Solution manual managerial accounting by cabrera 2010 chapter 15 answer

The portion of the plan which is to be executed in the next year is included in the budget for that year.. For example, a budget should not cover a period when purchasing activity is hig

CHAPTER 15

FUNCTIONAL AND ACTIVITY-BASED

BUDGETING

I Questions

1 No Planning and control are different, although related, concepts Planning involves developing objectives and formulating steps to achieve those objectives Control, by contrast, involves the means by which management ensures that the objectives set down at the planning stage are attained

2 Budgets have a dual purpose, for planning and for following up the implementation of the plan The great benefits from budgeting lie in the quick investigation of deviations and in the subsequent corrective action Budgets should not be prepared in the first place if they are ignored, buried in files, or improperly interpreted

3 Two major features of a budgetary program are (1) the accounting techniques which developed it and (2) the human factors which administer it The human factors are far more important The success

of a budgetary system depends upon its acceptance by the company members who are affected by the budget Without a thoroughly educated and cooperative management group at all levels of responsibility, budgets are a drain on the funds of the business and are a hindrance instead of help to efficient operations

4 Manufacturing overhead costs are budgeted at normal operating capacity, and the costs are applied to the products using a predetermined rate The predetermined rate is computed by dividing a factor that can be identified with both the products and the overhead into the overhead budgeted at the normal operating capacity Budgets may also be used in costing products in a standard cost accounting system

5 The production division operates to produce the products that are sold Production and sales must be coordinated Products must be manufactured so that they will be available to meet sales delivery dates Activity of the production division will depend upon the sales that can be made Also, the sales division is limited by the capabilities

of the production department in manufacturing products Successful operations depend upon a coordination of sales and production

6 Labor hour required for production can be translated into labor pesos

by multiplying the number of hours budgeted by the appropriate labor rates The rates to be used will depend upon the rates established for job classifications and the policy with respect to premium pay for overtime or shift differences

7 A long-range plan for the acquisition of plant assets is broken down and entered in the current budget as the plan unfolds The portion of the plan which is to be executed in the next year is included in the budget for that year

8 A budget period is not limited to any particular unit of time At a minimum, a budget should cover at least one operating cycle For example, a budget should not cover a period when purchasing activity

is high and omit the period when sales volume and cash collection are relatively high The budget period should encompass the entire cycle extending from the purchasing operation to the subsequent sale of the products and the realization of the sales in cash Ordinarily, a budget

of operations is prepared for a year which in turn is divided into quarters and months Long-term budgets, such as budgets for projects

or capital investments, may extend five to ten years or more into the future

9 A rolling budget or a progressive budget or sometimes called continuous budget, is a budget which is prepared throughout the year

As one month elapses, a budget is prepared for one more month in the future At any one time for example, the company will have a budget for one year into the future, when July of one year is over, a budget for the following July will be added at the other end of the budget This process of adding a new month as a month expires is continuous

10 Variances that are revealed by a comparison of actual results with a budget are investigated if it appears that an investigation is warranted The investigation may show that stricter control measures are needed

or that some weaknesses in the operation should be corrected It may also reveal that the budget plan should be revised The comparison is one step in the control and direction of business operations

11 A comparison of actual results with a budget can contribute information that can be applied in the preparation of better budgets in the future Subsequent investigation of variances provides management with a better knowledge of operations This knowledge can be applied in the preparation of more realistic budgets for subsequent fiscal periods

12 A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets, i.e., the budget is not imposed from above The major advantages are: (1) the views and judgments of persons from all levels of an organization are represented in the final budget document; (2) budget estimates generally are more accurate and reliable, since they are prepared by those who are closest to the problems; (3) managers generally are more motivated to meet budgets which they have participated in setting; (4) self-imposed budgets reduce the amount of upward “blaming” resulting from inability to meet budget goals One caution must be exercised in the use of self-imposed budgets The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack

13 No, although this is clearly one of the purposes of the cash budget The principal purpose is to provide information on probable cash needs

during the budget period, so that bank loans and other sources of

financing can be anticipated and arranged well in advance of the actual time of need

14 Zero-based budgeting requires that managers start at zero levels every year and justify all costs as if all programs were being proposed for the first time In traditional budgeting, by contrast, budget data are usually generated on an incremental basis, with last year’s budget being the starting point

II Matching Type

III Exercises

Exercises 1 (Schedule of Expected Cash Collections)

Requirement 1

July August September Total

May sales:

June sales:

P540,000 × 70%, 10%

July sales:

P600,000 × 20%,

August sales:

P900,000 × 20%, 70%

September sales:

P500,000 × 20% 100,000 100,000

Notice that even though sales peak in August, cash collections peak in September This occurs because the bulk of the company’s customers pay

in the month following sale The lag in collections that this creates is even more pronounced in some companies Indeed, it is not unusual for a company to have the least cash available in the months when sales are greatest

Requirement 2

Accounts receivable at September 30:

From August sales: P900,000 × 10% P 90,000 From September sales: P500,000 × (70% + 10%) 400,000 Total accounts receivable P490,000

Exercise 2 (Production Budget)

July August Septembe r Quarter

Add desired ending inventory* 4,500 6,000 5,000 5,000

Total needs 34,500 51,000 65,000 140,000

* 10% of the following month’s sales

Exercise 3 (Materials Purchase Budget)

Quarter – Year 2 Year 3 First Second Third Fourth First

Required production of calculators 60,000 90,000 150,000 100,000 80,000 Number of chips per calculator ×   3 ×   3 ×   3 ×   3 ×   3 Total production needs—chips 180,000 270,000 450,000 300,000 240,000

Year 2

Production needs—chips 180,000 270,000 450,000 300,000 1,200,000 Add desired ending inventory—

chips 54,000 90,000 60,000 48,000 48,000 Total needs—chips 234,000 360,000 510,000 348,000 1,248,000 Less beginning inventory—chips 36,000 54,000 90,000 60,000 36,000 Required purchases—chips 198,000 306,000 420,000 288,000 1,212,000 Cost of purchases at P2 per chip P396,000 P612,000 P840,000 P576,000 P2,424,000

Exercise 4 (Direct Labor Budget)

Requirement 1

Assuming that the direct labor workforce is adjusted each quarter, the direct labor budget would be:

1st Quarter Quarter 2nd Quarter 3rd Quarter 4th Year

Direct labor time per unit (hours)

× 0.40 × 0.40 × 0.40 × 0.40 × 0.40 Total direct labor hours needed

Direct labor cost per hour × P11.00 × P11.00 × P11.00 × P11.00 × P11.00

Requirement 2

Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages are paid, the direct labor budget would be:

Quarter Quarter Quarter Quarter

Units to be produced 5,000 4,400 4,500 4,900 18,800 Direct labor time per unit

(hours) × 0.40 × 0.40 × 0.40 × 0.40 × 0.40 Total direct labor hours needed

2,000 1,760 1,800 1,960 7,520 Regular hours paid 1,800 1,800 1,800 1,800 7,200 Overtime hours paid 200 - - 160 360 Wages for regular hours

(@ P11.00 per hour) P19,800 P19,800 P19,800 P19,800 P79,200 Overtime wages

(@ P11.00 per hour × 1.5) 3,300 - - 2,640 5,940 Total direct labor cost P23,100 P19,800 P19,800 P22,440 P85,140

Exercise 5 (Manufacturing Overhead Budget)

Requirement 1

Kiko Corporation Manufacturing Overhead Budget

1 st Quarter Quarter 2nd Quarter 3rd Quarter 4th Year

Budgeted direct labor-hours 5,000 4,800 5,200 5,400 20,400 Variable overhead rate x P1.75 x P1.75 x P1.75 x P1.75 x P1.75 Variable manufacturing overhead P 8,750 P 8,400 P 9,100 P 9,450 P 35,700 Fixed manufacturing overhead 35,000 35,000 35,000 35,000 140,000 Total manufacturing overhead 43,750 43,400 44,100 44,450 175,700 Less depreciation 15,000 15,000 15,000 15,000 60,000 Cash disbursements for

manufacturing overhead P28,750 P28,400 P29,100 P29,450 P115,700

Requirement 2

Total budgeted manufacturing overhead for the year (a) P175,700 Total budgeted direct labor-hours for the year (b) 20,400

Exercise 6 (Selling and Administrative Budget)

Helene Company Selling and Administrative Expense Budget

1st Quarter Quarter 2nd Quarter 3rd Quarter 4th Year

Budgeted unit sales 12,000 14,000 11,000 10,000 47,000 Variable selling and x P2.75 x P2.75 x P2.75 x P2.75 x P2.75

administrative expense per

unit

Variable expense P33,000 P 38,500 P 30,250 P 27,500 P129,250 Fixed selling and

administrative expenses:

Advertising 12,000 12,000 12,000 12,000 48,000 Executive salaries 40,000 40,000 40,000 40,000 160,000 Insurance 6,000 6,000 12,000 Property taxes 6,000 6,000 Depreciation 16,000 16,000 16,000 16,000 64,000 Total fixed selling and

administrative expenses 68,000 74,000 74,000 74,000 290,000 Total selling and administrative

expenses 101,000 112,500 104,250 101,500 419,250 Less depreciation 16,000 16,000 16,000 16,000 64,000 Cash disbursements for selling

and administrative expenses

P 85,000 P 96,500 P 88,250 P 85,500 P355,250

Exercise 7 (Cash Budget Analysis)

Quarter (000 omitted)

Add collections from customers

76 90 125 * 100 391 *

Less disbursements:

Dividends 2 * 2 * 2 * 2 * 8

Excess (deficiency) of cash

available over disbursements

(3)* (15) 30 * 13 10

Financing:

Repayments (including

interest) 0 0 (25) (7)* (32) Total financing 8 20 (25) (7) (4) Cash balance, ending P 5 P 5 P 5 P 6 P 6

*Given

IV Problems

Problem 1 (Schedule of Expected Cash Collections and Disbursements)

Requirement 1

September cash sales P 7,400 September collections on account:

July sales: P20,000 × 18% 3,600 August sales: P30,000 × 70% 21,000 September sales: P40,000 × 10% 4,000 Total cash collections P36,000

Requirement 2

Payments to suppliers:

August purchases (accounts payable) P16,000 September purchases: P25,000 × 20% 5,000 Total cash payments P21,000

Requirement 3

COOKIE PRODUCTS Cash Budget For the Month of September

Cash balance, September 1 P 9,000 Add cash receipts:

Collections from customers 36,000 Total cash available before current financing 45,000 Less disbursements:

Payments to suppliers for inventory P21,000 Selling and administrative expenses 9,000 * Equipment purchases 18,000 Dividends paid 3,000 Total disbursements 51,000 Excess (deficiency) of cash available over

disbursements (6,000) Financing:

Borrowings 11,000 Repayments 0 Interest 0 Total financing 11,000

Cash balance, September 30 P  5,000

  * P13,000 – P4,000 = P9,000

Problem 2 (Production and Purchases Budget)

Requirement 1

Production budget:

July August Septembe r October

Requirement 2

During July and August the company is building inventories in anticipation

of peak sales in September Therefore, production exceeds sales during these months In September and October inventories are being reduced in anticipation of a decrease in sales during the last months of the year Therefore, production is less than sales during these months to cut back on inventory levels

Requirement 3

Raw materials purchases budget:

July August Septembe r Quarter Third

Add desired ending inventory

Less beginning inventory (lbs.) 64,500 84,000 89,250 64,500

* 30,500 units (October production) × 3 lbs per unit= 91,500 lbs.; 91,500 lbs ×

0.5 = 45,750 lbs.

As shown in requirement (1), production is greatest in September However, as shown in the raw material purchases budget, the purchases of materials is greatest a month earlier because materials must be on hand to support the heavy production scheduled for September

Problem 3 (Cash Budget; Income Statement; Balance Sheet)

Requirement 1

Schedule of cash receipts:

Cash sales—June P 60,000 Collections on accounts receivable:

May 31 balance 72,000 June (50% × 190,000) 95,000 Total cash receipts P227,000 Schedule of cash payments for purchases:

May 31 accounts payable balance P 90,000 June purchases (40% × 200,000) 80,000 Total cash payments P170,000

PICTURE THIS, INC

Cash Budget For the Month of June Cash balance, beginning P 8,000 Add receipts from customers (above) 227,000 Total cash available 235,000 Less disbursements:

Purchase of inventory (above) 170,000 Operating expenses 51,000 Purchases of equipment 9,000 Total cash disbursements 230,000 Excess of receipts over disbursements 5,000 Financing:

Borrowings—note 18,000 Repayments—note (15,000) Interest (500)