CH-15 Budgeting and Financial Planning – Cost Management: Strategies for Business Decisions : Book Guide

Chapter 15 Budgeting and Financial Planning ANSWERS TO REVIEW QUESTIONS 15.1 Organization goals are broad-based statements of purpose. Strategic plans take the broad-based statements and express them in terms of detailed steps needed to attain those goals. Budgets are the short-term plans used to implement the steps included in the strategic plans. For example, a company may have a goal of "Becoming the number 1 company in the industry." The strategic plans would include such statements as: "Increase sales volume by 20% per year." The master budget would state the number of units that are needed to be produced and sold in the coming period to meet the 20% volume increase as well as the production and marketing costs necessary to attain that objective. The master budget would also include estimates of the levels of cash, accounts receivable, inventories, and fixed assets needed to support the budgeted level of activity. 15.2 Operational budgets specify how an organization's operations will be carried out to meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of professional personnel of various types required to carry out the hospital's mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash budget showing planned cash receipts and disbursements. 15.3 An example of using the budget to allocate resources in a university is found in the area of research funds and grants. Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process. 15.4 General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air. 15.5 Since middle management has better knowledge about operations at lower levels in the organization, and since budgets are usually used to evaluate performance or compute bonuses for middle management, middle management may have a tendency to underestimate revenues and overestimate costs. This bias arises because if the biased plans are adopted, middle management will find it easier to meet targets and to achieve bonus awards. Of course, if upper management always "tightens" the budget plans suggested by middle management, gaming may result. The disadvantage of this gaming is that the planning effectiveness may be reduced. 15.6 The budget manual says who is responsible for providing various types of information, when the information is required, and what form the information is to take. The budget manual also states who should receive each schedule when the master budget is complete. 15.7 The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and deadlines to employees throughout the organization, the budget director often develops and disseminates a budget manual. 15.8 A master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. Many other assumptions are used throughout the rest of the budgeting process. 15.9 A financial-planning model is a set of mathematical relationships that expresses the interactions among the various operational, financial, and environmental events that determine the overall results of an organization’s activities. A financial-planning model is a mathematical expression of all the relationships in the budget. Once the financial-planning model is constructed, it can be run many times on a computer with different combinations of assumptions and predictions. This process enables the budget analyst to see how the budget will appear under a variety of circumstances. 15.10 The difference between the revenue or cost projection that a person provides in the budgeting process and a realistic estimate of the revenue or cost is called budgetary slack. Building budgetary slack into the budget is called padding the budget. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. Cost estimates are often inflated, and revenue estimates are often understated. In this situation, the budget loses its effectiveness as a planning tool. 15.11 An organization can reduce the problem of budgetary slack in several ways. First, it can avoid relying on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections. 15.12 Under zero-base budgeting, the budget for virtually every activity in the organization is initially set to zero. To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness. The zero-base budgeting approach forces management to rethink each phase of an organization's operations before allocating resources. 15.13 The EOQ approach assumes that some inventory must be held. The objective of the model is to balance the cost of ordering against the cost of holding inventory. In contrast, the JIT philosophy is to reduce all inventories to the absolute minimum, eliminating them completely if possible. The JIT viewpoint asserts that inventory holding costs tend to be higher than may be apparent because of the inefficiency and waste involved in storing inventory. This view, coupled with the JIT goal of reducing ordering costs to very low amounts, results in the desirability of more frequent and smaller order quantities. In addition, under JIT inventory management, order quantities typically will vary depending on requirements. In contrast, under the EOQ model, the order quantity remains constant. ANSWERS TO CRITICAL ANALYSIS 15.14 The flowchart below depicts the components of the master budget for a service station. 15.15 As long as the employees are willing to have all direction come down from above, there may be no problem with this executive’s approach. However, employees throughout the organization generally are perceived to prefer some input into organization decisions. Indeed, managers at lower levels of the organization usually have more technical expertise about their specific organization subunit than the chief executive officer has. Therefore, inputs from the lower ranks may improve organization operations because plans will be based on better information. In addition, employees will be more likely to support a plan that they have participated in preparing. 15.16 The city could use budgeting for planning purposes in many ways. For example, the city's personnel budget would be important in planning for required employees in the police and fire departments. The city's capital budget would be used in planning for the replacement of the city's vehicles, computers, administrative buildings, and traffic control equipment. The city's cash budget would be important in planning for cash receipts and disbursements. It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash needs at all times. 15.17 Behavioral studies indicate that when the budget is an upper limit on expenditures, employees will have a strong incentive to create budget slack. Thus, in a governmental setting, we would expect a strong incentive to overestimate costs to provide a cushion for future expenditures. 15.18 Cash receipts and disbursements often take place in different time periods from when items are recognized in the income statement and balance sheet. Thus, a company needs to prepare a cash budget to ensure that cash needs will be met. 15.19 In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal needs, and money for entertainment and miscellaneous expenses. 15.20 Frequently managers will wait until near the end of the budget period to make discretionary expenditures. Sometimes managers will use "excess" funds from one period to stock up on supplies and other items that would normally be a part of the next budget period’s costs. (Managers have incentives to spend the money requested to maintain the credibility of their requests.) These activities are sometimes considered detrimental to the organization because they result in a waste of resources and improper timing of expenditures. Nonetheless, in many situations the cost of controlling these potentially adverse activities exceeds the benefits. 15.21 Firms with international operations face a variety of additional challenges in preparing their budgets. • A multinational firm's budget must reflect the translation of foreign currencies into U.S. dollars. Almost all the world's currencies fluctuate in their values relative to the dollar, and this fluctuation makes budgeting for those translations difficult. • It is difficult to prepare budgets when inflation is high or unpredictable. Some foreign countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and complicates a multinational's budgeting process. • The economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies with foreign operations face the task of anticipating such changing conditions in their budgeting processes. 15.22 First there is an incentive for members of various subunits to overestimate costs in order to achieve bonus awards. Of course, if the targets are set so tight that they cannot be reasonably achieved then there may be a problem for the entire incentive system. In addition, there may be a disincentive to increase sales if it means increasing costs. 15.23 Since inventories would be eliminated, the timing of purchases would be closer to the time of production. This would minimize the differences between the timing of cash outflows for materials purchases, work in process and finished goods, and the time when the related costs are recognized in the production budget. SOLUTIONS TO EXERCISES 15.24 (15 min) Sales forecasting Estimate sales revenues for Madison County Bank: Portfolio Amount Interest Rate Income Commercial loans…... $28 million x 5.5% $1,540,000 Consumer loans…….. 25 million x 8.5% 2,125,000 Securities…………….. 6 million x 6.5% 390,000 Total……………… $4,055,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.25 (15 min) Production planning Estimate production levels for Pandora Pillow Corporation: 15.26 (15 min) Sales forecasting Estimate sales revenues for Ujvari & Company: .85 = market volume in the coming year (as a percent of last year) .90 = number of trades in the coming year (as a percent of last year) 1.30 = average commission per trade in the coming year (as a percent of last year) 45,000 trades x 210 euros per trade x .85 x .90 x 1.30 = 9,398,025 euros 15.27 (45 min) Internet search of governmental budgets Students’ answers on this open-ended internet search of governmental budgets will vary widely depending on the governmental unit selected, the year the search is done, and their interests. Among the budgetary items that students often find interesting are the huge outlays for interest on the national debt in the U.S. federal budget, the cost of federal and state entitlement programs, and the rather modest salaries of state legislators and city mayors. 15.28 (25 min) Estimate production and materials requirements EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.28 (continued) 15.29 (25 min) Estimate purchases and cash disbursements 15.29 (continued) 15.30 (45 min) Beyond budgeting The opinions of both students and faculty will vary widely on this controversial and contemporary topic. The position of beyond budgeting enthusiasts is that traditional budgeting processes are so costly and constraining to management performance that they should be abandoned and replaced with a radically new management model. A more moderate approach suggests that the master budget is still an important management tool, but the budgeting process can be improved. Giving managers “ownership” of their business units by pushing decision making and performance evaluation to more decentralized levels in the organization is a key aspect of this new approach. 15.31 (25 min) Estimate purchases and cash disbursements b. Cash required to make purchases: January: $5,390 = 7,700 x $.70 February: $4,970 = 7,100 x $.70 March: $3,360 = 4,800 x $.70 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.32 (15 min) Estimate cash collections The correct answer is $299,000 15.33 (20 min) Budgeting cash receipts b. Operational plans depend on various assumptions. Usually there is uncertainty about these assumptions, such as sales demand or inflation rates. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.34 (30 min) Budgeting cash receipts This pattern is repeated in subsequent months. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.35 (30 min) Budgeting cash receipts a. Revenues are as follows: March $ 2,500 = .5 calls x 100 subscribers x $50 April 6,000 = 1.0 call x 120 subscribers x $50 May 23,400 = 1.8 calls x 260 subscribers x $50 June 33,000 = 2.2 calls x 300 subscribers x $50 July 30,000 = 2.0 calls x 300 subscribers x $50 August 23,800 = 1.7 calls x 280 subscribers x $50 Collections of these revenues are expected according to the following schedule: This pattern is repeated in subsequent months. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.36 (25 min) Prepare budgeted financial statements EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.37 (15 min) Economic order quantity a. The EOQ is 600. b. The EOQ is 1,200. 15.38 (35 min) Impact of quantity discounts on order quantity First compute the EOQ without regard to the discount schedule: Then compute the total costs under the initial Q* and for the minimum quantity required to earn each of the next price breaks. Order Carrying Order Forgone Total Quantity Cost Cost Discount Costs 42 42 x $450 810 x $500 810 x $1,500 2 42 x (6% – 2%) = $9,450 = $9,643 = $48,600 $67,693 80 80 x $450 810 x $500 810 x $1,500 2 80 x (6% – 5%) = $18,000 = $5,063 = $12,150 $35,213 Optimal 150 150 x $450 810 x $500 zero 2 150 = $33,750 = $2,700 -0- $36,450 15.39 (20 min) Impact of constraints on optimal order quantity If there were a restriction on the storage capacity, then the optimal order size would be 42 units, not the 50 unit restriction. This may be found by comparing the total cost at 42 units given in exercise 15.38 as $67,693 with the following costs at 50 units. Carrying Order Forgone Total Cost Cost Discount Costs 50 x $450 810 x $500 810 x $1,500 2 50 x (6% - 2%) = $11,250 = $8,100 = $48,600 $67,950 SOLUTIONS TO PROBLEMS 15.40 (30 min) Budgeted purchases and cash flows a. The correct answer is $225,000. BB + TI = TO + EB (130% x 11,900) + TI = 11,900 + (130% x 11,400) 15,470 + TI = 11,900 + 14,820 TI = 11,900 + 14,820 – 15,470 = 11,250 units 11,250 x $20 = $225,000 b. The correct answer is $243,600. BB + TI = TO + EB (130% x 11,400) + TI = 11,400 + (130% x 12,000) 14,820 + TI = 11,400 + 15,600 TI = 11,400 + 15,600 – 14,820 = 12,180 units 12,180 x $20 = $243,600 c. The correct answer is $333,876. 60% x $363,000* x 97% = $211,266 25% x $363,000* = 90,750 9% x $354,000† = 31,860 $333,876 *August sales †July sales 15.40 (continued) d. The correct answer is $285,379 September purchases paid in October: $225,000* x 46% = $103,500 September selling general and administrative expenses paid in October: [($357,000 x 15%) – $2,000] x 46% = $23,713 October purchases paid in October: $243,600** x 54% = $131,544 October selling, general and administrative expenses paid in October: [($342,000 x 15%) – $2,000] x 54% = $26,622 $103,500 + $23,713 + $131,544 + $26,622 = $285,379 *From part a. of this problem **From part b. of this problem e. The correct answer is 12,260 BB + TI = TO + EB (130% x 12,000) + TI = 12,000 + (130% x 12,200) TI = 12,000 + 15,860 –15,600 = 12,260 units 15.41 (25 min) Production budget EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.42 (40 min) Budgeted income statement and cash budget a. Budgeted income statement EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.42 (continued) b. Cash budget: Cash from operations would equal revenues less cash costs, which excludes depreciation. 15.43 (60 min) Preparing operational budget schedules a. Sales budget for 20x0: Units Price Total Small housing 60,000 $70 $4,200,000 Large housing 40,000 $90 3,600,000 Projected sales $7,800,000 b. Production budget (in units) for 20x0: Small Housing Large Housing Projected sales 60,000 40,000 Add: Desired inventories, December 31, 20x0 25,000 9,000 Total requirements 85,000 49,000 Deduct: Expected inventories, January 1, 20x0 20,000 8,000 Production required (units) 65,000 41,000 c. Raw-material purchases budget (in quantities) for 20x0: Raw Material Sheet Metal Bar Stock Bases Small housings (65,000 units projected to be produced) 260,000 130,000 __ Large housings (41,000 units projected to be produced) 205,000 123,000 41,000 Production requirements 465,000 253,000 41,000 Add: Desired inventories, December 31, 20x0 36,000 32,000 7,000 Total requirements 501,000 285,000 48,000 Deduct: Expected inventories, January 1, 20x0 32,000 29,000 6,000 Purchase requirements (units) 469,000 256,000 42,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.43 (continued) d. Raw-material purchases budget for 20x0: Raw Material Raw Material Required (units) Anticipated Purchase Price Total Sheet metal 469,000 $8 $3,752,000 Bar stock 256,000 5 1,280,000 Bases 42,000 3 126,000 e. Direct-labor budget for 20x0: Projected Production (units) Hours per Unit Total Hours Rate Total Cost Small housing 65,000 2 130,000 $15 $1,950,000 Large housing 41,000 3 123,000 20 2,460,000 Total $4,410,000 f. Manufacturing overhead budget for 20x0: Cost Driver Quantity Cost Driver Rate Budgeted Cost Purchasing and material handling 725,000 lb.a $ .25 $181,250 Depreciation, utilities and inspection 106,000 housingsb 4.00 424,000 Shipping 100,000 housingsc 1.00 100,000 General manufacturing overhead 253,000 hr.d 3.00 759,000 Total manufacturing overhead $1,464,250 a725,000 = 469,000 + 256,000 (from req. d) b106,000 = 65,000 + 41,000 (from req. b) c100,000 = 60,000 + 40,000 (from req. a) d253,000 = 130,000 + 123,000 (from req. e) 15.44 (25 min) Sales expense budget 15.45 (40 min) Ethical issues in budgeting a. The use of alternative accounting methods to manipulate reported earnings is unethical because it violates the standards of ethical conduct for management accountants. The competence standard is violated because of failure to comply with technical standards and lack of appropriate analysis. The integrity standard is violated because this action induces people to carry out duties unethically due to extreme management pressure, subverts the attainment of an organization's objectives, and discredits the profession. The objectivity standard is violated because of failure to communicate information fully and fairly. b. Yes, costs related to revenue should be expensed in the period in which the revenue is recognized. Perishable supplies are purchased for use in the current period, will not provide benefits in future periods, and should be matched against the revenue recognized in the current period. The accounting treatment for the supplies was not in accordance with generally accepted accounting principles. c. Gary Wood's actions were appropriate. Upon discovering the change in the method of accounting for supplies, Wood brought the matter to the attention of his immediate superior, Kern. Upon learning of the arrangement with Pristeel, Wood told Kern the action was improper and requested that the accounts be corrected and the arrangement discontinued. Wood clarified the situation with a qualified and objective peer (advisor) before disclosing Kern's arrangement with Pristeel to Delmarva’s division manager, Kern's immediate superior. Contact with levels above the immediate superior should be initiated only with the superior's knowledge, assuming the superior is not involved. In this case, the superior is involved. Thus, Wood has acted appropriately by approaching North without Kern's knowledge. 15.46 (40 min) Comprehensive budget plan EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.46 (continued) 15.47 (40 minutes) Prepare budgeted financial statements a. Budgeted income statement: EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.47 (continued) Cash from operations would equal revenues less cash costs, which excludes depreciation. 15.48 (45 min) Operational budgeting a. Production budget: Estimated sales for third quarter 18,000 units Less: Beginning inventory (5,000) Plus: Ending inventory (80%  7,000) 5,600 Production requirements for third quarter 18,600 units b. Material, labor, and overhead budgets: (1) Raw Material B42 F68 M03 Usage 108,000 72,000 36,000 Less: Beginning inventory (35,000) (30,000) (14,000) Plus: Ending inventory 42,000 28,000 14,000 Purchases in units 115,000 70,000 36,000 Price per unit  $2.40  $3.60  $1.20 Cost of purchases $276,000 $252,000 $ 43,200 (2) Units Produced DLH per Unit* Total DLH Cost per DLH Total Cost Forming 18,000 .4 7,200 $16 $115,200 Assembly 18,000 1.0 18,000 11 198,000 Finishing 18,000 .125 2,250 12 27,000 27,450 DLH $340,200 *DLH denotes direct-labor hours. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 15.48 (continued) *50% of the budgeted annual cost of $186,000. This assumes that management believes the annual budget for facility-level (fixed) overhead is still valid, and facility-level overhead will be incurred at the same budgeted rate (i.e., $93,000 every six months). Two alternative amounts are also reasonable, depending on the assumptions one makes: (1) $92,500 (original annual budget of $186,000 minus the $93,500 incurred in the first six months), or (2) $93,500, the actual facility-level (fixed) overhead incurred in the first six months. 15.49 (40 min) Production and direct-labor budgets; activity-based overhead budget a. Production and direct-labor budgets BUTLER CORPORATION BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 Month January February March Quarter Sales (units) 10,000 12,000 8,000 30,000 Add: Ending inventory* 16,000 12,500 13,500 13,500 Total needs 26,000 24,500 21,500 43,500 Deduct: Beginning inventory 16,000 16,000 12,500 16,000 Units to be produced 10,000 8,500 9,000 27,500 Direct-labor hours per unit  1 1  .75 Total hours of direct labor time needed 10,000 8,500 6,750 25,250 Direct-labor costs: Wages ($16.00 per DLH)† $160,000 $136,000 $108,000 $404,000 Pension contributions ($.50 per DLH) 5,000 4,250 3,375 12,625 Workers' compensation insurance ($.20 per DLH) 2,000 1,700 1,350 5,050 Employee medical insurance ($.80 per DLH) 8,000 6,800 5,400 20,200 Employer's social security (at 7%) 11,200 9,520 7,560 28,280 Total direct-labor cost $186,200 $158,270 $125,685 $470,155 *100 percent of the first following month's sales plus 50 percent of the second following month's sales. †DLH denotes direct-labor hour. 15.49 (continued) b. Use of data throughout the master budget: Components of the master budget, other than the production budget and the direct-labor budget, that would also use the sales data include the following: • Sales budget • Cost-of-goods-sold budget • Selling and administrative expense budget Components of the master budget, other than the production budget and the direct-labor budget, that would also use the production data include the following: • Direct-material budget • Manufacturing-overhead budget • Cost-of-goods-sold budget Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-labor-hour data include the following: • Manufacturing-overhead budget (for determining the overhead application rate) Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-labor cost data include the following: • Manufacturing-overhead budget (for determining the overhead application rate) • Cost-of-goods-sold budget • Cash budget • Budgeted income statement 15.49 (continued) a. Manufacturing overhead budget: BUTLER CORPORATION MANUFACTURING OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 Month January February March Quarter Shipping and handling $ 25,000 $ 30,000 $20,000 $ 75,000 Purchasing, material handling, and inspection 30,000 25,500 27,000 82,500 Other overhead 70,000 59,500 47,250 176,750 Total manufacturing overhead $125,000 $115,000 $94,250 $334,250 15.50 (25 min) Economic order quantity a. Annual cost of ordering and storing XL-20 = b. Economic order quantity = = = = 600 c. Using the formula given for requirement (1): Total annual cost of ordering and storing XL-20 = = $2,400 Note that this cost does not include the actual cost of XL-20 purchases (i.e., the quantity purchased multiplied by the price). d. Orders per year: Number of orders per year = e. Using the new cost data: (1) EOQ = = = = 100 15.50 (continued) (2) Number of orders per year = = 48 15.51 (20 min) Inventory ordering and holding costs a. Tabulation of inventory ordering and holding costs: Order size 400 600 800 Number of orders (4,800 ÷ order size) 12 8 6 Ordering cost ($150  number of orders) $1,800 $1,200 $900 Average inventory (order size ÷ 2) 200 300 400 Holding costs ($4  average inventory) $800 $1,200 $1,600 Total annual costs (ordering costs + holding costs) $2,600 $2,400 $2,500 minimum b. The tabular method is cumbersome and does not necessarily identify the optimal order quantity. An order quantity other than those included in the table may be the least-cost order quantity. 15.52 (25 min) Graphical analysis of economic order quantity 15.53 (35 min) a. Reorder point: Monthly usage = = Usage during 1-month lead time = 400 canisters Reorder point = 400 canisters The chemical XL-20 should be ordered in the economic order quantity of 600 canisters when the inventory level falls to 400 canisters. In the one month it takes to receive the order, those 400 canisters will be used in production. b. Safety stock and new reorder point: Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average monthly usage still is 400 canisters, there is the potential for an excess range of 100 canisters in any particular month. The safety stock of XL-20 is equal to the potential excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the reorder point is 500 canisters (400 + 100). The materials and parts manager should order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters. During the one-month lead time, another 300 to 500 canisters of XL-20 will be used in production. SOLUTIONS TO CASES 15.54 (120 min) Comprehensive master budget a. Sales budget: 20x0 20x1 December January February March First Quarter Total sales $400,000 $440,000 $484,000 $532,400 $1,456,400 Cash sales* 100,000 110,000 121,000 133,100 364,100 Sales on account† 300,000 330,000 363,000 399,300 1,092,300 *25% of total sales. †75% of total sales. b. Cash receipts budget: 20x1 January February March First Quarter Cash sales $110,000 $121,000 $133,100 $ 364,100 Cash collections from credit sales made during current month* 33,000 36,300 39,930 109,230 Cash collections from credit sales made during preceding month† 270,000 297,000 326,700 893,700 Total cash receipts $413,000 $454,300 $499,730 $1,367,030 *10% of current month's credit sales. †90% of previous month's credit sales. 15.54 (continued) c. Purchases budget: *Since April's expected sales and cost of goods sold are the same as the projections for march, the desired ending inventory for march is the same as that for February. †the desired ending inventory for the quarter is equal to the desired ending inventory on March 31, 20x1. **The beginning inventory for the quarter is equal to the December ending inventory. 15.54 (continued) *40% of current months' purchases [see requirement (c)]. †60% of the prior month's purchases [see requirement (c)]. **Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31. 15.54 (continued) 15.54 (continued) 15.54 (continued) i. UNIVERSAL ELECTRONICS, INC. Budgeted Balance Sheet March 31, 20x1 Cash $ 19,954 Accounts receivable* 365,370 Inventory 186,340 Buildings and equipment (net of accumulated depreciation)† 676,000 Total assets $1,247,664 Accounts payable** $ 223,608 Bond interest payable 5,000 Property taxes payable 900 Bonds payable (10%; due in 20x6) 300,000 Common Stock 490,000 Retained earnings 228,156 Total liabilities and stockholders' equity $ 1,247,664 *Accounts receivable, 12/31/x0 $ 276,000 Sales on account [req. (a)] 1,092,300 Total cash collections from credit sales ($109,230 + $893,700) [req. (b)] (1,002,930 ) Accounts receivable, 3/31/x1 $ 365,370 †Buildings and equipment (net), 12/31/x0 $ 626,000 Cost of equipment acquired 125,000 Depreciation expense for first quarter (75,000 ) Buildings and equipment (net), 3/31/x1 $ 676,000 **Accounts payable, 12/31/x0 $ 176,400 Purchases [req. (c)] 1,051,820 Cash payments for purchases [req. (d)] (1,004,612 ) Accounts payable, 3/31/x1 $ 223,608 15.55 (40 min) Prepare cash budget for service organization The income statement is on a cash basis, hence we start with a budgeted income statement. 15.55 (continued) b. MEMORANDUM Date: Today To: Board of Directors, PHOENIX FITNESS CLUB From: I. M. Student Subject: Comments on Budgeted Income Statement (Cash Basis) The accompanying budget indicates that Phoenix Fitness Club could experience several operational problems in 20x9, including the following: • The lessons and classes contribution to cash decreased because the projected wage increase for lesson and class employees is not made up by the increased volume of lessons and classes. • Operating costs are increasing faster than revenues from membership fees. • The fitness club seems to have a cash management problem. Although there appears to be enough cash generated for the club to meet its obligations, there are past due amounts on equipment and regular accounts. Perhaps the cash balance may not be large enough for day to day operating purposes. c. The manager’s concern with regard to the Board’s expansion goals are justified. The 20x9 budget projections show only a minimal increase in the cash balance. The total cash available is well short of the cash needed for the land purchase over and above the club’s working capital needs. However, it appears that the new equipment purchases can be made on an annual basis. If the Board desires to purchase the adjoining property, it is going to have to consider significant increases in fees or other methods of financing such as membership bonds, or additional mortgage debt. Solution Manual for Cost Management: Strategies for Business Decisions Ronald W. Hilton, Michael W. Maher, Frank H. Selto 9780073526805, 9780072430332, 9780072830088, 9780072299021, 9780072881820, 9780072882551, 9780070874664, 9780072388404, 9780072343533