Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-1 (20 minutes)

1. July August September Total

May sales:
$430,000 × 10%........ $ 43,000 $ 43,000
June sales:
$540,000 × 70%,
10%.......................... 378,000 $ 54,000 432,000
July sales:
$600,000 × 20%,
70%, 10%................. 120,000 420,000 $ 60,000 600,000
August sales:
$900,000 × 20%,
70%.......................... 180,000 630,000 810,000
September sales:
$500,000 × 20%........ 100,000 100,000
Total cash collections..... $541,000 $654,000 $790,000 $1,985,000

Notice that even though sales peak in August, cash collections peak
in September. This occurs because the bulk of the company’s
customers pay in the month following sale. The lag in collections that
this creates is even more pronounced in some companies. Indeed, it
is not unusual for a company to have the least cash available in the
months when sales are greatest.

2. Accounts receivable at September 30:

From August sales: $900,000 × 10%...................... $ 90,000
From September sales: $500,000 × (70% + 10%). . 400,000
Total accounts receivable....................................... $490,000

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Solutions Manual, Chapter 8
Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-2 (10 minutes)

July August Sept. Quarter

Budgeted sales in units............ 30,000 45,000 60,000 135,000
Add desired ending inventory*.. 4,500 6,000 5,000 5,000
Total needs............................. 34,500 51,000 65,000 140,000
Less beginning inventory.......... 3,000 4,500 6,000 3,000
Required production................. 31,500 46,500 59,000 137,000

*10% of the following month’s sales

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-3 (15 minutes)

Quarter—Year 2 Year 3
First Second Third Fourth First
Required production of calculators........... 60,000 90,000 150,000 100,000 80,000
Number of chips per calculator................ × 3 × 3 × 3 × 3 × 3
Total production needs—chips................. 180,000 270,000 450,000 300,000 240,000

Year 2
First Second Third Fourth Year
Production needs—chips......................... 180,000 270,000 450,000 300,000 1,200,000
Add desired ending inventory—chips........ 54,000 90,000 60,000 48,000 48,000
Total needs—chips.................................. 234,000 360,000 510,000 348,000 1,248,000
Less beginning inventory—chips.............. 36,000 54,000 90,000 60,000 36,000
Required purchases—chips...................... 198,000 306,000 420,000 288,000 1,212,000
Cost of purchases at $2 per chip.............. $396,000 $612,000 $840,000 $576,000 $2,424,000

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-4 (20 minutes)

1. Assuming that the direct labor workforce is adjusted each quarter, the direct
labor budget would be:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Units to be produced.................... 5,000 4,400 4,500 4,900 18,800
Direct labor time per unit (hours). . ×0.40 ×0.40 ×0.40 ×0.40 ×0.40
Total direct labor hours needed... . 2,000 1,760 1,800 1,960 7,520
Direct labor cost per hour............. ×$11.00 ×$11.00 ×$11.00 ×$11.00 ×$11.00
Total direct labor cost.................. $22,000 $19,360 $19,800 $21,560 $82,720

2. Assuming that the direct labor workforce is not adjusted each quarter and that
overtime wages are paid, the direct labor budget would be:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Units to be produced.................... 5,000 4,400 4,500 4,900 18,800
Direct labor time per unit (hours). . ×0.40 ×0.40 ×0.40 ×0.40 ×0.40
Total direct labor hours needed... . 2,000 1,760 1,800 1,960 7,520
Regular hours paid....................... 1,800 1,800 1,800 1,800 7,200
Overtime hours paid..................... 200 0 0 160 360
Wages for regular hours
(@ $11.00 per hour).................. $19,800 $19,800 $19,800 $19,800 $79,200
Overtime wages (@ $11.00 per
hour × 1.5 hours)..................... 3,300 0 0 2,640 5,940
Total direct labor cost.................. $23,100 $19,800 $19,800 $22,440 $85,140

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-5 (15 minutes)

1. Krispin Corporation
Manufacturing Overhead Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Budgeted direct labor-hours......... 5,000 4,800 5,200 5,400 20,400
Variable overhead rate................. × $1.75 × $1.75 × $1.75 × $1.75 × $1.75
Variable manufacturing overhead. . $ 8,750 $ 8,400 $ 9,100 $ 9,450 $ 35,700
Fixed manufacturing overhead...... 35,000 35,000 35,000 35,000 140,000
Total manufacturing overhead...... 43,750 43,400 44,100 44,450 175,700
Less depreciation......................... 15,000 15,000 15,000 15,000 60,000
Cash disbursements for
manufacturing overhead............ $28,750 $28,400 $29,100 $29,450 $115,700

2. Total budgeted manufacturing overhead for the year (a)...................................... $175,700

Total budgeted direct labor-hours for the year (b)................................................ 20,400
Predetermined overhead rate for the year (a) ÷ (b)............................................. $8.61

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-6 (15 minutes)

Haerve Company
Selling and Administrative Expense Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Budgeted unit sales.................................. 12,000 14,000 11,000 10,000 47,000
Variable selling and administrative expense
per unit................................................. × $2.75 × $2.75 × $2.75 × $2.75 × $2.75
Variable expense...................................... $ 33,000 $ 38,500 $ 30,250 $ 27,500 $129,250
Fixed selling and administrative expenses:
Advertising............................................ 12,000 12,000 12,000 12,000 48,000
Executive salaries................................... 40,000 40,000 40,000 40,000 160,000
Insurance.............................................. 6,000 6,000 12,000
Property taxes........................................ 6,000 6,000
Depreciation.......................................... 16,000 16,000 16,000 16,000 64,000
Total fixed selling and administrative
expenses............................................... 68,000 74,000 74,000 74,000 290,000
Total selling and administrative expenses. . . 101,000 112,500 104,250 101,500 419,250
Less depreciation...................................... 16,000 16,000 16,000 16,000 64,000
Cash disbursements for selling and
administrative expenses.......................... $ 85,000 $ 96,500 $ 88,250 $ 85,500 $355,250

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-7 (20 minutes)

Forest Outfitters
Cash Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Cash balance,
beginning............ $ 50,000 $ 30,000 $ 69,800 $ 49,800 $ 50,000
Total cash receipts. . 340,000 670,000 410,000 470,000 1,890,000
Total cash available. 390,000 700,000 479,800 519,800 1,940,000
Less total cash
disbursements...... 530,000 450,000 430,000 480,000 1,890,000
Excess (deficiency)
of cash available
over
disbursements...... (140,000) 250,000 49,800 39,800 50,000
Financing:
Borrowings (at
beginning)*....... 170,000 170,000
Repayments (at
ending)............. (170,000) (170,000)
Interest ..............
§
(10,200) (10,200)
Total financing........ 170,000 (180,200) (10,200)
Cash balance,
ending................. $ 30,000 $ 69,800 $ 49,800 $ 39,800 $ 39,800

* Since the deficiency of cash available over disbursements is $140,000,

the company must borrow $170,000 to maintain the desired ending
cash balance of $30,000.
§
$170,000 × 3% × 2 quarters = $10,200

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-8 (10 minutes)

Seattle Cat
Budgeted Income Statement
Sales (380 units @ $1,850 each).......................... $703,000
Cost of goods sold (380 units @ $1,425 each)....... 541,500
Gross margin...................................................... 161,500
Selling and administrative expenses*.................... 137,300
Net operating income.......................................... 24,200
Interest expense................................................. 11,000
Net income......................................................... $ 13,200
* 380 × $85 + $105,000 = $137,300

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 8-9 (20 minutes)

Academic Copy
Budgeted Balance Sheet
Assets
Current assets:
Cash*............................................... $ 4,400
Accounts receivable............................ 6,500
Supplies inventory.............................. 2,100
Total current assets.............................. $13,000
Plant and equipment:
Equipment......................................... 28,000
Accumulated depreciation................... (9,000)
Plant and equipment, net...................... 19,000
Total assets......................................... $32,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................... $ 1,900
Stockholders' equity:
Common stock................................... $ 4,000
Retained earnings#............................ 26,100
Total stockholders' equity...................... 30,100
Total liabilities and stockholders' equity. . $32,000
* Plug figure.
# Retained earnings is computed as follows:
Retained earnings, beginning balance. . $21,000
Add net income.................................. 8,600
29,600
Deduct dividends............................... 3,500
Retained earnings, ending balance...... $26,100

Problem 8-23 (45 minutes)

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Solutions Manual, Chapter 8 9
Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

1. Schedule of expected cash collections:

Month
April May June Quarter
From accounts receivable. $141,000 $ 7,200 $148,200
From April sales:
20% × 200,000............ 40,000 40,000
75% × 200,000............ 150,000 150,000
4% × 200,000.............. $ 8,000 8,000
From May sales:
20% × 300,000............ 60,000 60,000
75% × 300,000............ 225,000 225,000
From June sales:
20% × 250,000............ 50,000 50,000
Total cash collections....... $181,000 $217,200 $283,000 $681,200

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Chapter 9

Exercise 9-1 (10 minutes)

Gator Divers
Flexible Budget
For the Month Ended March 31
Actual diving-hours....................................... 190
Revenue ($380.00q)...................................... $72,200
Expenses:
Wages and salaries ($12,000 + $130.00q). . . 36,700
Supplies ($5.00q)....................................... 950
Equipment rental ($2,500 + $26.00q).......... 7,440
Insurance ($4,200)..................................... 4,200
Miscellaneous ($540 + $1.50q).................... 825
Total expense............................................... 50,115
Net operating income.................................... $22,085

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 9-2 (10 minutes)

1. The activity variances are shown below:

Air Meals
Activity Variances
For the Month Ended December 31
Activity
Planning Flexible Variance
Budget Budget s
Meals.......................................... 20,000 21,000
Revenue ($3.80q)........................ $76,000 $79,800 $3,800 F
Expenses:
Raw materials ($2.30q)............. 46,000 48,300 2,300 U
Wages and salaries
($6,400 + $0.25q).................. 11,400 11,650 250 U
Utilities ($2,100 + $0.05q)......... 3,100 3,150 50 U
Facility rent ($3,800)................. 3,800 3,800 0
Insurance ($2,600)................... 2,600 2,600 0
Miscellaneous ($700 + $0.10q). . 2,700 2,800 100 U
Total expense.............................. 69,600 72,300 2,700 U
Net operating income................... $ 6,400 $ 7,500 $1,100 F

2. Management should note that the level of activity was above what had
been planned for the month. This led to an expected increase in profits
of $1,100. However, the individual items on the report should not
receive much management attention. The favorable variance for
revenue and the unfavorable variances for expenses are entirely caused
by the increase in activity.

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 9-3 (15 minutes)

Olympia Bivalve
Revenue and Spending Variances
For the Month Ended July 31
Revenue
and
Spending
Flexible Actual Variance
Budget Results s
Pounds....................................... 7,000 7,000
Revenue ($4.20q)........................ $29,400 $28,600 $ 800 U
Expenses:
Packing supplies ($0.40q).......... 2,800 2,970 170 U
Oyster bed maintenance 3,600 3,460 140 F
($3,600)................................
Wages and salaries 6,040 6,450 410 U
($2,540 + $0.50q)..................
Shipping ($0.75q)..................... 5,250 4,980 270 F
Utilities ($1,260)....................... 1,260 1,070 190 F
Other ($510 + $0.05q).............. 860 1,480 620 U
Total expense.............................. 19,810 20,410 600 U
Net operating income................... $ 9,590 $ 8,190 $1,400 U

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Exercise 9-4 (20 minutes)

1.
Mt. Hood Air
Flexible Budget Performance Report
For the Month Ended August 31
Revenue
Plannin Flexibl and Actual
g Activity e Spending Result
Budget Variances Budget Variances s
Flights (q)...................................... 50 52 52
Revenue ($360.00q)....................... $18,000 $720 F $18,720 $1,740 U $16,980
Expenses:
Wages and salaries 8,400 184 U 8,584 44 F 8,540
($3,800 + $92.00q)...................
Fuel ($34.00q)............................. 1,700 68 U 1,768 162 U 1,930
Airport fees ($870 + $35.00q)...... 2,620 70 U 2,690 0 2,690
Aircraft depreciation ($11.00q)..... 550 22 U 572 0 572
Office expenses ($230 + $1.00q).. 280 2 U 282 168 U 450
Total expense................................ 13,550 346 U 13,896 286 U 14,182
Net operating income..................... $ 4,450 $374 F $ 4,824 $2,026 U $ 2,798

2. The overall activity variance is $374 favorable and is due to an increase in activity. The $1,740
unfavorable revenue variance is very large relative to the company’s net operating income and should
be investigated. Was this due to discounts given or perhaps a lower average number of passengers
per flight than usual? The other variances are relatively small, but are worth some management
attention—particularly if they recur next month.

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

Problem 8-23 (continued)

2. Cash budget:
Month
April May June Quarter
Cash balance,
beginning.................. $ 26,000 $ 27,000 $ 20,200 $ 26,000
Add receipts:
Collections from
customers............... 181,000 217,200 283,000 681,200
Total available............... 207,000 244,200 303,200 707,200
Less disbursements:
Merchandise
purchases................ 108,000 120,000 180,000 408,000
Payroll....................... 9,000 9,000 8,000 26,000
Lease payments......... 15,000 15,000 15,000 45,000
Advertising................. 70,000 80,000 60,000 210,000
Equipment purchases.. 8,000 — — 8,000
Total disbursements...... 210,000 224,000 263,000 697,000
Excess (deficiency) of
receipts over
disbursements............ (3,000) 20,200 40,200 10,200
Financing:
Borrowings................ 30,000 — — 30,000
Repayments............... — — (30,000) (30,000)
Interest..................... — — (1,200) (1,200)
Total financing.............. 30,000 — (31,200) (1,200)
Cash balance, ending.... $ 27,000 $ 20,200 $ 9,000 $ 9,000

3. If the company needs a minimum cash balance of $20,000 to start each

month, the loan cannot be repaid in full by June 30. Some portion of the
loan balance will have to be carried over to July.

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Solution for Exercise (Bus 247-Chapter8- Profit planning and control)

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