# Ex 8-31 - McGraw-Hill

Document Sample

```					Exercise 8-31 What If Analysis

“What-if” Analysis    As the management accountant for the Tyson Company you have been asked to prepare a
financial planning model regarding collection of accounts receivable and then to perform a “what-if” analysis
regarding the assumption regarding estimated uncollectible accounts. You are provided with the following
information:

Collection Pattern for Credit Sales: 75% of the company’s credit sales are collected in the month of sale, 20%
in the month following month of sale, and 5% uncollectible.

Credit Sales: January 2007, \$100,000; February 2007, \$120,000; March 2007, \$110,000.

Required

1. What is meant by the term “what-if” analysis?

2. Generate a spreadsheet model regarding estimated bad-debts expense under the following three conditions:
1%, 3%, 5% (base case), and 8%. Prepare an estimate of bad debts expense for each of three months, January
through March, and for the quarter as a whole.

3. What is the value to Tyson Company of creating a model and then performing the “what-if” analysis
described above?

Input Data
January          February           March
Estimated credit sales:                  \$100,000          \$120,000         \$110,000

Month of Sale 1st Month After      Bad Debts
Collection pattern                             75%            20%                5%

Alternative estimates of bad-debts:             1%                3%               5%              8%

Solution
Exercise 8-32 Purchase Budget and Payment
Janet DeVolris, purchasing manager of Corkin Manufacturing, a small Midwest manufacturer of
specialty tools, was frustrated because her efforts to reduce the use of expensive overnight shipping
appeared to be futile. Rush orders, last-minute changes, and other operating emergencies seemed
to be the firm’s way of life. Although she vowed to keep last minute actions to a minimum, overnight
shipping shows no sign of abatement after six months.

At a recent convention, several suppliers mentioned that Corkin Manufacturing rarely takes
advantage of the discount terms she worked so hard for them to grant. She was very surprised
because sales terms of 2/10, n/30 or better yielded an annual return of at least 36 percent.

Tony Blair, the firm’s CEO, recently praised Janet lavishly for her performance for the last six
months and gave her a generous raise. Still, she feels frustrated and unfulfilled.

Required What could Janet do to overcome her frustration?

Solution
Exercise 8-33 Budgetary Slack and Zero-Base Budgeting
Bob Bingham is the controller of Atlantis Laboratories, a manufacturer and distributor of generic prescription
pharmaceuticals. He is currently preparing the annual budget and reviewing the current business plan. The
firm’s business unit managers prepare and assemble the detailed operating budgets with technical assistance
from the corporate accounting staff. The business unit managers then present the final budgets to the corporate
executive committee for approval. The corporate accounting staff reviews the budgets for adherence to
corporate accounting policies but not for reasonableness of the line items within the budgets.

Bob is aware that the upcoming year for Atlantis could be a difficult one because of a major patent expiration
and the loss of a licensing agreement for another product line. He also knows that during the budgeting
process, “slack” is created in varying degrees throughout the organization. Bob believes that this slack has a
negative effect on the firm’s overall business objectives and should be eliminated where possible.

Required

1. Define the term budgetary slack.
2. Explain the advantages and disadvantages of budgetary slack from the point of view of (a) the
business unit manager who must achieve the budget, and (b) corporate management.
3. Bob Bingham is considering implementing zero-base budgeting in Atlantis Laboratories.
a. Define zero-base budgeting.
b. Describe how zero-base budgeting could be advantageous to Atlantis Laboratories in
controlling budgetary slack.
c. Discuss the disadvantages Atlantis Laboratories might encounter in using zero-base budgeting.

Solution
Exercise 8-34 Cash Disbursements Budget
Background
The Ajax Company budgets the following purchases of Direct Materials for the first quarter of the
year:
January    February     March
Budgeted Purchases   \$100,000 \$120,000 \$110,000

All purchases of direct materials are made on credit. On average, the company pays 75% of its
purchases in the month of sales, and the remainder in the following month.
Problem Information

January           February           March
Budget Purchases                                    \$100,000           \$120,000          \$110,000

Percentage paid during month of sale                                     75%
Percentage discount for early payment                                     2%
Extra days allowed if discount is not taken (i.e., under 2/10, n/30)      20

8-34 Requirements

1. For the months of February and March, what are the estimated cash payments for purchases of
direct materials under the assumption that there is no (cash) discount for early payment?
2. For the months of February and March, what are the estimated cash payments for purchases of
direct material under the assumption that the purchase terms are 2/10, net 30. The company’s policy
is to take advantage of all cash discounts for early payment.
3. Provide an economic argument as to why it is good (economic) policy to take advantage of early
payment discounts, as in (2) above.

Solution
Exercise 8-35 Budgeted Cash Receipts and Cash Payments
Background

The Dyson Company, a retailer, makes both cash and credit sales (i.e., sales on open account). Information regarding
budgeted sales for the last quarter of the year is as follows:

October November        December
Cash Sales                              \$100,000 \$120,000         \$80,000
Credit Sales                            \$100,000 \$150,000         \$90,000
Total                                 \$200,000  \$270,000          \$170,000

Past experience shows that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 65% are
collected in the month of sale; the remaining 35% are collected in the month following the month of sale.
Customers are granted a 2% discount for payment within ten days of billing. Approximately 80% of collectible
credit sales take advantage of the cash discount.

Inventory purchases each month are 100% of the cost of the following month’s projected sales. (The gross profit
rate for Dyson is approximately 25%.) All merchandise purchases are made on credit, with 25% paid in the month
of purchase and the remainder paid in the following month. No cash discounts for early payment are in effect

Credit Sales Uncollectible                   5%
Credit Sales Collection
Collected month of Sale                  65%
Collected following month                35%
Discount for early payment                2%
%age of sales collected early            80%
Inventory purchases as a %age of cost      100%
Gross profit                                25%
Inventory paid in purchase month            25%
Remainder paid following month              75%

8-35 Requirements

1. Calculate the budgeted total cash receipts/collections for November and December.

2. Calculate budgeted cash payments for November and December.
Budgeted sales for January of the coming year =     \$200,000

Solution
Exercise 8-36 Production and Materials Purchases Budgets
Background

DeVaris Corporation's budget calls for the following sales for next year:

Quarter 1           45,000 units           Quarter 3    34,000 units
Quarter 2           38,000 units           Quarter 4    48,000 units

Each unit of the product requires 3 pounds of direct material. The company's policy is to b
quarter with an inventory of the product equal to 10% of that quarter's sales requirements
of direct materials equal to 20% of that quarter's direct materials requirements for producti

Direct Materials                                                3
Inventory requirement as a percentage of product              10%
Direct Materials inventory as a percentage need for production20%

8-36 Requirements

Required Determine the production and materials purchases budgets for the second qu

Solution
for next year:

mpany's policy is to begin each
s sales requirements and an inventory
uirements for production.

pounds

udgets for the second quarter.
Exercise 8-37 Purchase Discounts
It is typically beneficial for companies to take advantage of early- payment discounts allowe
made on credit. To see why this is the case, determine the effective rate of interest associated
advantage of the early-payment discount for each of the following situations. Assume in eac
payment is made on the 30th day of the billing cycle.

Required
1. What is the opportunity cost of not taking advantage of the discount associated with
under the following terms: 2/10, n/30?
2. What is the opportunity cost of not taking advantage of the discount associated with
under the following terms: 1/10, n/30?
3. What is the appropriate accounting treatment for purchase discounts?

Input Data

Discount % for early payment:               1%       2%

Discount period (no. of days)        10
Days in month beyond discount period                  20

Solution
ment discounts allowed on purchases
of interest associated with not taking
tions. Assume in each case that

ounts?
Exercise 8-38 Production and Materials Budgets-Process Costing
Background

Uecker Company budgets on an annual basis. The planned beginning and ending inve
year of July 1, 2007 through June 30, 2008, for one of its products, XPL30, are as follo

July 1, 2007          June 30, 2008
Raw materials              40,000                50,000
Work in process            10,000                20,000
Finished goods             80,000                50,000

Two units of raw materials are needed to complete one unit of finished product. All mat
production. The company completes are WIP before starting a new batch and plans to
2007-2008 fiscal year.

Number of units of raw materials per one unit of finished product
Planned production

8-38 Requirements

1. How many units of XPL30 must Uecker Company complete?
2. How many units of XPL30 must Uecker Company start into production during the 2007–2
year?
3. How many units of raw materials must Uecker Company purchase during the 2007–2008
before completion of the manufacturing process for XPL30?

Solution
ting

ng and ending inventory levels (in units) for the fiscal
XPL30, are as follows:

hed product. All materials are added at the beginning of
batch and plans to sell 480,000 units during the

2
480,000

on during the 2007–2008 fiscal

uring the 2007–2008 fiscal year?
quired materials immediately
Exercise 8-39 Purchase Budget and Payment
You are a relatively recent hire to the Hartz & Co., a local manufacturer of plumbing suppl
have been asked to prepare for a presentation to the company’s management a condensed cash
for the months of November and December, 2007.

The cash balance at November 1st was \$75,000. It is the company’s policy to maintain a
balance of \$50,000 at the end of each month. Cash receipts (from cash sales and collect
receivable) are projected to be \$525,000 for November and \$450,000 for December. Cash
(sales commissions, advertising, delivery expense, wages, utilities, etc.), prior to financi
scheduled to be \$450,500 in November and \$550,000 in December.

Short-term borrowing is available, in increments of \$1,000, at the beginning of each month.
on any such loans is estimated to be 12%. Interest and any repayments of principal (if any)
occur at the end of each month. As of November 1 st, the company has a \$50,000 short-ter
from the local bank.

Required     Use the preceding information to prepare the cash budget for November and D
The December 31st cash balance should be \$49,490.)

Data Input

Cash balance, November 1st                             \$75,000
Minimum eom cash balance                               \$50,000
Budgeted cash receipts:
November                                         \$525,000
December                                         \$450,000
Budgeted cash disbursements:
November                                         \$450,500
December                                         \$550,000
Interest rate on borrowings                            12.00%
Short-term loan payable, November 1st                 \$50,000
Borrowings in increments of                            \$1,000

Solution
facturer of plumbing supply products. You
nagement a condensed cash-flow statement

any’s policy to maintain a minimum cash
rom cash sales and collection of accounts
50,000 for December. Cash disbursements
ties, etc.), prior to financing activity, are
r.

beginning of each month. The interest rate
yments of principal (if any) are assumed to
any has a \$50,000 short-term loan payable

udget for November and December. (Hint:

per year
Exercise 8-40 Cash Budget
Background

Carla Inc. Budget Data
Cash balance, beginning                   \$10,000
Collections from customers               \$150,000
Expenses:
Direct materials purchases                \$25,000
Operating expenses                        \$50,000
Payroll                                   \$75,000
Income taxes                               \$6,000
Machinery purchases                       \$30,000

NOTE:       Operating expenses include depreciation =\$20,000
Minimum cash balance =                   \$20,000

8-40 Requirements

Compute the amount the firm needs to finance or excess cash available for Ca

Solution
ss cash available for Carla to invest.
Exercise 8-41 Cash Budget

Bill Joyce, CEO of Joyce and Associates, expects the firm to have \$6,000 cash on hand
estimates the total revenues in 2007 to be \$250,000, of which \$175,000 will be collected
and fringe benefits constitute the bulk of the firm’s expenditures and will amount to \$
operating expenses, including \$5,000 for depreciation and \$3,000 for property taxes, are \$1
expense is an increase of \$500 from the current year. In addition, Bill Joyce plans to upd
for \$24,000 in 2007. He expects the payment in 2007 for the office equipment will be \$6,0
the firm is located requires payment of at least one-half of property taxes before the
remainder before June 30 of the following year.

Required Can Bill meet the minimum cash balance? Show Calculations

Input Data

Expected opening cash balance, 2007
Estimated revenues, 2007
Collections of revenues, 2007
Payroll & Fringe Benefits, 2007
Other operating expenses, 2007:
Depreciation expense
Property taxes
Other (misc.)
Projected 2007 increase in property taxes
Purchase of office equipment (fixed assets)
Payment in 2007 for office equipment puchase
Property tax payment %, prior to end of year
Minimum cash balance required

Solution
to have \$6,000 cash on hand at the end of 2006. He
ch \$175,000 will be collected during the year. Payroll
ditures and will amount to \$160,000 in 2007. Other
,000 for property taxes, are \$18,000. The property-tax
ition, Bill Joyce plans to update the office equipment
office equipment will be \$6,000. The county in which
f property taxes before the end of the year and the

Calculations

\$6,000
\$250,000
\$175,000
\$160,000

\$5,000
\$3,000
\$10,000
\$500
\$24,000
\$6,000
50%
\$6,000
Exercise 8-42 Cash Budgeting: Not-for-Profit Context

Tri-county Social Service Agency is a not-for-profit organization in the Midwest. Use the following
information to complete the cash budget for the year ending December 31, 2007.

 The Board of Trustees requires that Tri-county maintain a minimum cash balance of \$8,000.
 If cash is short, the agency may borrow from an endowment fund enough to maintain the \$8,000
minimum. Repayment must be made as soon as possible. No interest is charged.
 It is anticipated that the year 2007 will begin with an \$11,000 cash balance.
 Contract revenue is received evenly during the year.
 Mental health income is expected to grow by \$5,000 in the second and third quarters but not change
in the fourth quarter.
8-42 Requirements

Answer the following questions and complete the cash budget statements in the form below.

Solution
Exercise 8-43 Accounts Receivable Collections
Background

Esplanade Company's credit sales have the following historical pattern:

70%   Collected in the month of sale
15%   Collected in the first month after sale
10%   Collected in the second month after sale
4%   Collected in the third month after sale
1%   Uncollectible

These sales on open account (credit sales) have been budgeted for the last s

July         \$60,000                       October     \$90,000
August       \$70,000                       November   \$100,000
September    \$80,000                       December    \$85,000

8-43 Requirements

1) Determine the estimated total cash collections from accounts receivable durin
2) Compute the estimated total cash collections during the fourth quarter from cr

Solution

1) Determine the estimated total cash collections from accounts receivable durin

2) Compute the estimated total cash collections during the fourth quarter from cr
historical pattern:

budgeted for the last six months in 2007:

counts receivable during October 2007.
e fourth quarter from credit sales of the fourth quarter

counts receivable during October 2007.

e fourth quarter from credit sales of the fourth quarter
Exercise 8-44 Accounts Receivable Collections and Sensitivity Analysis
Background

Doreen Company is preparing its cash budget for the month of May. The following information is available
concerning its accounts receivable:

Actual credit sales for March                                   \$120,000
Actual credit sales for April                                   \$150,000
Estimated credit sales for May                                  \$200,000
Estimated collections in month of sale                               25%
Estimated collections in first month following month of sale         60%
Estimated collections in the second month after month of sale        10%
Estimated provision for bad debts in month of sale                    5%

8-44 Requirements

Determine for Doreen Company for the month of May:
1. Estimated cash receipts from accounts receivable collections.
2. The gross amount of accounts receivable at the end of the month.
3. The net amount of accounts receivable at the end of the month.
4. Recalculate requirements (1) and (2) under the assumption that estimated collections in month of sale = 60% and
in first month following month of sale = 25%.
5. What are the benefits and likely costs of moving to the situation described about in (4)?

Solution
Exercise 8-45 Budgeting: Not-for Profit Context
Catholic Charities Regional Agency serves several contiguous counties in Ohio. The f
Board of Directors monitors financial activity for the agency. This oversight includes
investment of excess funds and the management of endowment funds. These decisi
annual budget preparation since the investment accounts serve as a source of needed
excess funds.

As a Catholic Charities agency, the regional organization must adhere to guidelines
Council of Catholic Bishops. Visit the council’s web site at http://www.usccb.org/fina
its Socially Responsible Investment Guidelines, which discuss basic principles for inve
Investment Policy of the organization.

Required:

1. What is the meaning of the word “stewardship”? Should the religious or philos
organization affect decisions that are made as part of the budgeting process?

2. How should a board of directors for this organization apply these principles in maki
tied to the annual budget?

3. Would you, as a board member, ignore such principles to increase investment gains? W

4. If the agency’s monies are managed by an investment firm, should the board reques
stocks included in individual investment funds to verify compliance with the stated in
organization?
Solution
ounties in Ohio. The finance committee of its
his oversight includes decisions regarding the
nt funds. These decisions are relevant to the
as a source of needed funds and/or a use of

://www.usccb.org/finance/srig.htm and review
asic principles for investments, and the stated

he religious or philosophical position of an
g process?

ese principles in making investment decisions

se investment gains? Why or why not?

hould the board request information about the
ance with the stated investment policy of the
Exercise 8-46 Budgeting Cash Receipts: Cash Discounts Allowed on Receivables
Background
Yeopay Plumbing Supply accepts bank charge cards and offers established plumbers charge
accounts with terms of 1/eom, n/45. Yeopay’s experience is that 25 percent of its sales are for cash
and bank credit cards. The remaining 75 percent are on credit. Of the cash sales, 40 percent pay
cash and the remaining 60 percent pay with bank credit cards. Yeopay receives payments from the
bank on credit card sales at the end of the day. However, Yeopay has to pay 3 percent for these
services. An aging schedule for accounts receivable shows the following pattern on credit sales:

All accounts not paid by the end of the second month following the sale are considered overdue and
are subject to 2 percent monthly late charge. Yeopay has prepared the following sales forecasts:

Sales Data                     Amount         Breakdown of Cash/Bank Credit-Card Sales
June                            \$60,000     Cash sales                                            40%
July                            \$80,000     Bank credit-card sales                                60%
August                          \$90,000      Bank processing fee                                   3%
September                       \$96,000     Collection of Credit Sales:
October                         \$88,000      Current month                                        20%
Sales Terms                                    1st month                                            50%
Cash and bank credit-card sales     25%      2nd month                                            15%
Credit sales                        75%      3rd month                                            12%
Discount term                        1%      Late charge/mo.                                       2%

8-46 & 8-47 Requirements

1) Prepare a schedule of cash receipts for September and October.

2) What is the approprirate accounting treatments for the bank service fees and the cash discounts allowed on collection
of receivables?

Solution
Exercise 8-48 Activity-Based Budgeting (ABB)
Background

OFC Company of Kansas City prints buisness forms and other specialty products, such as writing paper,
envelopes, note cards, and greeting cards. Its Business Services division offers inventory management services
and desktop delivery on request. The division uses an activity-based costing (ABC) system. The budgeted usage
of each activity cost driver and cost-driver rates for January 2007 for the Business Services division are:

Activity                  Cost Driver      Budgeted Activity              Cost Driver Rate
Storage                   Cartons in inventory 400,000              \$0.4925 carton/month
Requistition handling     Requisitions          30,000               \$12.50
Pick packing              Lines                800,000                \$1.50
Data entry                Lines                800,000                \$0.80
Requisitions          30,000                \$1.20
Desktop delivery          Per delivery          12,000               \$30.00

The division made 11,700 deliveries to deliver 1,170,000 cartons to customers. The division expects the average delivery
size in January 2007 to remain unchanged.

deliveries           11,700
cartons delivered 1,170,000

8-48 Requirements

1. What is the total budgeted cost for each activity and for the Business Services Division in January 2007?

2. What is the budgeted cost per delivered carton and the total budgeted cost for the Business Services Division if the firm uses
a single cost rate (based on the number of cartons delivered) to estimate cost?

3. Dories Supply Chain Management Company offers to install an electronic order-processing system that transmits customer
requisitions via the Internet to the Business Services Division for immediate pick, packing, and delivery. No requisition handling
and data entry will be needed once the system is fully functional. How much savings can the Business Services Division expect
from switching to the new system before considering the payment to Dories? Can you estimate the amount if the firm uses a
single cost rate based on the number of cartons delivered to determine the budgeted cost for the division?

Solution
Exercise 8-49 Activity-Based Budgeting with Continuous Improvements
OFC Company (Exercise 8–48) has decided to implement a continuous improvements
operational efficiency. After a careful study, management and employees agree that the
reduce cost rates for batch-level activities by 2 percent and unit-level activities by 1 percent
first year of the program starting February 2006. The firm has decided to delay the im
program for customer-sustaining and facility-level activities until 2007. The firm expects
driver usage in each of the next two months to be the same as those in January. (Use 4 deci
rates.)
Required
1.   Identify unit-level and batch-level activities.
2.   What are the total budgeted costs for each activity and for the division as a whole in F
3.   Identify three factors that are likely to be critical for a successful kaizen program.
4.   What are primary criticisms regarding Kaizen Budgeting?

Input Data

Cost-reduction rate, batch-level activities =                               2%
Cost-reduction rate, unit-level activities =                                1%

Monthly
Activity Rates         Activity
Activity                  January              Volume
Requisition handling                  \$12.50             30,000
Pick packing                            \$1.50           800,000
Data entry--lines                       \$0.80           800,000
Data entry--requisitions                \$1.20            30,000
Desktop deliveries                    \$30.00             12,000

Solution
Improvements
continuous improvements program to improve
employees agree that the firm will be able to
evel activities by 1 percent per month during the
as decided to delay the implementation of the
til 2007. The firm expects the amount of cost-
ose in January. (Use 4 decimal points for all cost

the division as a whole in February and March?
essful kaizen program.

per month
per month
Exercise 8-50 Cash Budgets
Background

Information pertaining to Noskey Corporation's sales revenus includes this:

November                  December                      January
2006 (Actual)            2006 (Budgeted)              2007 (Budgeted)

Cash Sales                \$80,000                  \$100,000                        \$60,000
Credit Sales             \$240,000                  \$360,000                       \$180,000
TOTAL Sales              \$320,000                  \$460,000                       \$240,000

Management estimates 5% of credit sales to be uncollectible. Of collectible credit sales, 60% is collected in the
month of sale and the remainder in the month following month of sale. Purchases of inventory each month include 70%
of the next month's projected total sales. Additional units are purchased in the month of sales to meet sales needs. All
inventory purchases are on account; 25% are paid in the month of purchase, and the remainder is paid in the month
following purchase. Purchase costs are approximately 60% of the selling price.

Estimated collections in month of sale                                   60%
Estimated collections in first month following month of sale             40%
Estimated provision for bad debts in month of sale                        5%
Inventory purchases as a percent of next month's projected sales         70%
Inventory purchases paid in the month of purchase                        25%
Inventory purchases paid in the month after purchase                     75%
Purchase costs as a percent of selling price                             60%

8-50 Requirements

1) Budgeted cash collections in December 2006 from November 2006 credit sales
2) Budgeted total cash receipts in January 2007
3) Budgeted total cash payments in December 2006 for inventory purchases

Solution
Exercise 8-51 Service Firm Budget
Background

Refer to AccuTax, Inc. in the chapter. One of the partners is planning to retire at the end of the year. May Higgins, the sole
remaining partner, plans to add a manager at an annual salary of \$90,000. She expects the manager to work, on average,
45 hours per week for 45 weeks per year. She plans to change the required staff time for each hour spent to complete a tax

Complex Individual     Simple Individual

Partner                                                         0.30 hr                     0.05   hr
Manager                                                         0.20 hr                     0.15   hr
Senior Consultant                                               0.50 hr                     0.40   hr         0.20 hr
Consultant                                                                                  0.40   hr         0.80 hr

The manager is salaried and earns no overtime pay. Senior consultants are salaried but receive time and a half for any
overtime worked. The firm plans to keep all the senior consultants and adjust the number of consultants as needed, including
employing part-time consultants, who are also paid on an hourly basis. The partner has also decided to have five supporting
staff at \$40,000 each. All other operating data remain unchanged. The manager will share 10 percent of any excess profit
over \$500,000 before bonus.
Hourly
Business return revenue (given)            \$1,000,000       \$250
Complex individual return                  \$1,200,000       \$100
Simple individual return                   \$1,640,000         \$50

Hours per person per week:
Partner                                                         50
Manager                                                         45
Senior Consultant                                               40
Consultant                                                      40
Annual Salaries:
Per partner =                      \$250,000
Per manager =                      \$90,000
Per senior consultant =            \$90,000
Per support staff =                \$40,000
Consultant's pay:
Earnings per year =                 \$60,000
Number of support staff                                          5

8-51 Requirements

1) What is the budgeted total cost for overtime hours worked by senior consultants?
2) How many full-time consultants should be budgeted?
3) Determine the manager's total compensation and total pre-tax operating income for the firm assuming that the
revenues from preparing tax returns remain unchanged.

Solution
Exercise 8-52 Budgetary Pressure and Ethics

Midwest Industries produces and distributes industrial chemicals in its Belco Division, which is located in
Michigan’s upper-peninsula. Belco’s earnings increased sharply in 2007, and bonuses were paid to the
management staff for the first time in three years. Bonuses are based in part on the amount by which reported
income exceeds budgeted income.
Maria Gonzales, vice-president of finance, was pleased with reported earnings for 2007 and therefore thought
that pressure to “show” financial results would subside. However, Tom Lin, Belco’s division manager, told
Gonzales that he “saw no reason why bonuses for 2008 should not be double those of 2007.” As a result, Gonzales
felt pressure to increase reported income to exceed budgeted income by an even greater amount, a situation that
would ensure increased bonuses.
Gonzales met with Bill Wilson of P&R, Inc., a primary vendor of Belco’s manufacturing supplies and
equipment. Gonzales and Wilson have been close business contacts for many years. Gonzales asked Wilson to
identify all of Belco’s purchases of perishable supplies as “equipment” on sales invoices issued by P&R. The
reason Gonzales gave for her request was that Belco’s division manager had imposed stringent budget constraints
on operating expenses, but not on capital expenditures. Gonzales planned to capitalize (rather than expense) the
cost of perishable supplies and then include them with the “Equipment” account on the balance sheet. In this way,
Gonzales could defer the recognition of expenses to a later year. This procedure would increase reported earnings,
which in turn would lead to higher bonuses (in the short run). Wilson agreed to do as Gonzales had asked.
While analyzing the second quarter financial statements, Gary Wood, Belco’s director of cost accounting,
noticed a large decrease in supplies expense from a year ago. Wood reviewed the “Supplies Expense” account and
noticed that only equipment buy no supplies had been purchased from P&R, a major source for such supplies.
Wood, who reports to Gonzales, immediate brought this to the attention of Gonzales.
Gonzales told Wood of Lin’s high expectations and of the arrangement made with Wilson (from P&R). Wood
told Gonzales that her action was an improper accounting treatment for the supplies purchased from P&R. Wood
requested that he be allowed to correct the accounts and urged that the arrangement with P&R be discontinued.
Gonzales refused the request and told Wood not to become involved in the arrangement with P&R.
After clarifying the situation in a confidential discussion with an objective and qualified peer within Belco,
Wood arranged to meet with Lin, Belco’s division manager. At that meeting, Wood disclosed the arrangement

Required
1. Explain why the use of alternative accounting methods to manipulate reported earnings is unethical, if not
illegal.
2. Is Gary Wood, Belco’s director of cost accounting, correct in saying that the supplies purchased from P&R, Inc.
were accounted for improperly? Explain.
3. Assuming that the agreement of Gonzales with P&R was in violation of the IMA’s Statement of Ethical
Professional Practice (www.imanet.org), discuss whether Wood’s actions were appropriate or inappropriate.

Solution

Small businesses usually are the first to feel the effects of a recessionary economy and gen
recover. Two major reasons for these difficulties are managerial inexperience and inadequa
financial management.
Small business managers frequently have problems in planning and controlling profits, i
generation and cost-reduction activities. These important financial methods are especially
recessionary period. The financial problems of small businesses are further compounded if
accounting records and is inexperienced in the management of money.
Required

1. Profit planning is critical to the success of a small business. Identify key features that
when developing a profit plan for a small business.
2. The management accountant can help ensure that good accounting records exist in an
the key features that form the basis for a good accounting system that will support manag
3. Explain how the management accountant can assist an organization in adopting measu
appropriate money management.

Solution
ionary economy and generally are the last to

and controlling profits, including revenue
methods are especially critical during a
re further compounded if the firm keeps poor
ney.

dentify key features that should be considered

nting records exist in an organization. Discuss
m that will support management decisions.
zation in adopting measures to ensure
Problem 8-54 Ethics in Budgeting/ Budgetary Slack
Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages
for 2007. Scott Ford recently joined Norton’s accounting staff and is interested in learning
company’s budgeting process. During a recent lunch with Marge Atkins, sales manager,
manager, Scott initiated the following conversation:

Scott: Since I’m new around here and am going to be involved with the preparation of th
interested to learn how the two of you estimate sales and production numbers.
Marge: We start out very methodically by looking at recent history, discussing what we k
potential customers, and the general state of consumer spending. Then, we add that usu
with the best forecast we can.
Pete: I usually take the sales projections as the basis for my projections. Of course, we h
what this year’s closing inventories will be, and that sometimes is difficult.
Scott: Why does that present a problem? There must have been an estimate of closing i
current year.
Pete: Those numbers aren’t always reliable since Marge makes some adjustments to the
passing them on to me.
Marge: Well, we don’t want to fall short of the sales projections so we generally give ours
lowering the initial sales projection anywhere from 5 to 10 percent.
Pete: So you can see why this year’s budget is not a very reliable starting point. We alwa
production rates as the year progresses and, of course, this changes the ending inventor
make similar adjustments to expenses by adding at least 10 percent to the estimates; I th
the same thing.
Required
1. Marge Atkins and Pete Granger have described the use of budgetary slack.
a. Explain why Marge and Pete might behave in this manner, and describe the benefi
the use of budgetary slack.
b. Explain how the use of budgetary slack can adversely affect Marge and Pete.
2. As a management accountant, Scott Ford believes that the behavior described by Mar
and that he may have an obligation not to support this behavior. By citing the specific
of Ethical Professional Practice” (www.imanet.org), explain why the use of budgetary
personally, and the organization as a whole.

Solution
in the initial stages of preparing the annual budget
nterested in learning as much as possible about the
ns, sales manager, and Pete Granger, production

he preparation of the annual budget, I’d be
numbers.
scussing what we know about current accounts,
en, we add that usual dose of intuition to come up

ons. Of course, we have to make an estimate of
icult.
estimate of closing inventories in the budget for the

e adjustments to the sales numbers before

e generally give ourselves a little breathing room by

arting point. We always have to adjust the projected
the ending inventory estimates. By the way, we
to the estimates; I think everyone around here does

ary slack.
describe the benefits they expect to realize from

arge and Pete.
or described by Marge and Pete may be unethical
y citing the specific standards the IMA’s “Statement
e use of budgetary slack may be unethical
Problem 8-55 Master Budgeting

SecCo manufactures and sells security systems. The company started by installing photoe
systems in existing offices and has since expanded into the private home market. SecCo h
basic security system into three standard products, each of which can be upgraded to mee
of customers. SecCo’s manufacturing operation is moderate in size; it outsources the bulk
manufacturing to independent contractors. The security systems are approximately 85 per
SecCo receives them from contractors and require only final assembly in its own plant. E
through at least one of three assembly operations.
SecCo operates in a community that is flourishing. Evidence indicates that a great deal
construction will take place in the near future, and SecCo’s management has decided to p
market. To be competitive, SecCo must expand its operations.
In view of the expected increase in business, Sandra Becker, SecCo’s controller, believ
should implement a master budgeting system. She has decided to make a formal presenta
president explaining the benefits of a master budgeting system and outlining the budget s
that would be required.
Required
1. Explain what benefits can be derived from implementing a master budgeting system.
2. If Sandra Becker is going to develop a master budgeting system for SecCo,
a. Identify, in order, the schedules and/or statements that must be prepared.
b. Identify the subsequent schedules and/or statements to be derived from the schedules
identified in requirement 2a.

Solution
ed by installing photoelectric security
home market. SecCo has developed its
an be upgraded to meet the specific needs
it outsources the bulk of component
approximately 85 percent complete when
bly in its own plant. Each product passes

cates that a great deal of new commercial
ment has decided to pursue this new

Co’s controller, believes that the company
ake a formal presentation to SecCo’s
outlining the budget schedules and reports

dgeting system.
ecCo,
repared.
d from the schedules and statements
Problem 8-56 Comprehensize Profit Plan
Background
Spring Manufacturing Company makes two components identified as C12 and D57. Selec
follow:

Requirements for each finished component:
RM1
RM2
RM3
Direct labor
Product information:
Sales price
Sales units
Estimated beginning inventory (units)
Desired ending inventory (units)

Cost per pound
Estimated beginning inventory in pounds
Desired ending inventory in pounds

The firm expects the average wage rate to be \$25 per hour in 2007. Spring Manufacturing
year the firm determines the overhead application rate for the year based on the budgeted
maintains negligible WIP inventory and expects the cost per unit for both beginning and en
be identical.

Indirect materials-variable
Miscellaneous supplies and tools-variable
Indirect labor-variable
Supervision-fixed
Payroll taxes and fringe benefits-variable
Maintenance costs-fixed
Maintenance costs-variable
Depreciation-fixed
Heat, light, and power-fixed
Heat, light, and power-variable
Total

Sales salaries
Travel and entertainment
Depreciation-warehouse
Office salaries
Executive salaries
Supplies
Depreciation-office
Total

Income Tax Rate                                 40%

8-56 Requirements

Prepare the following schedules or statements for 2007:
1. Sales budget
2. Production budget
3. Direct materials purchases budget (units and dollars)
4. Direct labor budget
6. Cost of goods sold and ending inventory budgets
7. Selling and administrative expense budget
8. Budgeted Income Statement

Solution
s C12 and D57. Selected budgetary data for 2007

Finished Components
C12                             D57

10 pounds                      8   pounds
0                             4   pounds
2 pounds                      1   pound
2 hours                       3   hours

\$150                         \$220
12,000                        9,000
400                          150
300                          200

Direct Materials Information
RM1                RM2      RM3
\$2.00              \$2.50    \$0.50
3,000              1,500    1,000
4,000              1,000    1,500

Spring Manufacturing uses DLHs to apply overhead. Each
ased on the budgeted ouput for the year. The company
both beginning and ending finished products inventories to

\$10,000
\$5,000
\$40,000
\$120,000
\$250,000
\$20,000
\$10,080
\$71,330
\$43,420
\$11,000
\$580,830

Information

\$60,000
\$200,000
\$60,000
\$5,000
\$60,000
\$250,000
\$4,000
\$6,000
\$645,000
Problem 8-57 Comprehensize Profit Plan
Background

(Use information in Prob. 8-56 for Spring Manufacturing Company, amended as explained

Requirements for each finished component:
RM1
RM2
RM3
Direct labor
Product information:
Sales price
Sales units
Estimated beginning inventory (units)
Desired ending inventory (units)

Cost per pound
Estimated beginning inventory in pounds
Desired ending inventory in pounds

C12 is a mature product. The sales manager believes that the price of C12 can be raised
no effect on sales quantity. D57 is a new product introduced last year. Management believ
great potential and is considering lowering the price to \$180 to expand market size and ga
lowering of D57's selling price is likely to double the total units of D57 sold.

Variable:
Indirect materials-variable
Miscellaneous supplies and tools-variable
Indirect labor-variable
Maintenance costs-variable
Heat, light, and power-variable
Payroll taxes and fringe benefits-variable
Fixed:
Supervision-fixed
Maintenance costs-fixed
Depreciation-fixed
Heat, light, and power-fixed
Total

Sales salaries
Travel and entertainment
Depreciation-warehouse
Office salaries
Executive salaries
Supplies
Depreciation-office
Total

Income Tax Rate                              40%

8-56 Requirements

1. Amend the spreadsheet constructed in 8-56 to incorporate the changes outlined above.
on the firm's after-tax operating income?
2. Would you recommend that the firm execute the strategy?

Solution
Company, amended as explained below.)

Finished Components
C12                  D57

10 pounds                8    pounds
0                       4    pounds
2 pounds                1    pound
2 hours                 3    hours

\$160                    \$180
12,000                  18,000
400                     150
300                     200

Direct Materials Information
RM1       RM2            RM3
\$2.00      \$2.50         \$0.50
3,000      1,500         1,000
4,000      1,000         1,500

at the price of C12 can be raised to \$160 per unit with
uced last year. Management believes that D57 has a
180 to expand market size and gain market share. The
l units of D57 sold.

\$10,000
\$5,000
\$40,000
\$10,080
\$11,000
\$250,000

\$120,000
\$20,000
\$71,330
\$43,420
\$580,830

Information

\$60,000
\$200,000
\$60,000
\$5,000
\$60,000
\$250,000
\$4,000
\$6,000
\$645,000

orate the changes outlined above. What effect do the changes have
Problem 8-58 Comprehensize Profit Plan
Background--Use Data from Prob. 8-56, as amended.

Spring Manufacturing Company has had a continuous improvement (kaizen) program for t
kaizen program, the company is expected to manufacture C12 and D57 with the following

Requirements for each finished component:
RM1
RM2
RM3
Direct labor

The company also anticipates the following changes:

Decrase in total fixed overhead costs
Hourly wage rate, direct labor

Product information:
Sales price
Sales units
Estimated beginning inventory (units)
Desired ending inventory (units)

Cost per pound
Estimated beginning inventory in pounds
Desired ending inventory in pounds

Variable:
Indirect materials-variable
Miscellaneous supplies and tools-variable
Indirect labor-variable
Payroll taxes and fringe benefits-variable
Heat, light, and power-variable
Maintenance costs-variable
Fixed:
Supervision-fixed
Maintenance costs-fixed
Heat, light, and power-fixed
Depreciation-fixed
Total

Sales salaries
Travel and entertainment
Depreciation-warehouse
Office salaries
Executive salaries
Supplies
Depreciation-office
Total

Income Tax Rate                              40%

8-58 Requirements

1. What is the budgeted after-tax operating income if the firm can attain the expected oper
kaizen program?
2. What are the benefits of Spring Manufacturing Company adopting a continuous improve

Solution
(kaizen) program for the last two years. According to the
D57 with the following specifications:

C12                        D57

9 pounds               7   pounds
0                    3.6   pounds
1.8 pounds             0.8   pound
1.5 hours                2   hours

10.00%
5.00%
\$30.00

C12                        D57

\$150                    \$220
12,000                   9,000
400                     150
300                     200

Direct Materials Information
RM1       RM2          RM3
\$2.00      \$2.50       \$0.50
3,000      1,500       1,000
4,000      1,000       1,500

(Prior to Planned Decreases)

\$10,000
\$5,000
\$40,000
\$250,000
\$11,000
\$10,080

\$120,000
\$20,000
\$43,420
\$71,330
\$580,830

Expense Information

\$60,000
\$200,000
\$60,000
\$5,000
\$60,000
\$250,000
\$4,000
\$6,000
\$645,000

ain the expected operating level as prescribed by the

g a continuous improvement program? What are the limitations?
Problem 8-59 Retailer Budget
Background

D. Tomlinson Retail seeks your assistance in developing cash and other budget informatio
store expects tobalances at the end of April:

Cash
Accounts receivable
Inventories
Accounts payable

The company follows these guidelines in budget preparations:

Collection of credit sales:
Within discount period in month of sale
Outside of discount period, but before eom
Second month following month of sale
Uncollectible accounts

Cash discount allowed for collections within discount period
Purchases and expenses:
Paid in month incurred
Paid in month following month of purchase
Target ending inventory, as % of next month's sales (in units)
Cost per unit of inventory
SG&A Expenses:
Total (as % of current month's sales)
Portion of total expense represented as depreciation

Actual and projected sales follow:

Month

March
April
May
June
July
August

8-59 Requirements

1. Prepare schedules showing budgeted purchases for May and June.
2. Prepare a schedule showing budgeted cash disbursements during June.
3. Prepare a schedule showing budgeted cash collections during May.
4. Determine gross and net balances of accounts receivable on May 31.

Solution

D. Tomlinson
Budgeted Merchandise Purchases May and June

Sales (in units)
Cost per unit
Cost of Goods Sold (CGS)
Ending inventory (130% of next month's CGS)
Total needed
Beginning inventory (130% of this month's CGS)
Budgeted Merchandise Purchases

S, G, & A expenses:
Sales revenue
S, G, & A expense ratio
Total S, G, & A expense
Less: Depreciation
Out-of-pocket S, G & A expense

D. Tomlinson Retail
Budgeted Cash Disbursements for June

May
Merchandise purchases
Out-of-Pocket S, G & A expenses
Total payables
Payment for the current month’s payables (54%)
Owed from last month (46%)
Budgeted cash outflow for payables

D. Tomlinson Retail
Cash Collections May

From last month's (April) credit sales

Within the discount period
After the discount period

From credit sales two months ago (i.e., March)

Collection of credit sales made in March

Total cash collections

D. Tomlinson Retail
Gross and Net Balance of Accounts Receivable (AR) as of

March
Sales
Remaining AR %
AR Balance (Gross)
AR Balance (Net)
* @ 6% of gross sales dollars
other budget information for May, June, and July. The

\$5,500
\$437,000
\$309,400
\$133,055

60%
25%
9%
6% (written off at end of 3rd month following sale)
100%
3%

54%
46%
130%
\$20.00

15.00%
\$2,000

Dollars                       Units

\$354,000                       11,800
\$363,000                12,100
\$357,000                11,900
\$342,000                11,400
\$360,000                12,000
\$366,000                12,200

son
chases May and June

May         June     July

May          June
Retail
sements for June

May          June

Retail
ons May

Retail
Receivable (AR) as of May 31

April       May    Total
Problem 8-60 Sales Budget and Pro-Forma Financial Statements
Background

Mark Dalid founded Molid Company three years ago. The company produces P
with the most operating systems including Palm, MS Windows, and Linus with UB
capability. Since the company’s inception its business has expanded rapidly.
Maria Sanchez, the company’s general accountant, prepared a budget for the fisca
2008, based on the prior year’s sales and production activity. In view of the general b
believes that the sales growth experienced during the prior year will not continue at
forma statements of income and cost of goods sold prepared as part of the budget proce

MOLID COMPANY
Pro Forma Statement of Income (in thousands)
For the budget year ended August 31, 2008

Net sales
Cost of goods sold
Gross Profit
Operating expenses:
Selling                                     \$3,200
Income from operations before income taxes

MOLID COMPANY
Pro Forma Statement of Cost of Goods Sold (in thousands)
For the budget year ended August 31, 2008

Direct materials:
Materials inventory, 9/1/2008               \$1,360
Materials purchases                        \$14,476
Materials available for use                \$15,836
Materials inventory, 8/31/2008              \$1,628
Cost of direct materials used
Direct labor
Indirect materials                          \$1,421
Cost of goods manufactured
Finished goods inventory, 9/1/2007
Cost of goods available for sales
Finished goods inventory, 8/31/2008
Cost of goods sold

On December 10, 2007, Mark and Maria met to discuss the first-quarter operating results
November 30, 2006). Maria believed that several changes should be made to the original
been used to prepare the pro-forma statements. She prepared the following notes summa
not become known until the first-quarter results had been compiled. She submitted the foll

Original output volume for the year =
Revised output volume for the entire year =
Actual first-quarter production =
Balance of planned production spread evenly over this many months
Planned end-of-year inventory (units) =
Finished goods inventory:
September 1, 2007
November 30, 2007
Planned DL rate increase
Quarters in new year for which new labor rate will be in effect
Eq Units of DM on hand, beginning of the year
Eq Units of DM, forecasted end of the year
Purchases of DM, first-quarter:
Eq units
Dollars
Projected DM price increase
No. of quarters for which new DM rate will be in effect
Indirect materials cost, as a percentage of direct materials consumed in produc
Portion of fixed costs:
Selling and general expenses

8-60 Requirements

1. Based on the revised data that Bob presented, calculate Molid Company's sales for the
and (b) dollar volume of sales.

2. Prepare the pro-forma statement of cost of goods sold for the year ending August 31, 2

3. Maria suggests that the firm adopt a JIT strategy to better serve customers and to redu
out that the firm needs to incorporate new manufacturing technologies to maintain its co
to make changes because he does not want to upset the proven successful business. H
and he does not want to commit fresh capital just to change the business procedures. M
be needed to fund the changes. She points out that a JIT system maintains no finished
than those needed to produce 100 units of the finished products.

a. How much will the firm save by changing to JIT? (Hint: estimate the cost savings pe
of capital, say 10%, and the estimated reduction in net working capital under JIT.)
b. Should the firm follow Maria's suggestion?
c. What other factors should be considered in making the decision?

Solution
cial Statements

s ago. The company produces PDAs that are compatible
S Windows, and Linus with UBS connection and WiFi
has expanded rapidly.
nt, prepared a budget for the fiscal year ending August 31,
activity. In view of the general business slowdown, Maria
e prior year will not continue at the same pace. The pro
pared as part of the budget processes follow:

OMPANY
Income (in thousands)
nded August 31, 2008

\$31,248
\$20,765
\$10,483

\$5,400
\$5,083

OMPANY
of Goods Sold (in thousands)
nded August 31, 2008
\$14,208
\$1,134

\$4,661
\$20,003
\$1,169
\$21,172
\$407
\$20,765

he first-quarter operating results (September 1 through
pared the following notes summarizing the changes that had
n compiled. She submitted the following data to Mark:

162,000
170,000
35,000
over this many months                   9
3,300

9,300
9,000
8.00%
will be in effect                        1
16,000
18,500

37,500
\$3,300,000
5.00%
2
ect materials consumed in production10.00%
50.00%
100.00%

te Molid Company's sales for the year ending August 31, 2008 in (a) number of units sold,

for the year ending August 31, 2008, that Mark Dalid had requested.

tter serve customers and to reduce obsolescence costs. She points
ng technologies to maintain its competitive advantage. Mark is reluctant
he proven successful business. He knows that any changes cost money,
JIT system maintains no finished goods inventory and no more materials
d products.

Hint: estimate the cost savings per year as the product of the firm's cost
n net working capital under JIT.)

g the decision?
ber of units sold,
Problem 8-61 Budget for Merchandising Firm
Background

Budgeted sales:
December                                              \$220,000
January                                               \$200,000
Collections of A/R:
Collected in month of sale                              60.00%
Collected following month                               38.00%
Est B/D expense                                          2.00%
Discount for early payment                               1.00%
Gross margin %                                                25%
Target End Inv, as % of following month's sales            80.00%
Merchandise payments:
% paid in month following month of purchase           100.00%
Other operating expenses (cash) =                         \$22,600
Annual depreciation expense =                            \$216,000

Kelly Company's statement of financial position at the close of business

KELLY COMPANY
Statement of Financial Position
November 30, 2007

Assets
Cash
Accounts receivable (net of \$4,000 allowance for doubtful accounts)
Inventory
Property, plant, and equipment (net of \$680,000 accumulated deprecia
Total assets

Liabilities and Stockholders' Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and equity

8-61 Requirements

1. What is the total of budgeted cash collections for December?
2. How much is the book value of accounts receivable at the end of December?
3. How much is the income (loss) before income taxes for December?
4. What is the projected balance in inventory on December 31, 2007?
5. What are budgeted purchases for December?
6. What is the projected balance in accounts payable on December 31, 2007?

Solution

Kelly Company
Budgeted Cash Collections for December

From November’s sales = net A/R, November 30th =
From December’s sales =
Budgeted cash collections--December

Kelly Company
Net Accounts Receivable--December 31st

Budgeted sales in December (given)
Allowance for doubtful accounts =
Net A/R from sales in December
Collections of December sales in December =
Net Accounts Receivable--December 31st
Kelly Company
Budgeted Pre-Tax Operating Income--Decembe

Total sales
Gross margin ratio
Gross margin
Operating expenses:
Monthly cash operating expenses
Depreciation expense
Pre-tax operating income

Kelly Company
Budgeted Inventory--December 31st

Inventory, December 31st

Kelly Company
Budgeted Purchases--December

Inventory, December 1st (given)
Plus: Purchases during December (plug figure)
Cost of goods available for sale
Less: Cost of goods sold
Inventory, December 31st (part 4 above)

Kelly Company
Budgeted Accounts Payable--December 31st
Accounts Payable, December 1st (given)
Plus: Budgeted Purchases, December (part 5 above)
Total Accounts Payable During December
Less: Payments in December (entire beginning balance)
Budgeted Accounts Payable, December 31st
Alternatively, the end-of-December Accounts Payable Balance = Purchases made in December = ans
osition at the close of business on November 30th follows:

ELLY COMPANY
ent of Financial Position
ovember 30, 2007

\$22,000
wance for doubtful accounts)                    \$76,000
\$132,000
680,000 accumulated depreciation)              \$870,000
\$1,100,000

\$162,000
\$800,000
\$138,000
\$1,100,000

he end of December?
December?
31, 2007?

ecember 31, 2007?

Kelly Company
sh Collections for December

mber 30th =

Kelly Company
Receivable--December 31st
Kelly Company
ax Operating Income--December

Kelly Company
Inventory--December 31st

Kelly Company
d Purchases--December

ug figure)

Kelly Company
ounts Payable--December 31st
art 5 above)

inning balance)

ance = Purchases made in December = answer to Part 5 above.
Problem 8-62 Budget for Service Firm
Background

Triple-F Health Club (Family, Fitness, and Fun) is a not-for-profit family-oriented health clu
developing plans to acquire more equipment and to expand club facilities. The boad plans
equipment each year and wants to establish a fund to purchase the adjoining property in f
has a market value of about \$300,000.

The club manager, Jane Crowe, is concerned that the board has unrealistic goals in light o
She has sought the help of a club member with an accounting background to assist her in
supporting her concerns.
The member reviewed the club's records, including this cash-basis income statement:

TRIPLE-F HEALTH CLUB
Income Statement (Cash Basis)
For Years Ended October 31

Cash revenues:
Annual membership fees
Lesson and class fees
Miscellaneous
Total cash revenues

Cash expenses:
Manager's salary and benefits
Regular employees' wages and benefits
Lesson and class employees' wages and benefits
Towels and supplies
Utilities (heat and light)
Mortgage interest
Miscellaneous
Total cash expenditures
Increase in cash
Other financal information as of October 31, 2008:
Cash in checking account                       \$7,000
Petty cash                                     \$300
Outstanding mortgage balance                   \$360,000
A/P, purch of supplies and utilities           \$2,500

Purchase of exercise equipment during the year      \$25,000
Portion of purchase price paid in cash              \$10,000
Balance outstanding as of Oct 31, 2008              \$15,000

Planned purchase of equipment, coming year          \$25,000

Acquisition costs (2004):
Land and building                                 \$600,000
Cash payment, at time of acquisition              \$120,000
Financing:
Annual princ payment, Nov 1st                \$30,000
Plus: interest on unpaid balance, b-0-y      9.00%
Years of mortgage amort to date                         4

Anticipated annual membership growth rate            3.00%

Membership fees increases:
2008 (actual)                                    15.00%
2009 (est.)                                      10.00%

Lesson and class fees growth in 2009 = same as growth rate experienced in 2008

Miscellaneous revenue growth rate, 2009 = same as growth rate in 2008

Expected increases in operating expenses:
Hourly wage rates and the manager's salary15.00%
Towels and supplies, ultilities, and misc 25.00%

8-62 Requirements
1. Prepare a cash budget for 2009 for the Triple-H Health Club.
2. Indentify any operating problems that this budget discloses for the Triple-H Health Club
3. Is Jane Crowe's concern that the board's goals are unrealistic justified? Explain your an

Solution
ofit family-oriented health club. The club's board of directors is
se the adjoining property in four or five years. The adjoining property

has unrealistic goals in light of the club's recent financial performance.
g background to assist her in preparing a report to the board

basis income statement:

2008          2007

\$355,000     \$300,000
\$234,000     \$180,000
\$2,000       \$1,500
\$591,000     \$481,500

\$36,000      \$36,000
\$190,000     \$190,000
\$195,000     \$150,000
\$16,000      \$15,500
\$22,000      \$15,000
\$35,100      \$37,800
\$2,000       \$1,500
\$496,100     \$445,800
\$94,900      \$35,700
(due in November)

(cash)

years

ate experienced in 2008

th rate in 2008
Problem 8-63 Budgeting for Marketing Expenses; Strategy
Background
You have been recruited by a former classmate, Susanna Wu, to join the finance team of a
recently. The company produces a unique product-line of hypo-allergenic cosmetics and r
aggressive marketing program. The company is in a start-up phase and therefore has no sign
and revenues upon which to rely for budgeting and planning purposes. Given the restriction o
the available capital has been used for new-product development and to recruit a manage
costs, including marketing costs, is thought by the management team to be essential for the
company.
You have held a number of intensive discussions with Susanna and John Thompson, di
firm. They have asked you to prepare an estimated budget for marketing expenses for a mont
You are provided with the following data, which represent average actual monthly costs o

Cost
Sales commissions
Sales staff salaries
Telephone and mailing
Rental--Office building
Gas (utility)
Delivery charges
Depreciation--office furniture
Marketing consultants
TOTAL marketing costs

Changes/Assumptions

(1) Sales volume increase/month
(2) Sales price change
(3) Monthly % increase in staff salaries
(4) Percentage increase in price for:
Telephone and Mailing Costs
Delivery expense
(5) Percentage increase in rent
(6) Utility rate increase
(7) Purchase of new furniture:
Cost
Estimated salvage
Life (months)
(8) Monthly increase in consulting costs

8-63 Requirements

1. Use the preceding information to develop an Excel spreadsheet that can be used to gen
expenses. (Use the built-in function "SLD" to calculate monthly depreciation charges for
What is the percentage change, by line item and in total, for items in your budget?

2. The management team is worried about the short-term financial position of the new com
the president has expressed a desire to keep marketing expenses over the new few mo
Discussions with the marketing department indicate that telephone and mailing costs ar
can reasonably bear the planned-for reduction in marketing costs. The budget you have
increase in telephone and mailing costs. What must this percentage change (positive o
monthly marketing costs? (Hint: Use the "goal seek" function in Excel.)

3. Comment on the use of the budget in this situation for cost-control purposes.

Solution

Montly Marketing Expense Budget

Sales Commissions
Sales Staff Salaries
Telephone and mailing
Rental--Sales office building
Gas (utilities)
Delivery charges
Depreciation--Office furniture:
Exisiting furniture
New furniture
Marketing consultants
Total Budgeted Costs

2. In order to achieve the monthly targeted cost of \$350,000, the rate of "telephone and m
is the case in the proposed budget); in fact, the results of the "goal seek" analysis indica
approximately 43%, as shown below:

Monthly targeted cost =                          \$350,000

Monthly Marketing Expenses:
Sales Commissions
Sales Staff Salaries
Telephone and mailing
Rental--Sales office building
Gas (utilities)
Delivery charges
Depreciation--Office furniture:
Exisiting furniture
New furniture
Marketing consultants
Total Budgeted Costs

(Note: in using "goal seek," choose to set cell D98 to \$350,000 by changing cell D90. O
changes, the formula in E90 automatically calculates the required percentage change.

3. As indicated in the text, budgets can be used both for control and for planning purpose
lined either to the competitive strategy the business is pursuing or to the product life-cy
competing on the basis of a product-differentiation strategy), the relative emphasis of th
planning than control. That is, the information contained in this budgete can assist the
However, it probably should not be used for "controlling" (i.e., cutting) expenses in situa
are determinants of competitive success. Further, many types of so-called "discretiona
(or at least are "sticky") and therefore difficult to cut in the short run. As such, the prima
to better plan for, rather than control, the underlying expenses.
ategy

u, to join the finance team of a company that she founded
ypo-allergenic cosmetics and relies for its success on an
phase and therefore has no significant history of expenses
purposes. Given the restriction on available funds (most of
pment and to recruit a management team), the control of
ent team to be essential for the short-term viability of the

usanna and John Thompson, director of marketing for the
marketing expenses for a month of operations.
average actual monthly costs over the past three months:

Amount
\$120,000
\$40,000
\$38,000
\$25,000
\$12,000
\$70,000
\$8,000
\$25,000
\$338,000

ptions

10%
-5.00%
10%

6.00%
6.00%
0.00%
15%
\$30,000
\$0
60
\$5,000

dsheet that can be used to generate a monthly budget for marketing
onthly depreciation charges for the new equipment to be purchased.)

ancial position of the new company. Given the strain on available cash,
xpenses over the new few months to a maximum of \$350,000.
elephone and mailing costs are the only category, in the short run, that
ng costs. The budget you have prepared includes an assumed 6 percent
percentage change (positive or negative) be in order to achieve targeted
ion in Excel.)

st-control purposes.

nse Budget

Change
, the rate of "telephone and mailing" costs cannot increase at all (as
the "goal seek" analysis indicate that such rates must decrease by

Cost        Change

0,000 by changing cell D90. Once the dollar amount of cell D90
e required percentage change.)

ntrol and for planning purposes. The relative importance of each can be
rsuing or to the product life-cycle. In the present case (start-up company,
gy), the relative emphasis of the marketing budget is likely more for
n this budgete can assist the company in determining its financing needs.
(i.e., cutting) expenses in situations where the underlying expenditures
ypes of so-called "discretionary costs" (such as marketing) are fixed
e short run. As such, the primary benefit of the budget in such cases is
Problem 8-64 Strategy, Product Life-Cycle, and Cash Flow

Burke Company manufactures various electronic assemblies that it sells primarily to compu
Burke has built its reputation on quality, timely delivery, and products that are consistently
technology. Burke’s business is fast paced: A typical product has a short life; the product is
about a year and in the growth stage, with spectacular growth sometimes, for about a year.
experiences a rapid decline in sales as new products become available.

Burke has just hired a new vice president of finance, Devin Ward. Shortly after reporting fo
a conversation with Andrew Newhouse, Burke’s president. A portion of the conversation fo

started out that a reliable stream of new products was one of our key variables, in fact, the o
the threat of product obsolescence. You see, our products go through only the first half of t
cycle—the development stage and then the growth stage. Our products never reach the trad
stage or the declining product stage. Toward the end of the growth stage, products dies as n

Devin: I suppose your other key variables are cost controls and efficient production schedu

Andrew: Getting the product to market on schedule, whether efficiently or not, is importan
business announce a new product in March to be delivered in June, and they make the first
a year from March, or sometimes, never. Our reputation for delivering on schedule could a
much as anything.

Devin: Where I previously worked, we also recognized the importance of on-time deliverie
system set 93 percent on time as a standard.

Andrew: The key variable that is your responsibility is cash management. It took us a whil
first, we thought that profit was the key and that cash would naturally follow. But now we k
and the profits naturally follow. Still, we don’t manage cash well. Improving our cash man
thing we expect from you.

Required

1. Discuss the cash-generating and cash usage characteristics of products in gene
stages of the product life cycle—development, growth, maturity, and decline.
2. Describe the cash management problems confronting Burke Company.
3. Suggest techniques that Devin might implement to cope with Burke Company’s
problems.

stages of the product life cycle—development, growth, maturity, and decline.
2. Describe the cash management problems confronting Burke Company.
3. Suggest techniques that Devin might implement to cope with Burke Company’s
problems.

Solution
sells primarily to computer manufacturers.
cts that are consistently on the cutting edge of
short life; the product is in development for
imes, for about a year. Each product then
ble.

hortly after reporting for work at Burke, he had
n of the conversation follows.

ange is its central ingredient. We knew when we
y variables, in fact, the only way to cope with
h only the first half of the traditional product life
cts never reach the traditional mature product
tage, products dies as new ones are introduced.

cient production scheduling?

ently or not, is important. Some firms in this
and they make the first shipment in October, or
ng on schedule could account for our success as

nce of on-time deliveries. Our absorption cost

ement. It took us a while to recognize that. At
ly follow. But now we know that cash is the key
mproving our cash management is the main

s of products in general in each of the four
urity, and decline.
e Company.
th Burke Company’s cash management
urity, and decline.
e Company.
th Burke Company’s cash management
Problem 8-65 Continuous Budgeting

WestWood Corporation is a woodstove manufacturer in southern Oregon.
models: small stoves for heating a single room, mediumsized units for u
supplement to central heating systems, and large stoves with the capacity to pr

The manufacturing process consists of shearing and shaping steel, fabricating
Molded doors are custom-built at an outside foundry in the state, brass pl
custom-etched glass during assembly at WestWood’s plant. The finished stove
directly or through regional warehouses located throughout the western Unit
three tractor trailers and one large truck used to ship stoves to dealers and war

The budget for the year ending February 28, 2008, was finalized in Janu
assumption that the 10 percent annual growth rate that WestWood had experie

Stove sales are seasonal, and the first quarter of WestWood’s fiscal year
consequence, inventory levels were down at the start of the current fiscal year o

WestWood’s sales orders for the first quarter ended May 31, 2007, were up 5
last year and 40 percent above the first quarter budget. Unfortunately, not all o
due to the reduced inventory levels at the beginning of the quarter. WestWo
production over budgeted levels, but not in sufficient quantity to compensate
Therefore, it has a large backlog of orders. Furthermore, preliminary orders
percent above the budget, even though the projections for the winter of 200
demand. WestWood’s president attributes the increase to effective advertisin
increased installations of woodstoves in new houses, and the bankruptcy of W

Required
1. WestWood’s sales for the remainder of the 2007–2008 fiscal year will be much h
ago. Explain the effect this increase will have on the operations in the following fun

a.   Production
b.   Finance and accounting
c.   Marketing
d.   Personnel

2. Some companies follow the practice of preparing a “continuous budget.”

a. Explain what a continuous budget is.
b. Explain how WestWood could benefit by preparing a continuous budget. (CMA A
2. Some companies follow the practice of preparing a “continuous budget.”

a. Explain what a continuous budget is.
b. Explain how WestWood could benefit by preparing a continuous budget. (CMA A

Solution
in southern Oregon. WestWood manufactures three
iumsized units for use in mobile homes and as a
with the capacity to provide central heating.

ping steel, fabricating, welding, painting, and finishing.
n the state, brass plated at a plater, and fitted with
ant. The finished stoves are delivered to dealers either
hout the western United States. WestWood owns the
es to dealers and warehouses.

was finalized in January of 2007 and based on the
estWood had experienced since 2006 would continue.

stWood’s fiscal year is usually a slack period. As a
he current fiscal year on March 1, 2007.

y 31, 2007, were up 54 percent over the same period
Unfortunately, not all of the sales orders could be filled
the quarter. WestWood’s plant was able to increase
antity to compensate for the large increase in orders.
e, preliminary orders for the busy fall season are 60
for the winter of 2007–2008 indicate no decrease in
o effective advertising, the products’ good reputation,
d the bankruptcy of West-Wood’s principal competitor.

al year will be much higher than predicted five months
ns in the following functional areas of WestWood:

uous budget.”

uous budget.”

Prob. 8-66--Cash Budget
Background
Higgins Technologies manufactures plasma flat screen digital monitors. Use the
Higgins’ quarterly cash budgets for the year ending December 31, 2007.

1. Higgins plans a major innovation over a six-month period starting at the
quarter. The firm estimates the total cost to be \$80 million with a 25 percen
of the first quarter and equal installments at the end of each month for the r
months. The firm expects to sell the replaced equipment at the end of the fo
2. Higgins sold \$250 million 10-year 9 percent bonds three years earlier. I
payable semiannually on May 31 and November 30. The bond covenant req
minimum cash balance of \$30 million at all times and to deposit \$20 millio
before May 31 of each year.
3. Higgins has an open credit line with the U of A Bank for short-term loan
percent per year. The firm can draw up to \$100 million at the beginning
outstanding balances at the end of each quarter. All borrowings and repa
multiples of \$1 million. Interest on the loans is payable at the end of each
draw any funds on this account as of the end of the current year.
4. Debbie Hoskins, CFO, has determined that any excess cash on hand o
applied to pay down short-term bank loans or be invested in marketable s
quarter. The firm is likely to earn a 5 percent annual return on marketable se

8-66 Requirements

Given the preceding information, fill in the missing blanks in the schedule below.

Solution
digital monitors. Use the following data to complete
ember 31, 2007.

nth period starting at the beginning of the second
0 million with a 25 percent down payment at the end
nd of each month for the remainder over the next six
pment at the end of the fourth quarter for \$5 million.
nds three years earlier. Interest on these bonds is
0. The bond covenant requires the firm to maintain a
and to deposit \$20 million into a sinking fund on or

Bank for short-term loans at an interest rate of 12
million at the beginning of each quarter and repay
All borrowings and repayments are to be made in
yable at the end of each month. Higgins has yet to
e current year.
excess cash on hand over \$50 million should be
invested in marketable securities at the end of the
al return on marketable securities.

schedule below.
Problem 8-67 Comprehensive Budget; Strategy
Background

Gold Sporting Equipment (GSE) is in the process of preparing its budget for the third quarter of 2007. The budgeting staff has gathered the following data:

Account balances, June 30th                                                          Recent and forecasted sales                            Monthly Operating Expenses
Cash                        \$25,000                                                  June (actual)             \$75,000                        Fixed:
A/R                         \$15,000                                                  July                      \$80,000                           Salaries & wages           \$8,000
Inventory                   \$47,520                                                  August                    \$82,000                           Rent/Property Taxes        \$1,000
Bldg./Equip (net)          \$200,000                                                  September                 \$90,000                           Depreciation                \$800
Short-term payable (equip)       \$0                                                  October                  \$100,000
Bank loan payable                \$0                                                                                                           Variable:
Income taxes payable             \$0                                                                                                             Salaries & wages               5%
Sales Breakdown (on average):                                                                                                                   Other cash oper. Expenses      2%
Cash                         80%
Credit                       20% (ALL collected in month following sale)                                                                 Income tax rate (combined)        25%

Gross margin %                       40% (based on gross, not net, purchase price)

Purchases Information:
Each month, on the 15th, purchases equal the following month's projected sales (@ COST)
Terms of purchase, 1/10, n/30 ("1% discount if paid within 10 days; net amount is due in 30 days")
Purchases discount                1%
% of purchases for which the "early payment" discount is taken                                                                  100%

Planned equipment purchase, August:                                                              Cash-related information:
Cost                  \$127,000                                                                 Minimum cash balance                \$30,000
% paid Aug.             50%                                                                    Interest rate/year                    15%    (paid EOM)
% paid Oct.             50%                                                                    Borrowing/Repayments                \$10,000 increments
Borrowings occur @ BOM, repayments occur EOM

3. Sales are 80 percent cash and 20 percent on credit. Credit accounts are all collected 30 days after sale.

4. At gross purchase prices of inventories, GSE’s gross margin averages 40 percent of revenues. GSE records all inventory purchases at
net prices.

5. Operating expenses: Salaries and wages, \$8,000 per month plus 5 percent of revenue; rent and property tax, \$1,000 per month; other
operating expenses, excluding depreciations, 2 percent of revenues; depreciations \$800 per month. All cash operating expenses are paid
before the end of the month.

6. GSE has no minimum inventory requirement. The policy is to purchase each month on the 15th the expected sales for the following
month. Terms on purchases are 1/10, n/30. Purchases usually arrive on or before the 20th. GSE’s policy is to take all cash discounts
offered.

7. GSE is negotiating the purchase of new equipment for \$127,000 to be installed in September. Terms are 50 percent in the month before
and 50 percent after the month of installation.

8. Minimum cash balance is \$30,000. All borrowings are effective at the beginning of the month and all repayments are made at the end of
the month of repayment. Loans are repaid when sufficient cash is available. The interest rate is 15% per year, payable at the end of each
month. Both borrowings and repayments are in multiple of \$10,000. Management does not want to borrow any more cash than is
necessary and wants to repay whenever the cash on hand exceeds the minimum requirement.

9. GSE plans to pay no dividend to stockholders.

8-67 Requirements

1. Complete schedules A through E.

2. Prepare a budgeted income statement for the third quarter and beginning and end-of-quarter balance sheets. GSE estimates its income tax rate at 25 percent,
payable in the second quarter of the following year. (Hint: Cost of good sold percentage is 59.4%.)

3. Gold Sporting Equipment has been using the loan described in Item 8 to meet its needs for funds. Alternatively, Gold can issue long-term bonds at no more than
12% annual interest rate to incrase funds available for expansion. What is the most sensible type of loan GSE should use to meet its needs? Explain your answer.

4. The underlying business situation has been greatly simplyfied. List at least three complicating factors that may exist in a real business setting.

Solution
GOLD SPORTING EQUIPMENT
Budgeted Income Statement
For the Third Quarter of 2007

Sales
Cost of Goods Sold (CGS)
Gross Profit
Operating Expenses:
Salaries & wages
Rent & property taxes
Depreciation
Other operating expenses
Total Operating Expenses
Operating Income
Other Income/Expenses:
Interest Expense
Pre-tax Income
Income Taxes
Net Income

GOLD SPORTING EQUIPMENT
Budgeted Balance Sheet
For the Third Quarter of 2007

Assets
Cash
Accounts Receivable (A/R)
Inventory
Building and equipment (net)
Total Assets

Liabilities
Short-term payable (equipment purchases)
Bank notes payable
Income Tax Payable
Total Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity
TING EQUIPMENT
ncome Statement
d Quarter of 2007

(this means the CGS % = 59.4%)
(this means the Gross Profit % = 40.6%)

TING EQUIPMENT
d Balance Sheet
d Quarter of 2007
Beg. of Qtr. End of Qtr.

\$25,000
\$15,000
\$47,520
\$200,000
\$287,520

\$0
\$0
\$0
\$0
\$287,520
\$287,520
Problem 8-68 Cash Budgeting; Sensitivity Analysis
Background
CompCity, Inc., sells computer hardware. It also markets related software and software-
The company prepares annual sales forecasts for sales, of which the first six months o
below.
In a typical month, total sales are broken down as follows: cash sales, 25%; V
sales, 55%; and, 20% open account (the company’s own charge accounts). For bud
assume that cash sales plus bank credit-card sales are received in the month of sale;
sales are subject to a 3% processing fee, which is deducted daily at the time of deposit
cash account with the bank. Cash receipts from collection of accounts receivable are t
as follows: 25% in the month of sale, 45% in the month following the month of sale,
second month following the month of sale. The remaining receivables generally
uncollectible.
CompCity’s month-end inventory requirements for computer hardware units are 25%
month’s estimated sales. A one-month lead time is required for delivery from the hard
Thus, orders for computer hardware units are generally placed by CompCity on the 25 th
assure availability in the store on the first day of the month needed. These units are purc
under the following terms: n/45, measured from the time the units are delivered to Co
that CompCity takes the maximum amount of time to pay its invoices. On average, the p
hardware units runs 65% of selling price.

COMPCITY, Inc.
Forecasted Sales (units and dollars)
January-June, 2007
Hardware      Hardware Software/Support          Total
Sales (Units) Revenue Services Revenue Revenue
January           120      \$360,000      \$140,000          \$500,000
February           130      \$390,000      \$160,000          \$550,000
March           90      \$270,000      \$130,000          \$400,000
April         100      \$300,000      \$125,000          \$425,000
May          110      \$330,000      \$150,000          \$480,000
June          120      \$360,000      \$140,000          \$500,000
Totals              670       \$2,010,000     \$845,000         \$2,855,000

Sales Breakdown Information:
Cash Sales =                                        25.00%
Bank Credit-card (VISA) Sales                       55.00%
Open Account (CompCity) =                            20.00%
Bank collection fee/service charge =                   3.00%
Collection of Open Accounts:
Month of Sale =                                      25.00%
Following Month =                                    45.00%
2nd Month Following Sale =                           27.00%
Uncollectible accounts =                              3.00%
CGS Percentage, Hardware Sales =                      65.00%
Desired eom Inventory percentage =                    30.00%

8-68 Requirements

1. Calculate estimated cash receipts for April 2007 (show details).
2. The company wants to estimate the number of hardware units to order on January 25th
a. Determine the estimated number of units to be ordered
b. Calculate the dollar cost (per unit and total) for these units
3. Cash planning in this line of business is critical to success. Management feels that the a
(\$3,000) is firm--at least for the foreseeable future. Also, it is comfortable with the 30%
is not so sure, however, about (a) the CGS rate (because of the state of flux in the supp
sales in March 2007. Discussions with marketing and purchasing suggest that three ou
two variables, as follows:
March
Outcome          Sales           CGS%
Optimistic          100             60%
Expected             90             65%
Pessimistic          80             70%

The preceding outcomes are assumed to be independent, which means that there are n
You are asked to conduct a sensitivity analysis to determine the range of possible cash
different combinations of the above. Assume, for simplicity, that slaes volume for April is
Prepare a table disclosing each of the nine possible scenarios that could exist regarding

4. As part of the annual budgeting process, CompCity, Inc. prepares a cash budget by mo
company such as CompCity would prepare monthly cash-flow budgets for the entire yea
in the monthly planning process.
Solution
software and software-support services.
ch the first six months of 2007 are given

ws: cash sales, 25%; VISA® credit-card
rge accounts). For budgeting purposes,
ed in the month of sale; bank credit-card
ily at the time of deposit into CompCity’s
ccounts receivable are typically collected
wing the month of sale, and 27% in the
receivables generally turn out to be

ardware units are 25% of the following
r delivery from the hardware distributor.
y CompCity on the 25 th of each month to
ed. These units are purchased on credit,
nits are delivered to CompCity. Assume
oices. On average, the purchase price for
o order on January 25th:

nagement feels that the assumption of selling price per unit
mfortable with the 30% rate for end-of-month inventories. It
e state of flux in the supplier market), and (b) the level of predicted
ng suggest that three outcomes are possible for each of these

h means that there are nine possible combinations (3 x 3).
e range of possible cash outflows for April 10th, under
t slaes volume for April is considered known (i.e., is fixed).
that could exist regarding the cash outflow on April 10th.

es a cash budget by month for the entire year. Explain why a
budgets for the entire year. Explain the role of senstivity analysis

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 122 posted: 5/16/2012 language: English pages: 105
fanzhongqing http://