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
July...............................................................
August.........................................................

Amount Collected in October

$ 6,000
$150,000 4%
17,500
175,000 10%

September...................................................
October........................................................
Total.............................................................

200,000 15%
225,000 70%

30,000
157,500
$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
Month of Sale
October............................................
November........................................
December.........................................
Total.................................................
Total collections in fourth quarter
from credit sales in fourth
quarter.........................................
3.

Credit
Sales
$225,000
250,000
212,500

October
$157,500

$157,500

November
$ 33,750
175,000

208,750

December
$ 22,500
37,500
148,750
$208,750
$575,000

THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL BUILD A

SPREADSHEET SOLUTIONS IS AVAILABLE ON YOUR INSTRUCTORS CD
AND ON THE HILTON, 8E WEBSITE: www.mhhe.com/hilton8e.

EXERCISE 9-27 (30 MINUTES)

1.

Budgeted cash collections for December:

Month of Sale
November.............................................................
December..............................................................
Total cash collections..........................................

2.

Collections in December
$152,000
$400,000 38%
264,000
440,000 60%
$416,000

Budgeted income (loss) for December:

Sales revenue.......................................................................
Less: Cost of goods sold (75% of sales)............................
Gross margin (25% of sales)...............................................
Less: Operating expenses:..................................................
Bad debts expense (2% of sales)..............................
Depreciation ($432,000/12)........................................
Other expenses..........................................................
Total operating expenses..........................................
Income before taxes.............................................................

$440,000
330,000
$110,000
$8,800
36,000
45,200
90,000
$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.

Month
December....................
January.......................
Total December
purchases................

Sales
$440,000
400,000

Cost of
Goods
Sold
$330,000
300,000

Amount Purchased in December

$ 66,000
$330,000 20%
240,000
300,000 80%

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

$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

Sales (units).....................................................
Add: Ending inventory*...................................
Total needs.......................................................
Deduct: Beginning inventory..........................
Units to be produced.......................................
Direct-labor hours per unit..............................
Total hours of direct labor
time needed.................................................
Direct-labor costs:
Wages ($16.00 per DLH).............................
Pension contributions
($.50 per DLH).........................................
Workers' compensation
insurance ($.20 per DLH)........................
Employee medical insurance
($.80 per DLH).........................................
Employer's social security
(at 7%)......................................................
Total direct-labor cost.....................................

January
20,000
32,000
52,000
32,000
20,000
1

Month
February
24,000
25,000
49,000
32,000
17,000
1

March
16,000
27,000
43,000
25,000
18,000
.75

Quarter
60,000
27,000
87,000
32,000
55,000

20,000

17,000

13,500

50,500

$320,000

$272,000

$216,000

$808,000

10,000

8,500

6,750

25,250

4,000

3,400

2,700

10,100

16,000

13,600

10,800

40,400

22,400
$372,400

19,040
$316,540

15,120
$251,370

56,560
$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

PROBLEM 9-42 (120 MINUTES)

1.

Sales budget:
20x0
Total sales........................
Cash sales*......................
Sales on account............

December
$800,000
200,000
600,000

20x1
January February
$880,000 $968,000
220,000
242,000
660,000
726,000

March
$1,064,800
266,200
798,600

First
Quarter
$2,912,800
728,200
2,184,600

*25% of total sales.

75% of total sales.

2.

Cash receipts budget:

20x1
Cash sales.............................................
Cash collections from credit
sales made during current
month*...............................................
Cash collections from credit
sales made during preceding
month................................................
Total cash receipts...............................
*10% of current month's credit sales.

90% of previous month's credit sales.

January
$220,000

February
$242,000

March
$266,200

First
Quarter
$ 728,200

66,000

72,600

79,860

218,460

540,000
$826,000

594,000
$908,600

653,400
$999,460

1,787,400
$2,734,060

PROBLEM 9-42 (CONTINUED)

3.

Purchases budget:
20x0
December
Budgeted cost of
goods sold.................. $560,000
Add: Desired
ending inventory........ 308,000
Total goods
needed......................... $868,000

20x1
January

February

March

First
Quarter

$616,000

$677,600

$745,360

$2,038,960

338,800

372,680

372,680*

372,680

$1,050,280 $1,118,040

$2,411,640

$954,800

Less: Expected
beginning
inventory..................... 280,000
Purchases........................ $588,000

308,000
$646,800

338,800
$711,480

372,680
$745,360

308,000**
$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
January

February

$258,720

$284,592

$298,144

$ 841,456

352,800

388,080

426,888

1,167,768

$611,520

$672,672

$725,032

$2,009,224

Other expenses:
Sales salaries...................................
Advertising and promotion.............
Administrative salaries...................
Interest on bonds**.........................
Property taxes**...............................
Sales commissions.........................

$ 42,000
32,000
42,000
30,000
-08,800

$ 42,000
32,000
42,000
-010,800
9,680

$ 42,000
32,000
42,000
-0-010,648

$ 126,000
96,000
126,000
30,000
10,800
29,128

Total cash payments for other

expenses..........................................
Total cash disbursements....................

$154,800
$766,320

$136,480
$809,152

$126,648
$851,680

$ 417,928
$2,427,152

Inventory purchases:
Cash payments for purchases
during the current month*........
Cash payments for purchases
during the preceding
month........................................
Total cash payments for
inventory purchases.......................

March

First
Quarter

*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
January
Cash receipts [from req. (2)]................ $ 826,000
Cash disbursements
[from req. (4)]................................... (766,320)
Change in cash balance
during period due to operations.... $ 59,680
Sale of marketable securities
(1/2/x1)..............................................
30,000
Proceeds from bank loan
(1/2/x1).............................................. 200,000
Purchase of equipment........................ (250,000)
Repayment of bank loan
(3/31/x1)............................................
Interest on bank loan*..........................
Payment of dividends...........................

First
Quarter
$2,734,060

February
$ 908,600

March
$ 999,460

(809,152)

(851,680)

(2,427,152)

$ 99,448

$147,780

$ 306,908
30,000
200,000
(250,000)

(200,000) (200,000)
(5,000)
(5,000)
(100,000) (100,000)

Change in cash balance during

first quarter......................................
Cash balance, 1/1/x1.............................
Cash balance, 3/31/x1...........................

$ (18,092)
70,000
$ 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.......................................
Less: Minimum cash balance.......................................................................
Cash available for equipment purchases....................................................
Projected proceeds from sale of marketable securities.............................
Cash available................................................................................................
Less: Cost of investment in equipment.......................................................
Required short-term borrowing....................................................................

$ 70,000
50,000
$ 20,000
30,000
$ 50,000
250,000
$(200,000)

PROBLEM 9-42 (CONTINUED)

7.

GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
FOR THE FIRST QUARTER OF 20X1
Sales revenue.........................................................................
Less: Cost of goods sold......................................................
Gross margin.........................................................................
Selling and administrative expenses:
Sales salaries....................................................................
Sales commissions..........................................................
Advertising and promotion..............................................
Administrative salaries....................................................
Depreciation.....................................................................
Interest on bonds.............................................................
Interest on short-term bank loan.....................................
Property taxes..................................................................
Total selling and administrative expenses..........................
Net income.............................................................................

8.

$2,912,800
2,038,960
$ 873,840
$126,000
29,128
96,000
126,000
150,000
15,000
5,000
5,400

552,528
$ 321,312

GLOBAL ELECTRONICS COMPANY

BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE FIRST QUARTER OF 20X1
Retained earnings, 12/31/x0........................................................................
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
Retained earnings, 3/31/x1..........................................................................

$ 215,000
321,312
100,000
$ 436,312

PROBLEM 9-42 (CONTINUED)

9.

GLOBAL ELECTRONICS COMPANY

BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash................................................................................................................
Accounts receivable*....................................................................................
Inventory........................................................................................................
Buildings and equipment (net of accumulated depreciation)...................
Total assets....................................................................................................

$ 51,908
718,740
372,680
1,352,000
$2,495,328

Accounts payable**.......................................................................................
Bond interest payable...................................................................................
Property taxes payable..................................................................................
Bonds payable (10%; due in 20x6)...............................................................
Common Stock..............................................................................................
Retained earnings..........................................................................................
Total liabilities and stockholders' equity.....................................................

$ 447,216
10,000
1,800
600,000
1,000,000
436,312
$2,495,328

*Accounts receivable, 12/31/x0.....................................................................

Sales on account [req. (1)]............................................................................
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400).............................................................
Accounts receivable, 3/31/x1........................................................................

$ 540,000
2,184,600

Buildings and equipment (net), 12/31/x0....................................................

Cost of equipment acquired.........................................................................
Depreciation expense for first quarter.........................................................
Buildings and equipment (net), 3/31/x1.......................................................

$1,252,000
250,000
(150,000)
$1,352,000

**Accounts payable, 12/31/x0.......................................................................

Purchases [req. (3)].......................................................................................
Cash payments for purchases [req. (4)]......................................................
Accounts payable, 3/31/x1............................................................................
PROBLEM 9-34 (25 MINUTES)

$ 352,800
2,103,640
(2,009,224)
$ 447,216

1.

Tuition revenue budget:

Current student enrollment.
Add: 5% increase in student body
Total student body.
Less: Tuition-free scholarships.
Tuition-paying students
Credit hours per student per year.
Total credit hours..
Tuition rate per hour.

12,000
600
12,600
180
12,420
x 30
372,600
x $75

(2,005,860)
$ 718,740

Forecasted tuition revenue.

2.

$27,945,000

Faculty needed to cover classes:

Total student body.
Classes per student per year [(15 credit hours
3 credit hours) x 2 semesters].
Total student class enrollments to be covered.
Students per class.
Classes to be taught.
Classes taught per professor.
Faculty needed

12,600
x 10
126,000
25
5,040
5
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 salesthe starting point in the budgeting process.

PROBLEM 9-35 (25 MINUTES)

1.

Sales budget
Sales (in sets)..............................................
Sales price per set......................................
Sales revenue..............................................

2.

August
6,000

$60
$360,000

September
7,500

$60
$450,000

July
5,000
1,200
6,200
1,000
5,200

August
6,000
1,500
7,500
1,200
6,300

September
7,500
1,500
9,000
1,500
7,500

Production budget (in sets)

Sales............................................................
Add: Desired ending inventory..................
Total requirements......................................
Less: Projected beginning inventory........
Planned production....................................

3.

July
5,000

$60
$300,000

Raw-material purchases
Planned production (sets).............................
Raw material required per set
(board feet).................................................
Raw material required for production
(board feet).................................................
Add: Desired ending inventory of raw
material (board feet)..................................
Total requirements.........................................
Less: Projected beginning inventory of
raw material (board feet)...........................
Planned purchases of raw material
(board feet).................................................
Cost per board foot........................................
Planned purchases of raw material
(dollars)......................................................

July
5,200

10

August
6,300

10

September
7,500

10

52,000

63,000

75,000

6,300
58,300

7,500
70,500

8,000
83,000

5,200

6,300

7,500

53,100
$.60

64,200
$.60

75,500
$.60

$ 31,860

$ 38,520

$ 45,300

PROBLEM 9-35 (CONTINUED)

4.

Direct-labor budget
Planned production (sets).............................
Direct-labor hours per set.............................
Direct-labor hours required...........................
Cost per hour.................................................
Planned direct-labor cost..............................

5.

July
5,200

1.5
7,800

$21
$163,800

August
6,300

1.5
9,450

$21
$198,450

September
7,500

1.5
11,250

$21
$236,250

The electronic version of the Solutions Manual BUILD A SPREADSHEET

SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/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 Decembers
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 Februarys sales during February, or $78,400. Thus,
Februarys 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 Marchs sales will be outstanding, or $120,000 ($200,000 x 60%).

5.

Finished-goods inventories are maintained at 20% of the following months 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 $ 11,500
financing.

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
Sales Budget

b. Subsequent Schedule
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

Budget

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Budgeted Statement of Cash Flows