hilton ch 9 select solutions

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 OctoberJuly................................................................ $150,000 4% $ 6,000August.......................................................... 175,000 10% 17,500September.................................................... 200,000 15% 30,000October......................................................... 225,000 70% 157,500Total.............................................................. $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 SaleCredit Sales October November December

October............................................. $225,000 $157,500 $ 33,750 $ 22,500November......................................... 250,000 – 175,000 37,500December......................................... 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: www.mhhe.com/hilton8e.


1. Budgeted cash collections for December:

Month of Sale Collections in DecemberNovember.............................................................. $400,000 38% $152,000December............................................................... 440,000 60% 264,000Total cash collections.......................................... $416,000

2. Budgeted income (loss) for December:

Sales revenue......................................................................... $440,000Less: Cost of goods sold (75% of sales)............................. 330,000 Gross margin (25% of sales)................................................ $110,000Less: Operating expenses:...................................................

Bad debts expense (2% of sales).............................. $ 8,800Depreciation ($432,000/12)......................................... 36,000Other expenses........................................................... 45,200Total operating expenses........................................... 90,000

Income before taxes.............................................................. $ 20,000

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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 Sales

Cost of Goods Sold Amount Purchased in December

December.................... $440,000 $330,000 $330,000 20% $ 66,000January....................... 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.


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

MonthJanuary February March Quarter

Sales (units)...................................................... 20,000 24,000 16,000 60,000Add: Ending inventory*.................................... 32,000 25,000 27,000 27,000 Total needs........................................................ 52,000 49,000 43,000 87,000Deduct: Beginning inventory.......................... 32,000 32,000 25,000 32,000 Units to be produced........................................ 20,000 17,000 18,000 55,000Direct-labor hours per unit..............................

1 1 .75

Total hours of direct labortime 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' compensationinsurance ($.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


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)


Cash budget

Budgeted income statement

PROBLEM 9-32 (CONTINUED)

3. Manufacturing overhead budget:

SHADY SHADES, INC.MANUFACTURING OVERHEAD BUDGET


Month

January February March Quarter

Shipping and handling............... $ 60,000 $ 72,000 $48,000 $180,000Purchasing, material handling, and inspection............................. 90,000 76,500 81,000 247,500Other 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 50,000Add: Inventory, 12/31/x2

(.08 × 20x3 sales)................................... _10,400 _5,600 _4,800 Total required.............................................. 130,400 85,600 54,800Deduct: 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).................................. 8,456Darol (79,200 × .10)..................................... 7,920Norex (50,800 × .16).................................... _8,128 Total hours.................................................. 24,504

Conversion cost budget (24,504 x $20).... $490,080


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………………………………………………………………….. 201,640Add: Required inventory, 12/31/x2 (201,640 × .10)...................... 20,164 Subtotal............................................................................................ 221,804Deduct: 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)........................................................... $ 441,072Islin (24,504 × $20).................................................................... 490,080

Decrease in conversion cost......................................................... $ (49,008 ) Net increase in production cost.................................................... $ 152,632


1. Sales budget:

20x0 20x1

December January February MarchFirst

QuarterTotal sales........................ $800,000 $880,000 $968,000 $1,064,800 $2,912,800Cash sales*....................... 200,000 220,000 242,000 266,200 728,200Sales 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

January February MarchFirst

QuarterCash sales.............................................. $220,000 $242,000 $266,200 $ 728,200Cash collections from credit

sales made during currentmonth*................................................ 66,000 72,600 79,860 218,460

Cash collections from creditsales made during precedingmonth†................................................ 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.


3. Purchases budget:

20x0 20x1

December January February MarchFirst

QuarterBudgeted cost of

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

Add: Desiredending inventory......... 308,000 338,800 372,680 372,680 * 372,680 †

Total goodsneeded......................... $868,000 $954,800 $1,050,280 $1,118,040

$2,411,640

Less: Expectedbeginninginventory..................... ††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%)


4. Cash disbursements budget:

20x1


QuarterInventory purchases:Cash payments for purchases

during the current month*........ $258,720 $284,592 $298,144 $ 841,456Cash payments for purchases

during the precedingmonth†......................................... 352,800 388,080 426,888 1,167,768

Total cash payments forinventory purchases........................ $611,520 $672,672 $725,032 $2,009,224

Other expenses:Sales salaries................................... $ 42,000 $ 42,000 $ 42,000 $ 126,000Advertising and promotion............. 32,000 32,000 32,000 96,000Administrative salaries................... 42,000 42,000 42,000 126,000Interest on bonds**.......................... 30,000 -0- -0- 30,000Property taxes**............................... -0- 10,800 -0- 10,800Sales 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.


5. Summary cash budget:

20x1


QuarterCash receipts [from req. (2)]................ $ 826,000 $ 908,600 $ 999,460 $2,734,060Cash 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 $ 306,908Sale of marketable securities

(1/2/x1)............................................... 30,000 30,000Proceeds from bank loan

(1/2/x1)............................................... 200,000 200,000Purchase 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 duringfirst 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)


7. GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT


Sales revenue.......................................................................... $2,912,800Less: Cost of goods sold....................................................... 2,038,960Gross margin........................................................................... $ 873,840Selling and administrative expenses:

Sales salaries..................................................................... $126,000Sales commissions........................................................... 29,128Advertising and promotion.............................................. 96,000Administrative salaries..................................................... 126,000Depreciation....................................................................... 150,000Interest on bonds.............................................................. 15,000Interest on short-term bank loan..................................... 5,000Property taxes................................................................... 5,400

Total selling and administrative expenses........................... 552,528Net income............................................................................... $ 321,312


BUDGETED STATEMENT OF RETAINED EARNINGS


Retained earnings, 12/31/x0.......................................................................... $ 215,000Add: Net income............................................................................................ 321,312Deduct: Dividends......................................................................................... 100,000 Retained earnings, 3/31/x1............................................................................ $ 436,312



BUDGETED BALANCE SHEET

MARCH 31, 20X1

Cash.................................................................................................................. $ 51,908Accounts receivable*...................................................................................... 718,740Inventory.......................................................................................................... 372,680Buildings and equipment (net of accumulated depreciation)†................... 1,352,000 Total assets...................................................................................................... $2,495,328

Accounts payable**......................................................................................... $ 447,216Bond interest payable..................................................................................... 10,000Property taxes payable................................................................................... 1,800Bonds payable (10%; due in 20x6)................................................................ 600,000Common Stock................................................................................................ 1,000,000Retained earnings........................................................................................... 436,312 Total liabilities and stockholders' equity...................................................... $2,495,328

*Accounts receivable, 12/31/x0...................................................................... $ 540,000Sales on account [req. (1)]............................................................................. 2,184,600Total 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..................................................... $1,252,000Cost of equipment acquired........................................................................... 250,000Depreciation expense for first quarter.......................................................... (150,000 )Buildings and equipment (net), 3/31/x1........................................................ $1,352,000

**Accounts payable, 12/31/x0......................................................................... $ 352,800Purchases [req. (3)]......................................................................................... 2,103,640Cash payments for purchases [req. (4)]....................................................... (2,009,224)Accounts payable, 3/31/x1............................................................................. $ 447,216


1. Tuition revenue budget:Current student enrollment……………………. 12,000Add: 5% increase in student body…………… 600 Total student body………………………………. 12,600Less: Tuition-free scholarships………………. 180 Tuition-paying students………………………… 12,420Credit hours per student per year……………. x 30 Total credit hours……………………………….. 372,600Tuition rate per hour……………………………. x $75 Forecasted tuition revenue……………………. $27,945,000

2. Faculty needed to cover classes:

Total student body……………………………………. 12,600Classes per student per year [(15 credit hours ÷

3 credit hours) x 2 semesters]…………………. x 10 Total student class enrollments to be covered…. 126,000Students per class……………………………………. ÷ 25 Classes to be taught…………………………………. 5,040Classes 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.


1. Sales budget

July August SeptemberSales (in sets)............................................... 5,000 6,000 7,500Sales price per set....................................... $60 $60 $60 Sales revenue............................................... $300,000 $360,000 $450,000

2. Production budget (in sets)

July August SeptemberSales............................................................. 5,000 6,000 7,500Add: Desired ending inventory.................. 1,200 1,500 1,500 Total requirements...................................... 6,200 7,500 9,000Less: Projected beginning inventory........ 1,000 1,200 1,500 Planned production..................................... 5,200 6,300 7,500

3. Raw-material purchases

July August SeptemberPlanned production (sets)............................. 5,200 6,300 7,500Raw material required per set

(board feet).................................................. 10 10 10 Raw material required for production

(board feet).................................................. 52,000 63,000 75,000Add: Desired ending inventory of raw

material (board feet)................................... 6,300 7,500 8,000 Total requirements......................................... 58,300 70,500 83,000Less: 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 75,500Cost per board foot........................................ $.60 $.60 $.60 Planned purchases of raw material

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


4. Direct-labor budget

July August SeptemberPlanned production (sets)............................. 5,200 6,300 7,500Direct-labor hours per set.............................. 1.5 1.5 1.5 Direct-labor hours required........................... 7,800 9,450 11,250Cost 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: www.mhhe.com/hilton8e.

http://www.mhhe.com/hilton8e


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 inventory1,900 + X - 9,500 = 1,960X – 7,600 = 1,960X = 9,560

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

Cash balance, January 1………………………… $ 22,500Add: January receipts ($108,000 + $76,000).. 184,000

Subtotal………………………………………… $206,500Less: January payments………………………… 195,000 Cash balance before financing………………….

$ 11,500


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.


2.a. Schedule b. Subsequent Schedule

Sales Budget Production BudgetSelling Expense BudgetBudgeted Income Statement

Ending Inventory Budget (units) Production Budget

Production Budget (units) Direct-Material BudgetDirect-Labor BudgetManufacturing-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 StatementBudgeted 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 SheetBudgeted Statement of Cash Flows

Capital Expenditures Budget Cash Receipts and Disbursements BudgetBudgeted Balance SheetBudgeted Statement of Cash Flows

Cash Receipts and DisbursementsBudget

Budgeted Balance SheetBudgeted Statement of Cash Flows

Budgeted Balance Sheet Budgeted Statement of Cash Flows

Budgeted Statement of Cash Flows

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