EXERCISE 9-24 (15 MINUTES)

1. Production (in units) required for the year:

Sales for the year ............................................................................................ 480,000

Add: Desired ending finished-goods inventory on December 31 ............. 50,000
Deduct: Beginning finished-goods inventory on January 1 ...................... 80,000
Required production during the year ........................................................... 450,000

2. Purchases of raw material (in units), assuming production of 500,000 finished units:

Raw material required for production (500,000  2).................................... 1,000,000

Add: Desired ending inventory on December 31 ........................................ 45,000
Deduct: Beginning inventory on January 1 ................................................. 35,000
Required raw-material purchases during the year ...................................... 1,010,000

EXERCISE 9-27 (20 MINUTES)

1. BINGHAMTON FILM CORPORATION

EXPECTED CASH COLLECTIONS
AUGUST
Expected
Month Sales Percent Collections
June.................................................... $60,000 9% $ 5,400
July ..................................................... 78,000 20% 15,600
August................................................ 66,000 70% 46,200
Total ............................................... $67,200

2. BINGHAMTON FILM CORPORATION

EXPECTED CASH DISBURSEMENTS
AUGUST
July purchases to be paid in August ............................................................. $ 54,000
Less: 2% cash discount .................................................................................. 1,080

Net ................................................................................................................. $ 52,920

Cash disbursements for expenses ................................................................ 14,400
Total .............................................................................................................. $ 67,320
EXERCISE 9-27 (CONTINUED)

3. BINGHAMTON CORPORATION
EXPECTED CASH BALANCE
AUGUST 31
Balance, August 1............................................................................................ $ 22,000
Add: Expected collections .............................................................................. 67,200
Less: Expected disbursements ...................................................................... 67,320
Expected balance ........................................................................................ $ 21,880

EXERCISE 9-29 (20 MINUTES)

1.
Total Sales in January 20x2
$100,000 $130,000 $160,000
Cash receipts in January, 20x2
From December sales on account ............ $ 7,125* $ 7,125 $ 7,125
From January cash sales .......................... 75,000† 97,500 120,000
From January sales on account ............... 20,000** 26,000 32,000
Total cash receipts ..................................... $ 102,125 $130,625 $159,125

*$7,125 = $190,000  .25  .15

†$75,000 = $100,000  .75

**$20,000 = $100,000  .25  .80

2. Operational plans depend on various assumptions. Usually there is uncertainty about

these assumptions, such as sales demand or inflation rates. Financial planning helps
management answer "what if" questions about how the budget will look under various
sets of assumptions.
EXERCISE 9-30 (30 MINUTES)

1. Budgeted cash collections for December:

Month of Sale Collections in December

November .............................................................. $200,000  38% $ 76,000
December............................................................... 220,000  60% 132,000
Total cash collections .......................................... $208,000

2. Budgeted income (loss) for December:

Sales revenue ......................................................................... $220,000

Less: Cost of goods sold (75% of sales)............................. 165,000
Gross margin (25% of sales) ................................................ $ 55,000
Less: Operating expenses: ...................................................
Bad debts expense (2% of sales) .............................. $ 4,400
Depreciation ($216,000/12) ......................................... 18,000
Other expenses ........................................................... 22,600
Total operating expenses ........................................... 45,000
Income before taxes .............................................................. $ 10,000

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
Month Sales Sold Amount Purchased in December
December.................... $220,000 $165,000 $165,000  20% $ 33,000
January ....................... 200,000 150,000 150,000  80% 120,000
Total December
purchases ................ $153,000

Therefore, the December 31 balance in accounts payable will be $153,000.

SOLUTIONS TO PROBLEMS
PROBLEM 9-33 (25 MINUTES)

1. Tuition revenue budget:

Current student enrollment……………………. 8,000
Add: 5% increase in student body…………… 400
Total student body………………………………. 8,400
Less: Tuition-free scholarships………………. 120
Tuition-paying students………………………… 8,280
Credit hours per student per year……………. x 30
Total credit hours……………………………….. 248,400
Tuition rate per hour……………………………. x $75
Forecasted tuition revenue……………………. $18,630,000

2. Faculty needed to cover classes:

Total student body……………………………………. 8,400
Classes per student per year [(15 credit hours ÷ 3
credit hours) x 2 semesters]…………………. x 10
Total student class enrollments to be covered…. 84,000
Students per class……………………………………. ÷ 25
Classes to be taught…………………………………. 3,360
Classes taught per professor………………………. ÷ 5
Faculty needed………………………………………… 672

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 9-34 (30 MINUTES)

1. Schedule of cash collections:

January February March
Collection of accounts receivable:
$55,000 x 20%…………………………... $ 11,000
Collection of January sales ($150,000):
60% in January; 35% in February ….. 90,000 $ 52,500
Collection of February sales ($180,000):
60% in February; 35% in March…….. 108,000 $ 63,000
Collection of March sales ($185,000):
60% in March; 35% in April………….. 111,000
Sale of equipment…………………………. 5,000
Total cash collections………………… $101,000 $160,500 $179,000

2. Schedule of cash disbursements:

January February March

Payment of accounts payable………………... $ 22,000

Payment of January purchases ($90,000):
70% in January; 30% in February……….. 63,000 $ 27,000
Payment of February purchases ($100,000):
70% in February; 30% in March………….. 70,000 $ 30,000
Payment of March purchases ($140,000):
70% in March; 30% in April……………….. 98,000
Cash operating costs………………………….. 31,000 24,000 45,000
Total cash disbursements………………... $116,000 $121,000 $173,000

3. Cash budget:
January February March

Beginning cash balance………………………. $ 20,000 $ 20,000 $ 44,300

Total receipts……………………………………. 101,000 160,500 179,000
Subtotal………………………………………. $121,000 $180,500 $223,300
Less: Total disbursements…………………… 116,000 121,000 173,000
Cash excess (deficiency) before financing… $ 5,000 $ 59,500 $ 50,300
Financing:
Borrowing to maintain $20,000 balance.. 15,000
Loan principal repaid……………………… (15,000)
Loan interest paid………………………….. (200)*
Ending cash balance…………………………… $ 20,000 $ 44,300 $ 50,300

* $15,000 x 8% x 2/12
PROBLEM 9-35 (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 $216,000 equal 60% of December’s sales;
thus, December sales total $360,000 ($216,000 ÷ .6). Since the selling price is $40
per unit, Badlands sold 9,000 units ($360,000 ÷ $40).

2. Since the company expects to sell 10,000 units, sales revenue will total $400,000
(10,000 units x $40).

3. Badlands collected 40% of February’s sales in February, or $156,800. Thus,

February’s sales total $392,000 ($156,800 ÷ .4). Combining January sales ($152,000 +
$228,000), February sales ($392,000), and March sales ($400,000), the company will
report revenue of $1,172,000.

4. Sixty percent of March’s sales will be outstanding, or $240,000 ($400,000 x 60%).

5. Finished-goods inventories are maintained at 20% of the following month’s sales.

January sales total $380,000 ($152,000 + $228,000), or 9,500 units ($380,000 ÷ $40).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).

6. February sales will total 9,800 units ($392,000 ÷ $40), 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 $7,000 ($30,000 minimum balance - $23,000 ending balance):

Cash balance, January 1………………………… $ 45,000
Add: January receipts ($216,000 + $152,000).. 368,000
Subtotal………………………………………… $413,000
Less: January payments………………………… 390,000
Cash balance before financing…………………. $ 23,000
PROBLEM 9-39 (40 MINUTES)

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

Yarex Darol Norex

Sales for 20x2 ............................................. 60,000 40,000 25,000
Add: Inventory, 12/31/x2
(.08 × 20x3 sales) ................................... 5,200 2,800 2,400
Total required.............................................. 65,200 42,800 27,400
Deduct: Inventory, 12/31/x1
(.08 × 20x2 sales) .................................. 4,800 3,200 2,000
Required production in 20x2 ..................... 60,400 39,600 25,400

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

Conversion hours required:

Yarex (60,400 × .07) .................................... 4,228
Darol (39,600 × .10) ..................................... 3,960
Norex (25,400 × .16) .................................... 4,064
Total hours .................................................. 12,252

Conversion cost budget (12,252 × $20).... $245,040

3. Since the 20x1 usage of Islin is 100,000 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 (60,400 × 1) ..................................................................... 60,400
Darol (39,600 × .7) ..................................................................... 27,720
Norex (25,400 × .5) .................................................................... 12,700
Subtotal ....................................................... ................................... 100,820
Add: Required inventory, 12/31/x2 (100,820 × .10)...................... 10,082
Subtotal ........................................................................................... 110,902
Deduct: Inventory, 1/1/x2 (100,000 × .10) ..................................... 10,000
Required purchases (gallons) ....................................................... 100,902
Purchases budget (100,902 gallons × $5 per gallon).................. $504,510
4. The company should continue using Islin, because the cost of using Philin is $76,316
greater than using Islin, calculated as follows:

Change in material cost from substituting Philin for Islin:

20x2 production requirements:
Philin (100,820 × $5 × 1.2) ........................................................ $604,920
Islin (100,820 × $5) .................................................................... 504,100
Increase in cost of raw material .................................................... $100,820
Change in conversion cost from substituting Philin for Islin:
Philin (12,252 × $20 × .9) .......................................................... $220,536
Islin (12,252 × $20) .................................................................... 245,040
Decrease in conversion cost......................................................... $(24,504)
Net increase in production cost.................................................... $ 76,316

PROBLEM 9-40 (60 MINUTES)

1. Sales budget for 20x0:

Units Price Total

Light coils ................................................................. 60,000 $120 $ 7,200,000
Heavy coils ............................................................... 40,000 170 6,800,000
Projected sales ........................................................ $14,000,000

2. Production budget (in units) for 20x0:

Light Coils Heavy Coils

Projected sales ............................................................................... 60,000 40,000
Add: Desired inventories,
December 31, 20x0 ..................................................................... 25,000 9,000
Total requirements ......................................................................... 85,000 49,000
Deduct: Expected inventories, January 1, 20x0 .......................... 20,000 8,000
Production required (units) ........................................................... 65,000 41,000
3. Raw-material purchases budget (in quantities) for 20x0:

Raw Material
Sheet Copper
Metal Wire Platforms
Light coils (65,000 units projected
to be produced).................................................. 260,000 130,000 __
Heavy coils (41,000 units projected
to be produced).................................................. 205,000 123,000 41,000
Production requirements ........................................ 465,000 253,000 41,000
Add: Desired inventories, December 31, 20x0 ..... 36,000 32,000 7,000
Total requirements .................................................. 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x0 .................................................. 32,000 29,000 6,000
Purchase requirements (units)............................... 469,000 256,000 42,000

4. Raw-material purchases budget for 20x0:

Raw Material Anticipated

Required Purchase
Raw Material (units) Price Total
Sheet metal.............................................................. 469,000 $8 $3,752,000
Copper wire ............................................................. 256,000 5 1,280,000
Platforms ................................................................. 42,000 3 126,000
Total ......................................................................... $5,158,000

5. Direct-labor budget for 20x0:

Projected Hours
Production per Total Total
(units) Unit Hours Rate Cost
Light coils ..................................... 65,000 2 130,000 $15 $1,950,000
Heavy coils ................................... 41,000 3 123,000 20 2,460,000
Total .............................................. $4,410,000
6. Manufacturing overhead budget for 20x0:
Cost
Cost Driver Driver Budgeted
Quantity Rate Cost

Purchasing and material handling ........................ 725,000 lb.a $.25 $181,250

Depreciation, utilities, and inspection .................. 106,000 coils b $4.00 424,000
Shipping................................................................... 100,000c $1.00 100,000
General manufacturing overhead ......................... 253,000 hr. d $3.00 759,000
Total manufacturing overhead .............................. $1,464,250

a725,000 = 469,000 + 256,000 (from req. 3)

b106,000 = 65,000 + 41,000 (from req. 2)
c100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)

PROBLEM 9-41 (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.

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 Budgeted Income Statement
ending inventory in dollars) 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
PROBLEM 9-43 (60 MINUTES)

1. Sales budget:

Box C Box P Total

Sales (in units) 500,000 500,000
Sales price per unit  $.90  $1.30
Sales revenue $450,000 $650,000 $1,100,000

2. Production budget (in units):

Box C Box P
Sales ....................................................................................... 500,000 500,000
Add: Desired ending inventory ........................................... 5,000 15,000
Total units needed ................................................................ 505,000 515,000
Deduct: Beginning Inventory ............................................... 10,000 20,000
Production requirements ..................................................... 495,000 495,000

3. Raw-material budget:

PAPERBOARD
Box C Box P Total
Production requirement (number of boxes) .......... 495,000 495,000
Raw material required per box (pounds) ................  .3  .7
Raw material required for
production (pounds) ............................................. 148,500 346,500 495,000
Add: Desired ending
raw-material inventory.......................................... 5,000
Total raw-material needs .......................................... 500,000
Deduct: Beginning raw-material inventory ............ 15,000
Raw material to be purchased ................................. 485,000
Price (per pound) ......................................................  $.20
Cost of purchases (paperboard) ............................. $ 97,000
 CORRUGATING MEDIUM
Box C Box P Total
Production requirements (number of boxes) ........ 495,000 495,000
Raw material required per box (pounds) ................  .2  .3
Raw material required for
production (pounds) ............................................. 99,000 148,500 247,500
Add: Desired ending
raw-material inventory.......................................... 10,000
Total raw-material needs .......................................... 257,500
Deduct: Beginning raw-material inventory ............ 5,000
Raw material to be purchased ................................. 252,500
Price (per pound) ......................................................  $.10
Cost of purchases (corrugating medium) .............. $ 25,250
Total cost of raw-material purchases
($97,000 + $25,250) ............................................... $122,250

4. Direct-labor budget:

Box C Box P Total

Production requirements (number of boxes) 495,000 495,000
Direct labor required per box (hours) .....................  .0025  .005

Direct labor required for production (hours) 1,237.5 2,475 3,712.5

Direct-labor rate ........................................................  $12
Total direct-labor cost .............................................. $44,550

5. Manufacturing-overhead budget:

Indirect material ............................................................................................. $ 10,500

Indirect labor .................................................................................................. 50,000
Utilities ............................................................................................................ 25,000
Property taxes ................................................................................................ 18,000
Insurance ........................................................................................................ 16,000
Depreciation ................................................................................................... 29,000
Total overhead ............................................................................................... $ 148,500
6. Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel ......................................... $ 75,000

Advertising ..................................................................................................... 15,000
Management salaries and fringe benefits ................................................... 90,000
Clerical wages and fringe benefits............................................................... 26,000
Miscellaneous administrative expenses ..................................................... 4,000
Total selling and administrative expenses ................................................. $ 210,000

7. Budgeted income statement:

Sales revenue [from sales budget, req. (1)] ................................................ $1,100,000

Less: Cost of goods sold:
Box C: 500,000  $.21* .............................................................. $105,000
Box P: 500,000  $.43* ............................................................. 215,000 320,000
Gross margin .................................................................................................. $ 780,000
Selling and administrative expenses ........................................................... 210,000
Income before taxes ...................................................................................... $ 570,000
Income tax expense (40%) ............................................................................ 228,000
Net income ...................................................................................................... $ 342,000

*Calculation of manufacturing cost per unit:

budgeted manufacturing overhead

(a) Predetermined overhead rate =
volume of direct-labor hours
$148,500
=
(495,000)(.0025)  (495,000)(.005)
$148,500
=  $40 per hour
3,712.5 hours
(b) Calculation of manufacturing cost per unit:

Box C Box P
Direct material:
Paperboard
.3 lb.  $.20 per lb .......................................... $.06
.7 lb.  $.20 per lb .......................................... $.14
Corrugating medium
.2 lb.  $.10 per lb .......................................... .02
.3 lb.  $.10 per lb .......................................... .03
Direct labor:
.0025 hr.  $12 per hr .................................... .03
.005 hr.  $12 per hr ...................................... .06
Applied manufacturing overhead:
.0025 hr.  $40 per hr .................................... .10
.005 hr.  $40 per hr ...................................... ___ .20
Manufacturing cost per unit ...................................... $.21 $.43