Solution manual cost and managerial accounting by barfield 3rd the master budget

Budgeting utilizes goals, objectives, and forecasts in developing plans for production, revenues, costs, cash flows, and resource procurement.. Financial budgets detail the funds to be g

The Master BudgetQuestions

1 The diversity of resources used, activities conducted, and

quantities of funds provided/used make budgeting important to business Since there is no assurance of the continuity of

management, written plans are more useful than spoken plans to define and communicate the direction of the business Further, psychologically, writing plans down is the first step in gaining commitment to those plans

2 The basic budgeting process begins with planning This planning

involves the setting of objectives and translating those

objectives into required activities and needed resources The process also includes a control function of measuring whether thepredetermined objectives have been successfully attained and providing feedback to concerned and involved parties

3 A budget is considered a communication device because it

indicates what is to be accomplished over a certain time period

It helps to promote unity of goals throughout the organization because it should have been developed following an exchange of ideas and information among the people in the organization

4 Budgeting translates goals and objectives into the required

resources, activities, and arrangements needed to accomplish those goals and objectives The translation is extended to

assign activities and allocate resources to departments and

personnel who are responsible for execution of the budget

5 The strategic plan defines the basic purposes and goals of an

organization As such, the strategic plan identifies the key variables that will largely determine the success of the

organization Some of the major factors taken into account informulating the strategic plan include the state of the local and global economy, trends in technology and materials, and

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the legislative and political climates.

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6 Longer term plans contain insufficient detail to direct a

business Although the longer term plans provide general direction for a business, they are too vague to provide

guidance on a day-to-day basis Consequently, shorter term plans are compiled to implement the longer term plans for a specific period The shorter term plans can be made with

greater attention given to current organizational and

environmental constraints (current market, material and labor conditions) Also, the roles of specific middle- and lower- level managers can be determined in the detailed short-term plans

7 The budget represents the cornerstone for a company’s

management planning system Budgeting utilizes goals,

objectives, and forecasts in developing plans for production, revenues, costs, cash flows, and resource procurement

Budgeting originates with strategic planning As goals are implemented and programs developed, management needs

information about various alternatives so they can be

evaluated When a specific plan of action is determined, the budget becomes management’s master plan

8 Control is really an extension of planning rather than a

separate managerial function Without formal planning, there can be little control

9 Budgets serve as planning tools by providing an a priori view

of what is expected to happen in the organization for a

specific period of time After the period, the budgets serve

as a benchmark against which actual performance can be

compared Because participants know there will be an the-fact comparison between the actual performance and the budget, they are more attentive to the budget in the planning and implementation phases

after-10 An operating budget presents units expected to be sold or used

by a company and the price/costs associated with those units The sales and production budgets are operating budgets

Financial budgets detail the funds to be generated or used during the budget period (cash budget and capital

expenditure budget) The results from the operating budgets are the sources of input for the financial budgets For

example, sales projected in the sales budget impact the cash collections/receipts portion of the cash budget

11 The master budget is "demand driven" in that it is based in

its entirety on projected sales In some cases, demand does not "exist" at the point the budget is prepared (for example, when the company is introducing a new product) Without sales

or expected sales, the company would have no need to acquire resources or remain in operation

12 Managers estimate collections from sales through historical

company data on collection patterns, industry trends/patterns,and judgment Current economic information can play an

important part in estimating the collection pattern since inflation/deflation, interest rates, and employment affect both business and consumer ability to pay

Cash collections are important in the budgeting process because of their impact on the cash budget and the

availability of funds with which to make disbursements for operating and capital expenditures, and ownership

distributions

13 The production and purchases budgets are similar in that they

both begin with a key variable to their particular area, add ending inventory, and subtract beginning inventory These budgets differ in that the key variable for the production area

is sales, but the key variable for purchases is production The production budget is used to schedule needed material, labor, and overhead The purchases budget is used to determinethe amount and timing of material input to the production process as well as provide input into the cash budget as to the amount and timing of cash disbursements for such

purchases

14 To predict overhead cost for a specific volume of production,

costs must be separated into those that are volume dependent (variable costs), and those that are volume independent (fixed costs) The expected overhead for a given period is the sum

of the projected fixed cost plus the total variable cost The total variable cost is a function of the variable cost per unit and the expected volume of production

15 Cash is a very important resource for an organization because

it is the medium of exchange for organizational inputs and outputs A shortage of cash creates liquidity problems and mayprevent the firm from acquiring inputs that are crucial to its survival A firm can cover periods of cash shortages with

loans, equity sales, or sales of assets

16 A company needs to maintain a minimum cash balance simply to

have funds on hand in the event of an emergency or in the event that the budget does not "work out" exactly as planned

If cash collections are lower or cash disbursements are higherthan expected, the minimum cash balance provides a cushion or margin of safety to fall back on It is also possible that the

company’s bank requires a minimum cash balance in the

corporate account as either a condition of the account or as acompensating balance for an outstanding loan

17 Future sales are the primary source for future cash

collections Consequently, the firm's future sales and its collections policy, which is reflected in its current and

projected accounts receivable balance, are the primary

determinants of the amounts and timing of future cash

collections

18 Pro forma financial statements give managers a preview of how

things will turn out if actual activities conform to budgeted activities If managers are not pleased with what is

revealed, they are in a position to adjust their plans and actions

19 The pro forma financial statements serve two primary purposes;

they are useful summary performance measures of the operating plans and they may highlight organizational constraints that cannot be identified in the other budgets For example,

contracts with creditors may require the company to maintain acertain interest coverage ratio or a particular debt-to-asset ratio Only the pro forma income statement and balance sheet would provide confidence that the firm would be in compliance with these contractual requirements

20 They are similar in that they both focus on the balance of

cash and explain the change in cash balance over a period of time However, there are substantial differences between the two For example, the cash budget typically covers shorter time periods and has as its primary objective the

identification of periods of cash shortages and cash excesses The statement of cash flows has as its primary purpose the identification of the activities (operating, investing, and financing) that explain the change in the cash balance for a period

21 The process of continuous budgeting provides an on going

12-month period of planning for managers The planning horizon does not change and keeps management aware of the need for foresight and the ramifications of their activities

22 Budgetary slack results from an overestimation of expected

expenses or an underestimation of expected revenues so that the budget will be more easily achieved Because managerial performance is evaluated based on a comparison of actual and budgeted performance, the actual performance will appear to bemore favorable if sufficient slack is impounded in the budget

23 Employees are more likely to attempt to achieve objectives

that they had a part in setting than ones that were imposed onthem Participation also substantially increases the

acceptance of budget requirements, such as monetary or other resource constraints Empirical literature has shown that there is a high degree of correspondence between the

participatory budgeting process and job satisfaction Finally,helping in the budgeting process may result in a higher degree

of commitment to the organization (not just its goals)

24 Sections of budget manual Reasons for the section

a Statement of purposes and a To communicate as a first desired results step of cooperation

b Budgetary activities to b To designate who is

be performed responsible

c Calendar of budgetary c To indicate time table and activities provide coordination of

d Sample forms efforts

e Original, revised and d To provide for consistent approved budgets preparation

e To reflect revision of the

process and serve as a control document

25 The budget manual provides for standards of performance and

quality control in the budgeting process Having and using a budget manual communicates top management’s commitment to an effective budgeting process for lower-level managers

26 Students will have different answers No solution provided

28 Quarter Total 1st 2nd 3rd 4th

Sales 270,000 340,000 245,000 275,000 1,130,000End inv 102,000 73,500 82,500 90,000 90,000Total 372,000 413,500 327,500 365,000 1,220,000

Beg inv ( 81,000) (102,000) ( 73,500) ( 82,500) (81,000)Production 291,000 311,500 254,000 282,500 1,139,000

60,315 ft ÷ 3 ft per yard = 20,105 yds.

Yds needed for production 20,105

b Purchases budget - Material A Total

Units needed for production (42,500  2) + (25,500  1) 114,500Required ending inventory (annual units ÷ 12) 9,542Total requirements 124,042Less beginning inventory (4,000)

Pounds to be purchased 120,042

Purchases budget - Material B

Units needed for production (44,500  4) + (25,500  4) 280,000Required ending inventory (annual units ÷ 12) 23,333Total requirements 303,333Less beginning inventory (6,000)Pounds to be purchased 297,333

c Direct labor budget

32 a January February March

Feb sales (30% × $34,000) 10,200Mar sales (40% × $39,500 × 99%) 15,642 Total collections $35,532 $33,714 $34,692

b

Feb sales to be collected in April (30% × $34,000) $10,200Mar sales to be collected in April (30% × $39,500) 11,850Mar sales to be collected in May (30% × $39,500) 11,850

Total A/R balance at March 31 $33,900

33 a $606,900 Balance at Oct 1

(450,000) Remainder of Sept billings

$156,900 Remainder of Aug billings

c Oct collections of Aug

billings ($627,600 × 22%) $138,072Oct collections of Sept

billings ($562,500 × 55%) 309,375

Oct collections of Oct

billings ($800,000 × 20%) 160,000Total October collections $607,447

34 a $171,000 Balance at May 31

(135,000) Remainder of May sales

$ 36,000 Remainder of April sales

$36,000 = 0.15 April credit sales

$240,000 = April sales on credit = 0.75 of total sales

$320,000 = Total April sales

b $135,000 = 0.40 May sales

$337,500 = May sales on credit

c June collections of April sales $ 36,000

June collections of May sales

June cash sales ($650,000 × 25%) 162,500June collections of June credit sales

($650,000 × 75% × 60%) 292,500Total June collections $575,375

d Balance from May sales ($337,500 × 15%) $ 50,625

Balance from June sales ($487,500 × 40%) 195,000Total June 30 A/R balance $245,625

Accr income tax expense (no cash involved) 62,000

Increase in A/R (collected less than sold) (41,000)

Decrease in A/P (paid for more than purch.) (18,300)

Depreciation (no cash involved) 71,200

Estimated bad debts (no cash involved) 13,100

Projected increase in cash $367,000

Note: The declaration of a dividend does not affect cash, nor does it affect net income for the period

36 CGS [$2,000,000 × (1.00 - 0.40)=$2,000,000 × 0.6] $1,200,000

Less decr in inventory (sold more than bought) (33,750)Plus decr in A/P (paid for more than bought) 40,000Cash payments for inventory $1,206,250

Wages expense 512,500Other cash expenses 235,250 Total cash disbursements $1,954,000

37 July August September Total

Beginning cash balance $ 4,500 $ 2,900 $ 2,900 $ 4,500 Cash receipts 8,200 10,100 16,600 34,900Total cash available $12,700 $13,000 $19,500 $39,400Cash disbursements:

Payments on account $ 1,300 $ 3,900 $ 5,700 $10,900Wage expenses 5,000 6,100 6,100 17,200Overhead costs 4,000 4,600 4,400 13,000Total disbursements $10,300 $14,600 $16,200 $41,100Cash excess (inadequacy) $ 2,400 $(1,600) $ 3,300 (1,700) Minimum cash balance (2,500) (2,500) (2,500) (2,500)Cash available (needed) $ (100) $(4,100) $ 800 $(4,200)Financing:

Borrowings (repayments) $ 500 $ 4,500 $ (500) $ 4,500Acquire (sell) investments 0 0Receive (pay) interest (50) (50)Ending cash balance $ 2,900 $ 2,900 $ 2,750 $ 2,750

38 a Dinners Desserts Total Sales $800,000 $1,200,000 $2,000,000

Variable costs (560,000) (960,000) (1,520,000)Contribution margin $240,000 $ 240,000 $ 480,000Fixed costs (30,000)Net income $ 450,000

b CGS = $4,000,000 + (0.40 × $20,000,000) = $12,000,000

c CGS = [(1 - 0.25) × $800,000] $600,000

Increase in inventories 60,000Decrease in A/P 24,000 Total cash payment for inventories $684,000

d Sales (200,000 × 1.10) × ($20 × 1.15) = $5,060,000

Variable costs (200,000 × 1.10) × $6 = (1,320,000)Contribution margin $3,740,000Fixed costs ($600,000 + $200,000) (800,000)Net operating income $2,940,000

(CPA adapted)

39 Sales* $467,241

Cost of Goods Sold

Material (45,000 × $4.40) $198,000Labor (45,000 × $2.20) 99,000Overhead ($99,000 × 0.50) 49,500 346,500Gross profit $120,741Expenses

Selling** [$10,000 + ($0.08 × Sales)] $ 47,379Administrative 50,000 97,379Net income before taxes $ 23,362

b Cash collections, $440,000

c Credit sales, $600,000, and the provision for uncollectible accounts, $24,000

(CPA adapted)

41 Fredrik Novelty Wholesale Store

Pro Forma Income StatementFor the Month Ended May 31, 2003

42 a Original variable cost = $25 × 0.75 = $18.75;

variable cost after purchase of new machine: $18.75 × (1

120,000 × ($25 - $18.75) - $400,000 = 350,000

Profit improvement with new machine $437,200Assuming all costs related to the machine have been considered in the analysis, Joan should acquire the equipment

Problems

43 Production Budget - 2003

Jan.-June July-Dec Total

Sales budget 380,000 420,000 800,000Ending inventory 76,000 90,000 90,000Beginning inventory (30,000) (76,000) (30,000)Production 426,000 434,000 860,000

Material A Purchases Budget - 2003 Jan.-June July-Dec Total

Production budget 2,130,000 2,170,000 4,300,000Ending inventory 250,000 300,000 300,000 Beginning inventory (200,000) (250,000) (200,000)Purchases 2,180,000 2,220,000 4,400,000

Material B Purchases Budget - 2003 Jan.-June July-Dec Total

Production budget 1,278,000 1,302,000 2,580,000Ending inventory 160,000 200,000 200,000 Beginning inventory (140,000) (160,000) (140,000)Purchases 1,298,000 1,342,000 2,640,000

44 a Sales budget 300,000

Ending inventory (375,000 × 0.03) 11,250Beginning inventory (4,300)Production Budget 306,950 cans

b Tea Purchases Budget (pounds)

Production budget (306,950 × (14 ÷ 16)) 268,581.25Ending inventory (11,250 × (14 ÷ 16)) 9,843.75 Beginning inventory (2,750.00)

Purchases 275,675.00

c Sugar Purchases Budget (pounds)

Production budget (306,950 × (2 ÷ 16)) 38,368.75Ending inventory (11,250 × (2 ÷ 16)) 1,406.25Beginning inventory (600.00)Purchases 39,175.00

d ($4.50 × 275,675) + ($0.30 × 39,175) = $1,252,290

e ($1,252,290 × 0.30) × 0.98 = $368,173.26

45 a January February March Total

Sales 3,200 2,600 3,700 9,500Ending inventory 650 925 900 900Beginning inventory (800) (650) (925) (800)Production 3,050 2,875 3,675 9,600

b (Felt) January February March TotalProduction (yds.) 2,287.50 2,156.25 2,756.25 7,200.00End inv 431.25 551.25 540.00 540.00Beg inv (457.50) (431.25) (551.25) (457.50)Purchases 2,261.25 2,276.25 2,745.00 7,282.50Cost per yd × $7.00 × $7.00 × $7.00 × $7.00

$ of purchases $15,828.75 $15,933.75 $19,215.00 $50,977.50

(Ribbon) January February March TotalProduction (in.) 61,000.00 57,500.00 73,500.00 192,000.00End Inv 11,500.00 14,700.00 14,400.00 14,400.00Beg Inv (12,200.00) (11,500.00)(14,700.00) (12,200.00)Purchases 60,300.00 60,700.00 73,200.00 194,200.00Cost per yd × $0.05 × $0.05 × $0.05 × $0.05

$ of purchases $ 3,015.00 $ 3,035.00 $ 3,660.00 $ 9,710.00Total purchases $18,843.75 $18,968.75 $22,875.00 $60,687.50

c Month of Payment

January February March Total

Month of purchase:

December $ 3,800.00 $ 3,800.00 January 14,773.50 $ 3,768.75 18,542.25 February 14,871.50 $ 3,793.75 18,665.25 March 17,934.00 17,934.00 Totals $18,573.50 $18,640.25 $21,727.75 $58,941.50

d January February March TotalFactory overhead:

$5,200 + $2.25(prod.)$12,062.50 $11,668.75 $13,468.75 $37,200.00Non-factory overhead:

$2,800 + 10%(rev.) 8.560.00 7,480.00 9,460.00 25,500.00Totals $20,662.50 $19,148.75 $22,928.75 $62,700.00

e January February March TotalBeg Balance $18,760.00 $12,494.00 $13,000.00 $ 18,760.00Collections 58,080.00 48,960.00 62,640.00 169,680.00Cash available $76,840.00 $61,454.00 $75,640.00 $188,440.00Cash needed:

Purchases $18,573.50 $18,640.25 $21,727.75 $ 58,941.50 Overhead 20,622.50 19,148.75 22,928.75 62,700.00

DL ($3/hat) 9,150.00 8,625.00 11,025.00 28,800.00 Taxes 5,000.00 0.00 0.00 5,000.00 Bonuses 15,000.00 0.00 0.00 15,000.00 Total $68,346.00 $46,414.00 $55,681.50 $170,441.50Cash excess $ 8,494.00 $15,040.00 $19,958.50 $ 17,998.50Min Balance 12,000.00 12,000.00 12,000.00 12,000.00Cash (needed) avail $(3,506.00) $ 3,040.00 $ 7,958.50 $ 5,998.00Financing:

Borrow (repay) 4,000.00 (2,000.00) (2,000.00) 0.00 Receive (pay) interest 0.00 (40.00) (60.00) (100.00)Ending cash balance $12,494.00 $13,000.00 $17,898.50 $17,898.50

46 a (72,000* × 0.48) + ($120,000 × 0.50) = $94,560

*January sales: ($34,560 + $1,440) ÷ 0.50 = $72,000

b Beginning inventory $ 52,400

Purchases ($120,000 × 0.75 × 0.55) +($130,000 × 0.75 × 0.45) 93,375

Cost of Goods Sold ($120,000 × 0.75) (90,000)Ending inventory $ 55,775

c First, determine expected earnings for February: