 If these activities were eliminated,

there would be no effect on the critical path or the expected completion time because 3-4 and 4-5 are not on the critical path.

4 4 2

Activity 0-1 4 days Activity 1-2 3 days 7 days Slack time at event 2 2 days

PROBLEMS P16-1

(1) Budgeted cash disbursements during June:

Purchase of materials:

May (11,250 1 × $20 × 46%) $103,500 June (12,180 2 × $20 × 54%) 131,544 $235,044 Marketing, general, and administrative expenses:

May ($51,550 3 × 46%) $23,713 June ($49,300 4 × 54%) 26,622 50,335 Wages and salaries 37,900 5

Total $323,279

1 May 31 ending inventory (11,400 × 130%) 14,820 units

May production 11,900

Materials needed in May 26,720 units

April 30 ending inventory ($309,400 ÷ $20) 15,470

May purchases 11,250 units

2 June 30 ending inventory (12,000 × 130%) 15,600 units

June production 11,400

Materials needed in June 27,000 units

May 31 ending inventory 14,820

June purchases 12,180 units

3 ($357,000 May sales × 15%) – $2,000 depreciation = $51,550

4 ($342,000 June sales × 15%) – $2,000 depreciation = $49,300

5 Accrued payroll on June 1 $ 3,300

Payroll earned during June 38,000

$41,300 Accrued payroll on June 30 3,400

Cash paid out for payroll $37,900

(2) Budgeted cash collections during May:

March sales ($354,000 × 9%) $ 31,860 April sales ($363,000 × 97% × 60%) 211,266 April sales ($363,000 × 25%) 90,750 Total $333,876

P16-1 (Concluded)

(3) Budgeted units of inventory to be purchased during July:

July 31 ending inventory (12,200 × 130%) 15,860 units July production 12,000

Materials needed in July: 27,860 units June 30 ending inventory (12,000 × 130%) 15,600

July purchases 12,260 units

Beginning cash balance $ 100,000 $ 100,000 $ 100,000 Cash receipts during month:

Collections of accounts receivable:

($2,500,000 × 60%) 1,500,000 Total cash collections $1,880,000 $2,040,000 $2,380,000 Cash available for use during month $1,980,000 $2,140,000 $2,480,000 Cash disbursements during month:

Accounts payable for purchases:

Salaries (1/12 × $480,000) 40,000 40,000 40,000 Promotion (1/12 × $660,000) 55,000 55,000 55,000 Property taxes (1/4 × $240,000) 0 0 60,000 Insurance (1/12 × $360,000) 30,000 30,000 30,000 Utilities (1/12 × $300,000) 25,000 25,000 25,000 Income taxes ($1,020,000 income × 40% tax rate) 408,000 0 0 Total cash disbursements $2,002,000 $1,806,000 $2,080,000 Cash balance before borrowing or investment $ (22,000) $ 334,000 $ 400,000 Cash to be borrowed (or invested) 122,000 (234,000) (300,000) Ending cash balance $ 100,000 $ 100,000 $ 100,000

MAYNE MANUFACTURING COMPANY

Cash Budget For the Years Ending March 31

Cash generated from operations:

Collections from customers—

Excess of cash collections over cash

Cash received from liquidation of existing

Total cash available $165,000 $285,000 Payments to general creditors

(liquidation proceeds) 90,000 270,000 2

Balance of cash at end $ 75,000 1 $ 15,000

1 This amount could have been used to pay general creditors or carried forward to the beginning of the next year.

2 ($600,000 × 60%) – $90,000

P16-3 (Concluded)

Schedule A—Collections from customers:

Sales $900,000 $1,080,000 Beginning accounts receivable 0 75,000 Total $900,000 $1,155,000 Less ending accounts receivable 75,000 90,000 Collections from customers $825,000 $1,065,000 Schedule B—Disbursements for direct materials:

Direct materials required for production $200,000 $240,000 Required ending inventory 40,000 3 50,000 4

Total $240,000 $290,000 Less beginning inventory 0 40,000 Purchases $240,000 $250,000 Beginning accounts payable 0 20,000 Total $240,000 $270,000 Less ending accounts payable 20,000 25,000 Disbursements for direct materials $220,000 $245,000

3 12,000 units × 2/12 = 2,000; 2,000 × $20 per unit = $40,000

4 15,000 units × 2/12 = 2,500; 2,500 × $20 per unit = $50,000

P16-4

Production Budget:

Required to meet sales forecast:

January ($360,000 sales ÷ $150 per unit) 2,400 February ($450,000 sales ÷ $150 per unit) 3,000 March ($480,000 sales ÷ $150 per unit) 3,200 8,600 Desired finished goods ending inventory:

Total quantity of product to produce 9,100 Direct Materials Purchases Budget:

Desired materials ending inventory 2,000