Middle East Technical University



CH. 9 solutions

This comment is occasionally heard from people who have started and run their own small business for a long period of time. These individuals have great knowledge in their minds about running their business. They feel that they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by feel. This approach can result in several problems. First, if the person who is running the business is sick or traveling, he or she is not available to make decisions and implement plans that could have been clarified by a budget. Second, the purposes of budgeting are important to the effective running of an organization. Budgets facilitate communication and coordination, are useful in resource allocation, and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits without a budgeting process.

9-18 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.

9-19 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.

9-20 The five phases in a product's life cycle are as follows:

(a) Product planning and concept design

(b) Preliminary design

(c) Detailed design and testing

(d) Production

(e) Distribution and customer service

It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle will cover all of the costs to be incurred. A large portion of a product's life-cycle costs will be committed well before they are actually incurred.

Exercise 9-22 (25 minutes)

|1. |Cash collections in October: |

|Month of Sale |Amount Collected in October |

|July | $150,000 ( 4%   | $ 6,000 |

|August | 175,000 ( 10% | 17,500 |

|September | 200,000 ( 15% | 30,000 |

|October | 225,000 ( 70% | 157,500 |

|Total | | $211,000 |

| | |

| |Notice that the amount of sales on account in June, $122,500 was not needed to solve the exercise. |

|2. |Cash collections in fourth quarter from credit sales in fourth quarter. |

| | |Amount Collected |

| |Credit Sales | | | |

|Month of Sale | |October |November |December |

|October |$225,000 |$157,500 |$ 33,750 |$ 22,500 |

|November |250,000 | – |175,000 |37,500 |

|December |212,500 | – | – | 148,750 |

|Total | |$157,500 | 208,750 |$208,750 |

|Total collections in fourth quarter from credit sales | | | | |

|in fourth quarter | | | | |

| | | | |$575,000 |

3. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

Exercise 9-27 (30 minutes)

|1. |Budgeted cash collections for December: |

|Month of Sale |Collections in December |

|November |$400,000 ( 38% |$152,000 |

|December |440,000 ( 60% | 264,000 |

|Total cash collections | |$416,000 |

|2. |Budgeted income (loss) for December: |

|Sales revenue | |$440,000 |

|Less: Cost of goods sold (75% of sales) | | 330,000 |

|Gross margin (25% of sales) | |$110,000 |

|Less: Operating expenses: | | |

| Bad debts expense (2% of sales) |$ 8,800 | |

| Depreciation ($432,000/12) |36,000 | |

| Other expenses |45,200 | |

| Total operating expenses | |  90,000 |

|Income before taxes | |$ 20,000 |

Exercise 9-27 (continued)

|3. |Projected balance in accounts payable on December 31: |

| |The December 31 balance in accounts payable will be equal to December's purchases of merchandise. Since the store's gross margin is 25 |

| |percent of sales, its cost of goods sold must be 75 percent of sales. |

| | | | |

| | |Cost of Goods Sold | |

| | | | |

|Month |Sales | |Amount Purchased in December |

|December |$440,000 |$330,000 |$330,000 ( 20% | $ 66,000 |

|January |400,000 |300,000 |300,000 ( 80% | 240,000 |

|Total December purchases | | | | |

| | | | |$306,000 |

| | |

| |Therefore, the December 31 balance in accounts payable will be $306,000. |

Exercise 9-28 (20 minutes)

| |Memorandum |

| | | |

| |Date: |Today |

| |To: |President, East Bank of Mississippi |

| |From: |I.M. Student and Associates |

| |Subject: |Budgetary slack |

| |Budgetary slack is the difference between a budget estimate that a person provides and a realistic estimate. The practice of creating |

| |budgetary slack is called padding the budget. The primary negative consequence of slack is that it undermines the credibility and |

| |usefulness of the budget as a planning and control tool. When a budget includes slack, the amounts in the budget no longer portray a |

| |realistic view of future operations. |

| | The bank's bonus system for the new accounts manager tends to encourage budgetary slack. Since the manager's bonus is determined by |

| |the number of new accounts generated over the budgeted number, the manager has an incentive to understate her projection of the number |

| |of new accounts. The description of the new accounts manager's behavior shows evidence of such understatement. A 10 percent increase |

| |over the bank's current 10,000 accounts would mean 1,000 new accounts in 20x5. Yet the new accounts manager's projection is only 800 |

| |new accounts. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number. |

| |Problem 9-32 (40 minutes) |

| |1. |

| |Production and direct-labor budgets |

| | |

| | |

| | |

| | |

| | |

| |Shady Shades, Inc. |

| |Budget for Production and Direct Labor |

| |For the First Quarter of 20x1 |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| |Month |

| | |

| | |

| | |

| | |

| |January |

| |February |

| |March |

| |Quarter |

| | |

| |Sales (units) |

| |20,000 |

| |24,000 |

| |16,000 |

| |60,000 |

| | |

| |Add: Ending inventory* |

| |32,000 |

| |25,000 |

| |27,000 |

| |27,000 |

| | |

| |Total needs |

| |52,000 |

| |49,000 |

| |43,000 |

| |87,000 |

| | |

| |Deduct: Beginning inventory |

| |32,000 |

| |32,000 |

| |25,000 |

| |32,000 |

| | |

| |Units to be produced |

| |20,000 |

| |17,000 |

| |18,000 |

| |55,000 |

| | |

| |Direct-labor hours per unit |

| |(      1 |

| |(     1 |

| |(    .75 |

| | |

| | |

| |Total hours of direct labor |

| |time needed |

| | |

| |  20,000 |

| | |

| |17,000 |

| | |

| |13,500 |

| | |

| |50,500 |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| |Direct-labor costs: |

| | |

| | |

| | |

| | |

| | |

| |Wages ($16.00 per DLH)† |

| |$320,000 |

| |$272,000 |

| |$216,000 |

| |$808,000 |

| | |

| |Pension contributions |

| |($.50 per DLH) |

| | |

| |10,000 |

| | |

| |8,500 |

| | |

| |6,750 |

| | |

| |25,250 |

| | |

| |Workers' compensation |

| |insurance ($.20 per DLH) |

| | |

| |4,000 |

| | |

| |3,400 |

| | |

| |2,700 |

| | |

| |10,100 |

| | |

| |Employee medical insurance |

| |($.80 per DLH) |

| | |

| |16,000 |

| | |

| |13,600 |

| | |

| |10,800 |

| | |

| |40,400 |

| | |

| |Employer's social security |

| |(at 7%) |

| | |

| |22,400 |

| | |

| |19,040 |

| | |

| |15,120 |

| | |

| |56,560 |

| | |

| |Total direct-labor cost |

| |$372,400 |

| |$316,540 |

| |$251,370 |

| |$940,310 |

| | |

| | |

| | |

| |*100 percent of the first following month's sales plus 50 percent of the second following month's sales. |

| | |

| |†DLH denotes direct-labor hour. |

| | |

| |Problem 9-32 (Continued) |

| |2. |

| |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 |

| | |

| | |

| |PROBLEM 9-32 (CONTINUED) |

| | |

| |Manufacturing overhead budget: |

| | |

| |Shady Shades, Inc. |

| |Manufacturing Overhead Budget |

| |For the First Quarter of 20x1 |

| | |

| | |

| | |

| |Month |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| |January |

| |February |

| |March |

| |Quarter |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

| |Shipping and handling |

| |$ 60,000 |

| |$ 72,000 |

| |$48,000 |

| |$180,000 |

| | |

| |Purchasing, material handling, and inspection |

| | |

| |90,000 |

| | |

| |76,500 |

| | |

| |81,000 |

| | |

| |247,500 |

| | |

| |Other overhead |

| |210,000 |

| |178,500 |

| |141,750 |

| |530,250 |

| | |

| |Total manufacturing overhead |

| |$360,000 |

| |$327,000 |

| |$270,750 |

| |$957,750 |

| | |

| | |

| |PROBLEM 9-33 (40 MINUTES) |

| | |

| |1. Niagra Chemical Company’s production budget (in gallons) for the three products for 20x2 is calculated as follows: |

| | |

| | |

| |Yarex |

| |Darol |

| |Norex |

| | |

| | |

| | |

| | |

| | |

| | |

| |Sales for 20x2 |

| |120,000 |

| |80,000 |

| |50,000 |

| | |

| |Add: Inventory, 12/31/x2 |

| |(.08 × 20x3 sales) |

| | |

| |_10,400 |

| | |

| |_5,600 |

| | |

| |_4,800 |

| | |

| |Total required |

| |130,400 |

| |85,600 |

| |54,800 |

| | |

| |Deduct: Inventory, 12/31/x1 |

| | |

| | |

| | |

| | |

| |(.08 × 20x2 sales) |

| |9,600 |

| |6,400 |

| |4,000 |

| | |

| |Required production in 20x2 |

| |120,800 |

| |79,200 |

| |50,800 |

| | |

| | |

| |2. The company’s conversion cost budget for 20x2 is shown in the following schedule: |

| | |

| |Conversion hours required: |

| | |

| | |

| | |

| | |

| |Yarex (120,800 × .07) |

| |8,456 |

| | |

| | |

| | |

| |Darol (79,200 × .10) |

| |7,920 |

| | |

| | |

| | |

| |Norex (50,800 × .16) |

| |_8,128 |

| | |

| | |

| | |

| |Total hours |

| |24,504 |

| | |

| | |

| | |

| | |

| |Conversion cost budget (24,504 x $20) |

| | |

| |$490,080 |

| | |

| | |

| | |

| | |

| |PROBLEM 9-33 (CONTINUED) |

| | |

| |3. Since the 20x1 usage of Islin is 200,000 gallons, the firm’s raw-material purchases budget (in dollars) for Islin for 20x2 is as |

| |follows: |

| | |

| |Quantity of Islin required for production in 20x2 (in gallons): |

| |Yarex (120,800 × 1) |

| |Darol (79,200 × .7) |

| |Norex (50,800 × .5) |

| |120,800 |

| |55,440 |

| |25,400 |

| | |

| |Subtotal………………………………………………………………….. |

| |201,640 |

| | |

| |Add: Required inventory, 12/31/x2 (201,640 × .10) |

| |20,164 |

| | |

| |Subtotal |

| |221,804 |

| | |

| |Deduct: Inventory, 1/1/x2 (200,000 × .10) |

| |20,000 |

| | |

| |Required purchases (gallons) |

| |201,804 |

| | |

| | |

| |Purchases budget (201,804 gallons × $5 per gallon) |

| | |

| |$1,009,020 |

| | |

| | |

| |4. The company should continue using Islin, because the cost of using Philin is $152,632 greater than using Islin, calculated as |

| |follows: |

| | |

| |Change in material cost from substituting Philin for Islin: |

| |20x2 production requirements: |

| |Philin (201,640 × $5 × 1.2) |

| |Islin (201,640 × $5) |

| |$1,209,840 |

| |1,008,200 |

| | |

| |Increase in cost of raw material |

| |$ 201,640 |

| | |

| |Change in conversion cost from substituting Philin for Islin: |

| | |

| | |

| |Philin (24,504 × $20 × .9) |

| |$ 441,072 |

| | |

| |Islin (24,504 × $20) |

| |490,080 |

| | |

| |Decrease in conversion cost |

| |$ (49,008) |

| | |

| |Net increase in production cost |

| |$ 152,632 |

| | |

| | |

Problem 9-42 (120 minutes)

|1. |Sales budget: | | | | | |

| | |20x0 | |20x1 |

| | | | | | |First Quarter |

| | |December |January |February |March | |

| |Total sales |$800,000 |$880,000 |$968,000 |$1,064,800 |$2,912,800 |

| |Cash sales* |200,000 |220,000 |242,000 |266,200 |728,200 |

| |Sales on account† |600,000 |660,000 |726,000 |798,600 |2,184,600 |

| | | | | | | |

| |*25% of total sales. | | | | | |

| |†75% of total sales. | | | | | |

| | | | | | | |

|2. |Cash receipts budget: | | | | | |

| | | |20x1 |

| | | | | | |First Quarter |

| | | |January |February |March | |

| |Cash sales |$220,000 |$242,000 |$266,200 |$  728,200 |

| |Cash collections from credit | | | | |

| |sales made during current | | | | |

| |month* |66,000 |72,600 |79,860 |218,460 |

| |Cash collections from credit | | | | |

| |sales made during preceding | | | | |

| |month† | 540,000 | 594,000 | 653,400 |1,787,400 |

| |Total cash receipts |$826,000 |$908,600 |$999,460 |$2,734,060 |

| | | | | | |

| |*10% of current month's credit sales. | | | | |

| |†90% of previous month's credit sales. | | | | |

Problem 9-42 (Continued)

|3. |Purchases budget: | | | | | | |

| | |20x0 | |20x1 | |

| | | | | | |First |

| | |December |January |February |March |Quarter |

| |Budgeted cost of | | | | | |

| |goods sold |$560,000 |$616,000 |$677,600 |$745,360   |$2,038,960    |

| |Add: Desired | | | | | |

| |ending inventory | 308,000 | 338,800 | 372,680 | 372,680* |   372,680†   |

| |Total goods | | | | | |

| |needed |$868,000 |$954,800 |$1,050,280 |$1,118,040   |$2,411,640    |

| |Less: Expected | | | | | |

| |beginning | | | | | |

| |inventory |††280,000 | 308,000 | 338,800 | 372,680 |  308,000** |

| |Purchases |$588,000 |$646,800 |$711,480 |$745,360 |$2,103,640    |

| | |

| |*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. |

| |††50% x $560,000 (where $560,000 = December cost of goods sold = December sales of $800,000 x 70%) |

Problem 9-42 (Continued)

|4. |Cash disbursements budget: | | | | | |

| | | |20x1 |

| | | | | | |First Quarter | |

| | | |January |February |March | | |

| |Inventory purchases: | | | | | |

| |Cash payments for purchases | | | | | |

| |during the current month* |$258,720 |$284,592 |$298,144 |$ 841,456 | |

| |Cash payments for purchases | | | | | |

| |during the preceding | | | | | |

| |month† |352,800 |388,080 |426,888 |1,167,768 | |

| |Total cash payments for | | | | | |

| |inventory purchases |$611,520 |$672,672 |$725,032 |$2,009,224 | |

| | | | | | | |

| |Other expenses: | | | | | |

| | Sales salaries |$ 42,000 |$ 42,000 |$ 42,000 |$ 126,000 | |

| | Advertising and promotion |32,000 |32,000 |32,000 |96,000 | |

| | Administrative salaries |42,000 |42,000 |42,000 |126,000 | |

| | Interest on bonds** |30,000 |-0- |-0- |30,000 | |

| | Property taxes** |-0- |10,800 |-0- |10,800 | |

| | Sales commissions |   8,800 |   9,680 |  10,648 |   29,128 | |

| | | | | | | |

| |Total cash payments for other expenses | | | | | |

| | |$154,800 |$136,480 |$126,648 |$  417,928 | |

| |Total cash disbursements |$766,320 |$809,152 |$851,680 |$2,427,152 | |

| | | |

| |*40% of current month's purchases [see requirement (3)]. | |

| |†60% of the prior month's purchases [see requirement (3)]. | |

| |**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. | |

Problem 9-42 (Continued)

|5. |Summary cash budget: | | | | |

| | |20x1 |

| | | | | |First |

| | |January |February |March |Quarter |

| |Cash receipts [from req. (2)] |$ 826,000 |$ 908,600 |$ 999,460 |$2,734,060 |

| |Cash disbursements | | | | |

| |[from req. (4)] |(766,320) |(809,152) |(851,680) |(2,427,152) |

| |Change in cash balance | | | | |

| |during period due to operations |$  59,680 |$  99,448 |$147,780 |$ 306,908 |

| |Sale of marketable securities | | | | |

| |(1/2/x1) |30,000 | | |30,000 |

| |Proceeds from bank loan | | | | |

| |(1/2/x1) |200,000 | | |200,000 |

| |Purchase of equipment |(250,000) | | |(250,000) |

| |Repayment of bank loan | | | | |

| |(3/31/x1) | | |(200,000) |(200,000) |

| |Interest on bank loan* | | |(5,000) |(5,000) |

| |Payment of dividends | | |(100,000) | (100,000) |

| | | | | | |

| |Change in cash balance during | | | | |

| |first quarter | | | |$  (18,092) |

| |Cash balance, 1/1/x1 | | | |   70,000 |

| |Cash balance, 3/31/x1 | | | |$  51,908 |

| | |

| |*$200,000 ( 10% per year ( 1/4 year = $5,000 |

| | | |

|6. |Analysis of short-term financing needs: | |

| |Projected cash balance as of December 31, 20x0 |$   70,000   |

| |Less: Minimum cash balance |   50,000   |

| |Cash available for equipment purchases |$   20,000   |

| |Projected proceeds from sale of marketable securities |   30,000   |

| |Cash available |$  50,000   |

| |Less: Cost of investment in equipment |  250,000   |

| |Required short-term borrowing |$(200,000) |

Problem 9-42 (Continued)

|7. |Global Electronics Company |

| |Budgeted Income Statement |

| |for the First Quarter of 20x1 |

| | |

| | |

| | | | |

| |Sales revenue | |$2,912,800 |

| |Less: Cost of goods sold | | 2,038,960 |

| |Gross margin | |$  873,840 |

| |Selling and administrative expenses: | | |

| | Sales salaries |$126,000 | |

| | Sales commissions |29,128 | |

| | Advertising and promotion |96,000 | |

| | Administrative salaries |126,000 | |

| | Depreciation |150,000 | |

| | Interest on bonds |15,000 | |

| | Interest on short-term bank loan |5,000 | |

| | Property taxes |  5,400 | |

| |Total selling and administrative expenses | |  552,528 |

| |Net income | |$  321,312 |

|8. |Global Electronics Company |

| |Budgeted Statement of Retained Earnings |

| |for the First Quarter of 20x1 |

| | |

| | |

| | | |

| |Retained earnings, 12/31/x0 |$ 215,000 |

| |Add: Net income |321,312 |

| |Deduct: Dividends |  100,000 |

| |Retained earnings, 3/31/x1 |$ 436,312 |

Problem 9-42 (Continued)

|9. |Global Electronics Company |

| |Budgeted Balance Sheet |

| |March 31, 20x1 |

| | |

| | |

| | | |

| |Cash |$   51,908 | |

| |Accounts receivable* |718,740 | |

| |Inventory |372,680 | |

| |Buildings and equipment (net of accumulated depreciation)† | 1,352,000 | |

| |Total assets |$2,495,328 | |

| | | | |

| |Accounts payable** |$  447,216 | |

| |Bond interest payable |10,000 | |

| |Property taxes payable |1,800 | |

| |Bonds payable (10%; due in 20x6) |600,000 | |

| |Common Stock |1,000,000 | |

| |Retained earnings |   436,312 | |

| |Total liabilities and stockholders' equity |$2,495,328 | |

| | | | |

| |*Accounts receivable, 12/31/x0 |$ 540,000 | |

| |Sales on account [req. (1)] |2,184,600 | |

| |Total cash collections from credit sales | | |

| |[(req. (2)] ($218,460 + $1,787,400) |(2,005,860 |)|

| |Accounts receivable, 3/31/x1 |$  718,740 | |

| | | | |

| |†Buildings and equipment (net), 12/31/x0 |$1,252,000 | |

| |Cost of equipment acquired |250,000 | |

| |Depreciation expense for first quarter |  (150,000 |)|

| |Buildings and equipment (net), 3/31/x1 |$1,352,000 | |

| | | | |

| |**Accounts payable, 12/31/x0 |$ 352,800 | |

| |Purchases [req. (3)] |2,103,640 | |

| |Cash payments for purchases [req. (4)] |(2,009,224 |)|

| |Accounts payable, 3/31/x1 |$ 447,216 | |

PROBLEM 9-34 (25 MINUTES)

1. Tuition revenue budget:

|Current student enrollment……………………. |12,000 |

|Add: 5% increase in student body…………… | 600 |

|Total student body………………………………. |12,600 |

|Less: Tuition-free scholarships………………. | 180 |

|Tuition-paying students………………………… |12,420 |

|Credit hours per student per year……………. | x 30 |

|Total credit hours……………………………….. |372,600 |

|Tuition rate per hour……………………………. | x $75 |

|Forecasted tuition revenue……………………. |$27,945,000 |

2. Faculty needed to cover classes:

|Total student body……………………………………. |12,600 |

|Classes per student per year [(15 credit hours ÷ 3 credit hours) x 2 | |

|semesters]…………………. |x 10 |

|Total student class enrollments to be covered…. |126,000 |

|Students per class……………………………………. | ÷ 25 |

|Classes to be taught…………………………………. |5,040 |

|Classes taught per professor………………………. | ÷ 5 |

|Faculty needed………………………………………… | 1,008 |

3. Possible actions might include:

• Hire part-time instructors

• Use graduate teaching assistants

• Increase the teaching load for each professor

• Increase class size and reduce the number of sections to be offered

• Have students take an Internet-based course offered by another university

• Shift courses to a summer session

4. No. While the number of faculty may be a key driver, the number of faculty is highly dependent on the number of students. Students (and tuition revenue) are akin to sales—the starting point in the budgeting process.

problem 9-35 (25 minutes)

|1. |Sales budget |

| |July |August |September |

|Sales (in sets) | 5,000 | 6,000 | 7,500 |

|Sales price per set | ( $60 | ( $60 | ( $60 |

|Sales revenue | $300,000 | $360,000 | $450,000 |

|2. |Production budget (in sets) |

| |July |August |September |

|Sales | 5,000 | 6,000 | 7,500 |

|Add: Desired ending inventory | 1,200 | 1,500 | 1,500 |

|Total requirements | 6,200 | 7,500 | 9,000 |

|Less: Projected beginning inventory | 1,000 | 1,200 | 1,500 |

|Planned production | 5,200 | 6,300 | 7,500 |

|3. |Raw-material purchases |

| |July |August |September |

|Planned production (sets) | 5,200 | 6,300 | 7,500 |

|Raw material required per set | | | |

|(board feet) |( 10 |( 10 |( 10 |

|Raw material required for production | | | |

|(board feet) |52,000 |63,000 |75,000 |

|Add: Desired ending inventory of raw | | | |

|material (board feet) |6,300 |7,500 |8,000 |

|Total requirements | 58,300 | 70,500 | 83,000 |

|Less: Projected beginning inventory of | | | |

|raw material (board feet) |5,200 |6,300 |7,500 |

|Planned purchases of raw material | | | |

|(board feet) |53,100 |64,200 |75,500 |

|Cost per board foot | ( $.60 | ( $.60 | ( $.60 |

|Planned purchases of raw material | | | |

|(dollars) |$ 31,860 |$ 38,520 |$ 45,300 |

PROBLEM 9-35 (Continued)

|4. |Direct-labor budget |

| |July |August |September |

|Planned production (sets) | 5,200 | 6,300 | 7,500 |

|Direct-labor hours per set | ( 1.5 | ( 1.5 | ( 1.5 |

|Direct-labor hours required | 7,800 | 9,450 | 11,250 |

|Cost per hour | ( $21 | ( $21 | ( $21 |

|Planned direct-labor cost | $163,800 | $198,450 | $236,250 |

5. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: hilton8e.

PROBLEM 9-36 (30 MINUTES)

1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the following month. December receivables of $108,000 equal 60% of December’s sales; thus, December sales total $180,000 ($108,000 ÷ .6). Since the selling price is $20 per unit, Dakota Fan sold 9,000 units ($180,000 ÷ $20).

2. Since the company expects to sell 10,000 units, sales revenue will total $200,000 (10,000 units x $20).

3. Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus, February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000 + $114,000), February sales ($196,000), and March sales ($200,000), the company will report revenue of $586,000.

4. Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).

5. Finished-goods inventories are maintained at 20% of the following month’s sales. January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20). Thus, the December 31 inventory is 1,900 units (9,500 x 20%).

6. February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January 31 inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:

12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory

1,900 + X - 9,500 = 1,960

X – 7,600 = 1,960

X = 9,560

7. Financing required is $3,500 ($15,000 minimum balance less ending cash balance of $11,500):

|Cash balance, January 1………………………… |$ 22,500 |

|Add: January receipts ($108,000 + $76,000).. | 184,000 |

|Subtotal………………………………………… |$206,500 |

|Less: January payments………………………… | 195,000 |

|Cash balance before financing…………………. |$ 11,500 |

Problem 9-37 (45 minutes)

|1. |The benefits that can be derived from implementing a budgeting system include the following: |

| |The preparation of budgets forces management to plan ahead and to establish goals and objectives that can be quantified. |

| |Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the |

| |objectives of the entire firm. |

| |The budgeting process promotes internal communication and coordination. |

| |Budgets provide directions for day-to-day control of operations, clarify duties to be performed, and assign responsibility for these |

| |duties. |

| |Budgets help in measuring performance and providing incentives. |

| |Budgets provide a vehicle for resource allocation. |

Problem 9-37 (Continued)

|2. | | |

| |a. Schedule |b. Subsequent Schedule |

| |Sales Budget |Production Budget |

| | |Selling Expense Budget |

| | |Budgeted Income Statement |

| | | |

| |Ending Inventory Budget (units) |Production Budget |

| |Production Budget (units) |Direct-Material Budget |

| | |Direct-Labor Budget |

| | |Manufacturing-Overhead Budget |

| | | |

| |Direct-Material Budget |Cost-of-Goods-Manufactured Budget |

| |Direct-Labor Budget |Cost-of-Goods-Manufactured Budget |

| |Manufacturing-Overhead Budget |Cost-of-Goods-Manufactured Budget |

| |Cost-of-Goods-Manufactured Budget |Cost-of-Goods-Sold Budget |

| |Cost-of-Goods-Sold Budget (includes ending inventory in dollars) |Budgeted Income Statement |

| | |Budgeted Balance Sheet |

| | | |

| |Selling Expense Budget |Budgeted Income Statement |

| | | |

| |Research and Development Budget |Budgeted Income Statement |

| |Administrative Expense Budget |Budgeted Income Statement |

| | | |

| |Budgeted Income Statement |Budgeted Balance Sheet |

| | |Budgeted Statement of Cash Flows |

| | | |

| |Capital Expenditures Budget |Cash Receipts and Disbursements Budget |

| | |Budgeted Balance Sheet |

| | |Budgeted Statement of Cash Flows |

| | | |

| |Cash Receipts and Disbursements |Budgeted Balance Sheet |

| |Budget |Budgeted Statement of Cash Flows |

| |Budgeted Balance Sheet |Budgeted Statement of Cash Flows |

| |Budgeted Statement of Cash Flows | |

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