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					Solution
      8-34 Requirements




Solution
    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




Input Data

  Discount % for early payment:      1%     2%

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


Solution
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




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
Exercise 8-39 Purchase Budget and Payment




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
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




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

  $5,000
  $3,000
 $10,000
    $500
 $24,000
  $6,000
     50%
  $6,000
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
     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




Solution
                    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
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




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




       per month
       per month
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
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
Problem 8-53 Small Business Budget




Solution
Problem 8-54 Ethics in Budgeting/ Budgetary Slack




Solution
Problem 8-55 Master Budgeting




Solution
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.


                                                        Factory Overhead Information

           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




           Advertising
           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
5. Factory overhead 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



ad Information

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


Selling and Administrative Expense
            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




             Advertising
             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.



                           Factory Overhead Information

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

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


                          Selling and Administrative Expense
                                      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:

                          Decrease in variable factory overhead
                          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




             Advertising
             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)
          Factory Overhead Information

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

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


              Selling and Administrative
                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)
Bad-debt allowance*
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




                                          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
           General administrative                     $2,200
        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
           Factory overhead:
              Indirect materials                          $1,421
              General factory overhead                    $3,240
           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:
                General factory overhead
                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




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
 s should be made to the original budget assumptions that had
 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,
hange the business procedures. Maria argues that no additional capital will
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
Bad-debts expense
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
lub facilities. The boad plans to purchase about $25,000 new
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
 for the Triple-H Health Club. Explain your answer.
stic justified? Explain your answer.
Problem 8-63 Budgeting for Marketing Expenses; Strategy
Background




                             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




         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.)
 or items in your budget?

 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
Solution
Problem 8-65 Continuous Budgeting
Solution
Prob. 8-66--Cash Budget
                              Background




                                 8-66 Requirements

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


Solution
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




                                      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.
                              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
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

				
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