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9.E: Exercises (Part 3)

One Step Further: Skill-Building Cases

  1. Ethics in Budgeting. SportsMax sells sporting goods equipment at 100 stores throughout North America. Robert Manning is the manager of one SportsMax retail store in Chicago. The company is in the planning phase of establishing its operating budget for this coming year and has asked that all store managers submit their estimates of sales revenue, costs, and resulting profit. During the control phase, each store manager is evaluated by comparing budgeted profit with actual profit. Store managers who exceed budgeted profit are given a bonus equal to 10 percent of actual profit in excess of budgeted profit.

Required:

  1. Describe the ethical conflict that Robert Manning is facing.
  2. As the president and CEO of SportsMax, how might you motivate Robert Manning to provide an accurate operating budget?
  1. Group Activity: Creating a Budget. Form groups of two to four students. Each group is to complete the following requirements.

Required:

  1. Assume you are a full-time student living in an apartment near your college campus. Create a personal budget that includes the typical monthly expenses you would expect to incur.
  2. Explain how the control phase of budgeting would be implemented for the personal budget created in requirement a.
  3. Discuss the findings of your group with the class. (Optional: your instructor may ask you to submit your findings in writing.)
  1. Creating a Sales Budget and Production Budget Using Excel. Review the information for Templeton Corporation in Exercise 28. Prepare an Excel spreadsheet similar to Figure 9.3 and Figure 9.4 showing Templeton’s sales budget and production budget.
  2. Internet Project: Budgeting. Go to The New York Times’ Web site (http://www.nytimes.com), or a similar reputable Internet source, and find an article about budgeting. Summarize the article in a one-page report, and indicate how the budget described in the article is used for planning purposes. Submit a printed copy of the article with your report.

Comprehensive Cases

  1. Comprehensive Master Budget. Creative Shirts, Inc., produces T-shirts. The company’s fiscal year ends on December 31. Information to be used for the operating budget this coming year follows.

Sales and Production-Related Budget Information

  • Average sales price for each T-shirt is estimated to be $15. Unit sales for this coming year, ending December 31, are expected to be as follows:
    First quarter 20,000
    Second quarter 24,000
    Third quarter 28,000
    Fourth quarter 18,000
  • Finished goods inventory is maintained at a level equal to 10 percent of the next quarter’s sales. Finished goods inventory at the end of the fourth quarter budget period is estimated to be 2,000 units.
  • Each unit of product requires 3 yards of direct materials, at a cost of $2 per yard. Management prefers to maintain ending raw materials inventory equal to 20 percent of next quarter’s materials needed in production. Raw materials inventory at the end of the fourth quarter budget period is estimated to be 12,200 yards.
  • Each unit of product requires 0.1 direct labor hours at a cost of $14 per hour.
  • Variable manufacturing overhead costs are
    Indirect materials $0.70 per unit
    Indirect labor $0.90 per unit
    Other $0.50 per unit
  • Fixed manufacturing overhead costs per quarter are
    Salaries $18,000
    Other $20,000
    Depreciation $11,950

Selling and Administrative Budget Information

  • Management estimates all selling and administrative costs are fixed.
  • Quarterly selling and administrative cost estimates for the coming year are
    Salaries $15,000
    Rent $ 5,000
    Advertising $ 4,000
    Depreciation $ 9,000
    Other $10,000

Capital Expenditures and Cash Budget Information

  • The company plans to pay cash for selling and administrative equipment totaling $15,000 and production equipment totaling $9,000. Both will be purchased at the end of the fourth quarter and will not affect depreciation expense for the coming year.
  • All sales are made on credit. The company expects to collect 70 percent of sales in the quarter of sale and 30 percent the quarter following the sale. Accounts receivable at the end of last year totaled $80,000, all of which will be collected during the first quarter of this coming year.
  • All direct materials purchases are on credit. The company expects to pay 80 percent of purchases in the quarter of purchase and 20 percent the following quarter. Accounts payable at the end of last year totaled $25,000, all of which will be paid during the first quarter of this coming year.
  • The cash balance at the beginning of this coming year is expected to be $30,000.

Budgeted Balance Sheet Information

  • Assume 30 percent of fourth quarter budgeted sales will be collected in full the following year (this represents accounts receivable at the end of the fourth quarter).
  • Expected account balances at the end of the fourth quarter are
    Property, plant, and equipment (net) $100,000
    Common stock $250,000
  • Actual retained earnings at the end of last year totaled $42,720, and no cash dividends will be paid during the current budget period ending December 31.

Required:

  1. Prepare the quarterly sales and production-related budgets using the figure formats referenced here:
    1. Sales budget (Figure 9.3)
    2. Production budget (Figure 9.4)
    3. Direct materials purchases budget (Figure 9.5)
    4. Direct labor budget (Figure 9.6)
    5. Manufacturing overhead budget (Figure 9.7)
  2. Prepare a quarterly selling and administrative budget using the format shown in Figure 9.8.
  3. Prepare a quarterly budgeted income statement using the format shown in Figure 9.9.
  4. Prepare a quarterly capital expenditures budget using the format shown in Figure 9.10.
  5. Prepare a quarterly cash budget using the format shown in Figure 9.11.
  6. Prepare a budgeted balance sheet at December 31 using the format shown in Figure 9.12.
  7. Why does management at Creative Shirts, Inc., prepare a master budget? Explain.
  1. Comprehensive Master Budget with Cash Flow Issues. Air Boats, Inc., produces small inflatable boats. The company’s fiscal year ends on December 31. Information to be used for the operating budget this coming year follows.

Sales and Production-Related Budget Information

  • Average sales price for each boat is estimated to be $150. Unit sales for this coming year, ending December 31, are expected to be as follows:
    First quarter 100,000
    Second quarter 110,000
    Third quarter 125,000
    Fourth quarter 90,000
  • Finished goods inventory is maintained at a level equal to 15 percent of the next quarter’s sales. Finished goods inventory at the end of the fourth quarter budget period is estimated to be 13,000 units.
  • Each unit of product requires 4 pounds of direct materials, at a cost of $5 per pound. The management prefers to maintain ending raw materials inventory equal to 8 percent of next quarter’s materials needed in production. Raw materials inventory at the end of the fourth quarter budget period is estimated to be 30,000 pounds.
  • Each unit of product requires 0.5 direct labor hours at a cost of $15 per hour.
  • Variable manufacturing overhead costs are
    Indirect materials $2.10 per unit
    Indirect labor $1.10 per unit
    Other $1.70 per unit
  • Fixed manufacturing overhead costs per quarter are
    Salaries $250,000
    Other $300,000
    Depreciation $613,250

Selling and Administrative Budget Information

  • Management estimates all selling and administrative costs are fixed.
  • Quarterly selling and administrative cost estimates for the coming year are
    Salaries $3,000,000
    Rent $1,000,000
    Advertising $ 900,000
    Depreciation $1,200,000
    Other $1,600,000

Capital Expenditures and Cash Budget Information

  • The company plans to pay cash for selling and administrative equipment totaling $5,000,000 and production equipment totaling $20,000,000 (management plans to fully automate production with new machinery). Both will be purchased at the end of the fourth quarter and will not affect depreciation expense for the coming year.
  • All sales are made on credit. The company expects to collect 90 percent of sales in the quarter of sale and 10 percent the quarter following the sale. Accounts receivable at the end of last year totaled $1,400,000, all of which will be collected during the first quarter of this coming year.
  • All direct materials purchases are on credit. The company expects to pay 80 percent of purchases in the quarter of purchase and 20 percent the following quarter. Accounts payable at the end of last year totaled $400,000, all of which will be paid during the first quarter of this coming year.
  • The cash balance at the beginning of this coming year is expected to be $75,000.

Budgeted Balance Sheet Information

  • Assume 10 percent of fourth quarter budgeted sales will be collected in full the following year (this represents accounts receivable at the end of the fourth quarter).
  • Expected account balances at the end of the fourth quarter are
    Property, plant, and equipment (net) $32,000,000
    Common stock $13,500,000
  • Actual retained earnings at the end of last year totaled $2,641,400, and no cash dividends will be paid during the current budget period ending December 31.

Required:

  1. Prepare the quarterly sales and production-related budgets using the figure formats referenced here:
    1. Sales budget (Figure 9.3)
    2. Production budget (Figure 9.4)
    3. Direct materials purchases budget (Figure 9.5)
    4. Direct labor budget (Figure 9.6)
    5. Manufacturing overhead budget (Figure 9.7)
  2. Prepare a quarterly selling and administrative budget using the format shown in Figure 9.8.
  3. Prepare a quarterly budgeted income statement using the format shown in Figure 9.9.
  4. Prepare a quarterly capital expenditures budget using the format shown in Figure 9.10.
  5. Prepare a quarterly cash budget using the format shown in Figure 9.11
  6. Prepare a budgeted balance sheet at December 31 using the format shown in Figure 9.12. (Hint: cash will have a negative balance.)
  7. Review the cash budget for Air Boats, Inc. What issue is facing the treasurer, and how might this issue be resolved?
  1. Ethics in Budgeting. Carol Chadwick is the manager of the toys division at Matteler, Inc. Carol is in the process of establishing the budgeted income statement for this coming year, which will be submitted to the company president for approval. The division’s current year actual results were slightly higher than the 5 percent growth Carol had anticipated. These results are shown as follows.
    Figure 9.E.4.png
    Division managers receive a 20 percent bonus for actual net income in excess of budgeted net income. Carol believes growth in sales this year will be approximately 12 percent. She is considering submitting a budget showing an increase of 5 percent, which will increase her chances of receiving a significant bonus at the end of this coming year. Assume cost of goods sold are variable costs and will increase in proportion with sales revenue. That is, cost of goods sold will always be 60 percent of sales revenue. Assume selling and administrative expenses are fixed costs.

Required:

  1. Prepare a budgeted income statement for the toys division assuming sales revenue will increase 5 percent.
  2. Prepare a budgeted income statement for the toys division assuming sales revenue will increase 12 percent.
  3. How much will Carol potentially have to gain in bonus compensation by submitting a budget showing a 5 percent increase in sales revenue if actual growth turns out to be 12 percent?
  4. As the president and CEO of Matteler, how might you motivate Carol Chadwick to provide an accurate budgeted income statement?