CHAPTER 22

BUDGETING
EYE OPENERS

1. The three major objectives of budgeting are budget preparation when large quantities of
(1) to establish specific goals for future data need to be processed. In addition, by
operations, (2) to direct and coordinate plans using computerized simulation models,
to achieve the goals, and (3) to periodically management can determine the impact of
compare actual results with the goals. various operating alternatives on the master
2. Managers are given authority and budget.
responsibility for responsibility center 10. The first step in preparing a master budget is
performance. They are then accountable for preparing the operating budgets, which form
the perfor- mance of the responsibility the budgeted income statement. The first
center. operating budget to be prepared is the sales
3. If goals set by the budgets are viewed as budget.
unrealistic or unachievable, management 11. The production requirements must be care-
may become discouraged and may not be fully coordinated with the sales budget to
committed to the achievement of the goals, ensure that production and sales are kept in
resulting in the budget becoming less balance during the period. Ideally,
effective as a planning and control tool. manufacturing operations should be
4. Budgeting more resources for travel than maintained at 100% of capacity, with no idle
requested by department personnel is an time or overtime, and there should be neither
example of budgetary slack. excessive inventories nor inventories
5. A budget that is set too loosely may fail to insufficient to fill sales orders.
motivate managers and other employees to 12. Purchases of direct materials should be
perform efficiently. In addition, a loose budget closely coordinated with the production bud-
may cause a “spend it or lose it” mentality, get so that inventory levels can be
where excess budget resources are spent in maintained within reasonable limits.
order to protect the budget from future 13. Direct materials purchases budget, direct
reductions. labor cost budget, and factory overhead cost
6. Conflicting goals can cause employees or budget.
department managers to act in their own 14. a. The cash budget contributes to effective
self-interests to the detriment of the cash planning. This involves advance
organization’s objectives. planning so that a cash shortage does
7. Zero-based budgeting is used when an not arise and excess cash is not
organization wishes to take a “clean slate” permitted to remain “idle.”
view of operations. It is often used when the b. The excess cash can be invested in
organization wants to cut costs by readily marketable income-producing
reevaluating the need for and usefulness of securities or used to reduce loans.
all operations. 15. The schedule of collections from sales is
8. A static budget is most appropriate in situations used to determine the amount of cash
where costs are not variable to an underlying collected from current- and prior-period
activity level. As a result, it is reasonable to sales, based on collection history. The
plan spending on the basis of a fixed quantity schedule is used to help determine the
of resources for the year. This will occur in estimated cash receipts portion of the cash
some administrative functions, such as human budget.
resources, accounting, or public relations. 16. The plans for financing the capital
9. Computers not only speed up the budget- expenditures budget may affect the cash
ing process, but they also reduce the cost of budget.

193
 PRACTICE EXERCISES

PE 22–1A
Variable cost:
Direct labor (750 hours × $25* per hour)................................... $18,750
Fixed cost:
Equipment depreciation............................................................. 7,000
Total department costs.................................................................... $25,750
*$22,500/900 hours

PE 22–1B
Variable cost:
Direct labor (13,400 hours × $15.50* per hour)........................ $207,700
Fixed cost:
Property tax.................................................................................. 15,000
Total department costs.................................................................... $222,700
*$186,000/12,000 hours

PE 22–2A

Expected units to be sold................................................................ 78,000

Plus desired ending inventory, December 31, 2010..................... 4,500
Total.................................................................................................... 82,500
Less estimated beginning inventory, January 1, 2010................. 3,600
Total units to be produced............................................................... 78,900

PE 22–2B

Expected units to be sold................................................................ 205,000

Plus desired ending inventory, December 31, 2010..................... 15,000
Total.................................................................................................... 220,000
Less estimated beginning inventory, January 1, 2010................. 18,500
Total units to be produced............................................................... 201,500

194
PE 22–3A

Pounds of wax required for production:

Candle [(78,900 × 8 oz.)/16 oz.]............................................. 39,450
Plus desired ending inventory, December 31, 2010................ 2,400
Total.............................................................................................. 41,850
Less estimated beginning inventory, January 1, 2010........... 2,000
Total pounds to be purchased................................................... 39,850
Unit price (per lb.)........................................................................ $3.20
Total direct materials to be purchased..................................... $127,520

PE 22–3B

Square feet required for production:

Schedule planner (201,500 × 80 sq. ft.)............................... 16,120,000
Plus desired ending inventory, December 31, 2010................ 210,000
Total.............................................................................................. 16,330,000
Less estimated beginning inventory, January 1, 2010........... 250,000
Total square feet to be purchased............................................ $16,080,000
Unit price (per sq. ft.).................................................................. $0.10
Total direct materials to be purchased..................................... $ 1,608,000

PE 22–4A

Hours required for assembly:

Candle (78,900 × 15 min.) ......................................................... $1,183,500 min.
Convert minutes to hours..................................................... ÷ 60 min.
Molding hours........................................................................ 19,725 hrs.
Hourly rate.................................................................................... × $16.00
Total direct labor cost................................................................. $ 315,600

195
PE 22–4B

Hours required for assembly:

Schedule planner (201,500 × 12 min.)................................ 2,418,000 min.
Convert minutes to hours.................................................... ÷ 60 min.
Assembly hours.................................................................... 40,300 hrs.
Hourly rate.................................................................................... × $14.00
Total direct labor cost................................................................. $ 564,200

PE 22–5A

Finished goods inventory, January 1, 2010........... $ 12,000

Work in process inventory, January 1, 2010.......... $ 4,000
Direct materials:
Direct materials inventory, January 1, 2010
(2,000 × $3.20).................................................... $ 6,400
Direct materials purchases (from PE 22–3A).... 127,520
Cost of direct materials available for use.......... $133,920
Less direct materials inventory,
December 31, 2010 (2,400 × $3.20)............ 7,680
Cost of direct materials placed in production. . $126,240
Direct labor (from PE 22–4A).................................... 315,600
Factory overhead....................................................... 108,000
Total manufacturing costs....................................... 549,840
Total work in process during period....................... $553,840
Less work in process inventory,
December 31, 2010.................................................. 5,000
Cost of goods manufactured................................... 548,840
Cost of finished goods available for sale............... $560,840
Less finished goods inventory,
December 31, 2010.................................................. 11,200
Cost of goods sold.................................................... $549,640

196
PE 22–5B

Finished goods inventory, January 1, 2010.......... $ 39,000

Work in process inventory, January 1, 2010........ $ 18,000
Direct materials:
Direct materials inventory, January 1, 2010
(250,000 × $0.10)............................................. $ 25,000
Direct materials purchases (from PE 22–3B). . 1,608,000
Cost of direct materials available for use........ $1,633,000
Less direct materials inventory,
December 31, 2010 (210,000 × $0.10)...... 21,000
Cost of direct materials placed in
production....................................................... $1,612,000
Direct labor (from PE 22–4B).................................. 564,200
Factory overhead..................................................... 240,000
Total manufacturing costs...................................... 2,416,200
Total work in process during period..................... $2,434,200
Less work in process inventory, December 31,
2010............................................................................ 15,000
Cost of goods manufactured.................................. 2,419,200
Cost of finished goods available for sale............. $2,458,200
Less finished goods inventory, December 31,
2010............................................................................ 43,000
Cost of goods sold.................................................. $2,415,200

PE 22–6A

November
Payments for October purchases (80% × $15,000)............................ $12,000
Payments for November purchases (20% × $17,000)......................... 3,400
Total payments for purchases on account......................................... $15,400

PE 22–6B
May__
Collections from April sales (75% × $390,000).................................... $292,500
Collections from May sales (25% × $360,000)..................................... 90,000
Total receipts from sales on account.................................................. $382,500

197
 EXERCISES

Ex. 22–1

a.
A B C D E
1 BRITNEY LOGAN
2 Cash Budget
3 For the Four Months Ending December 31, 2010
4 September October November December
5 Estimated cash receipts from:
6 Part-time job $ 900 $ 900 $ 900 $ 900
50
7
Deposit ___ _ _ ____ _ ____ 0
8 Total cash receipts $ 900 $ 900 $ 900 $1,400
9 Estimated cash payments for:
10 Season football tickets $ 100
11 Additional entertainment 250 $ 250 $ 250 $ 250
12 Tuition 3,800
13 Rent 350 350 350 350
14 Food 200 200 200 200
15 Deposit 500 __ ___ __ ___ __ ___
16 Total cash payments $ 5,200 $ 800 $ 800 $ 800
17 Cash increase (decrease) $(4,300) $ 100 $ 100 $ 600
Cash balance at beginning of
18
month 7,000 2,700 2,800 2,900
Cash balance at end of
19
month $ 2,700 $2,800 $2,900 $3,500

b. The four-month budgets do not change with any identified activity level; thus,
they are static budgets.
c. While Logan’s budget might first appear satisfactory, Logan must earn enough
cash in order to pay for the spring semester tuition. Her present budget shows
that she will be $300 short of the tuition amount ($3,800 – $3,500). Thus, Logan
will likely need to adjust the plan before the fall term even begins. Some
possibilities would be to rent a lower cost apartment or to get a roommate so that
the rental cost is cut in half. An additional $175 per month would yield $700 by the
end of December, which would be sufficient to cover the $300 spring tuition
shortfall and provide a little extra. Other considerations include increasing her
part-time job hours and reducing her monthly entertainment and food allowance,
or making up the income difference with additional hours during Christmas break.
The budget gives Logan time to adjust her plans to future events. In this case,
Logan can see that her present plan will not provide sufficient cash, thus giving
her four months to adjust. If Logan did not budget but went ahead with the
original plan, she would be $300 short at the end of December with no time left to
adjust.

198
Ex. 22–2

A B C D
1 AGENTBLAZE
2 Flexible Selling and Administrative Expenses Budget
3 For the Month Ending January 31, 2010
4 Total sales $100,000 $125,000 $150,000
5 Variable cost:
6 Sales commissions $ 8,000 $ 10,000 $ 12,000
7 Advertising expense 21,000 26,250 31,500
8 Miscellaneous selling expense 3,000 3,750 4,500
9 Office supplies expense 4,000 5,000 6,000
10 Miscellaneous administrative expense 2,000 2,500 3,000
11 Total variable cost $ 38,000 $ 47,500 $ 57,000
12 Fixed cost:
13 Miscellaneous selling expense $ 2,250 $ 2,250 $ 2,250
14 Office salaries expense 15,000 15,000 15,000
15 Miscellaneous administrative expense 1,600 1,600 1,600
16 Total fixed cost $ 18,850 $ 18,850 $ 18,850
17 Total selling and administrative expenses $ 56,850 $ 66,350 $ 75,850

199
Ex. 22–3

a.
A B C D
1 NELL COMPANY—MACHINING DEPARTMENT
2 Flexible Production Budget
3 For the Three Months Ending March 31, 2010
4 January February March
5 Units of production 110,000 100,000 90,000
6
7 Wages $495,000 $450,000 $405,000
8 Utilities 33,000 30,000 27,000
9 Depreciation 60,000 60,000 60,000
10 Total $588,000 $540,000 $492,000
11
12 Supporting calculations:
13 Units of production 110,000 100,000 90,000
14 Hours per unit × 0.25 × 0.25 × 0.25
15 Total hours of production 27,500 25,000 22,500
16 Wages per hour × $18.00 × $18.00 × $18.00
17 Total wages $495,000 $450,000 $405,000
18
19 Total hours of production 27,500 25,000 22,500
20 Utility cost per hour × $1.20 × $1.20 × $1.20
21 Total utilities $ 33,000 $ 30,000 $ 27,000

Depreciation is a fixed cost, so it does not “flex” with changes in production. Since it
is the only fixed cost, the variable and fixed costs are not classified in the budget.
b.
January February March
Total flexible budget.......................... $588,000 $540,000 $492,000
Actual cost.......................................... 600,000 570,000 545,000
Excess of actual cost over budget... $ (12,000) $ (30,000) $ (53,000)
The excess of actual cost over the flexible budget suggests that the Machining
Department has not performed as well as originally thought. Indeed, the department
is spending more than would be expected, and it’s getting worse, given the level of
production for the first three months.

200
Ex. 22–4

A B C D
1 STEELCASE INC.—FABRICATION DEPARTMENT
2 Flexible Production Budget
3 October 2010
4 (assumed data)
5 Units of production 12,000 15,000 18,000
6
7 Variable cost:
8 Direct labor $ 84,0001 $ 105,0002 $ 126,0003
9 Direct materials 783,0004 978,7505 1,174,5006
10 Total variable cost $ 867,000 $1,083,750 $1,300,500
11
12 Fixed cost:
13 Supervisor salaries $ 140,000 $ 140,000 $ 140,000
14 Depreciation 22,000 22,000 22,000
15 Total fixed cost $ 162,000 $ 162,000 $ 162,000
16 Total department cost $1,029,000 $1,245,750 $1,462,500
17
18 1
12,000 × 20/60 × $21
19 2
15,000 × 20/60 × $21
20 3
18,000 × 20/60 × $21
21 4
12,000 × 45 × $1.45
22 5
15,000 × 45 × $1.45
23 6
18,000 × 45 × $1.45

EX. 22-5
A B C
1 ACCU-WEIGHT, INC.
2 Production Budget
3 For the Month Ending May 31, 2011
4 Units
5 Small Scale Large Scale
6 Expected units to be sold 52,000 66,500
7 Plus desired inventory, May 31, 2011 1,100 2,500
8 Total 53,100 69,000
9 Less estimated inventory, May 1, 2011 (1,500) (2,300)
10 Total units to be produced 51,600 66,700

201
Ex. 22–6

a.
A B C D
1 HARMONY AUDIO COMPANY
2 Sales Budget
3 For the Month Ending September 30, 2009
Unit Sales Unit Selling
4
Product and Area Volume Price Total Sales
5 Model DL:
6 East Region 3,700 $125 $ 462,500
7 West Region 4,250 125 531,250
8 Total 7,950 $ 993,750
9 Model XL:
10 East Region 3,250 $195 $ 633,750
11 West Region 3,700 195 721,500
12 Total 6,950 $1,355,250
13 Total revenue from sales $2,349,000

b.
A B C
1 HARMONY AUDIO COMPANY
2 Production Budget
3 For the Month Ending September 30, 2009
4 Units
5 Model DL Model XL
6 Expected units to be sold 7,950 6,950
7 Plus desired inventory, September 30, 2009 275 52
8 Total 8,225 7,002
9 Less estimated inventory, September 1, 2009 (240) (60)
10 Total units to be produced 7,985 6,942

202
Ex. 22–7

A B C D
1 ROBERTS AND CHOU, CPAs
2 Professional Fees Earned Budget
3 For the Year Ending December 31, 2010
Billable Hourly Total
4
Hours Rate Revenue
5 Audit Department:
6 Staff 32,400 $130 $ 4,212,000
7 Partners 4,800 250 1,200,000
8 Total 37,200 $ 5,412,000
9 Tax Department:
10 Staff 24,800 $130 $ 3,224,000
11 Partners 3,100 250 775,000
12 Total 27,900 $ 3,999,000
13 Small Business Accounting Department:
14 Staff 4,500 $130 $ 585,000
15 Partners 630 250 157,500
16 Total 5,130 $ 742,500
17 Total professional fees earned $10,153,500

Ex. 22–8
A B C
1 ROBERTS AND CHOU, CPAs
2 Professional Labor Cost Budget
3 For the Year Ending December 31, 2010
4 Staff Partners
5 Audit Department 32,400 4,800
6 Tax Department 24,800 3,100
7 Small Business Accounting Department 4,500 630
8 Total 61,700 8,530
9 Average compensation per hour × $30.00 × $125.00
10 Total professional labor cost $1,851,000 $1,066,250

203
Ex. 22–9

A B C D E
1 MARINO’S FROZEN PIZZA INC.
2 Direct Materials Purchases Budget
3 For the Month Ending April 30, 2010
4 Dough Tomato Cheese Total
5 Units required for production:
6 12″ pizza 13,5901 9,0602 11,3253
7 16″ pizza 34,0504 22,7005 28,3756
Plus desired inventory,
8
April 30, 2010 610 200 355
9 Total 48,250 31,960 40,055
Less estimated inventory,
10
April 1, 2010 580 205 325
11 Total units to be purchased 47,670 31,755 39,730
12 Unit price × $1.20 × $2.60 × $3.10
Total direct materials to be
13
purchased $57,204 $82,563 $123,163 $262,930
14
15 115,100 × 0.90 lb.
16 215,100 × 0.60 lb.
17 315,100 × 0.75 lb.
18 422,700 × 1.50 lbs.
19 522,700 × 1.00 lb.
20 622,700 × 1.25 lbs.

204
Ex. 22–10

A B C D
1 COCA-COLA ENTERPRISES—DALLAS PLANT
2 Direct Materials Purchases Budget
3 For the Month Ending March 31, 2010
4 (assumed data)
5 Concentrate 2-Liter Bottles Carbonated Water
6 Materials required for production:
7 Coke® 856* lbs. 214,000 btls. 428,000 ltrs.
8 Sprite® 489* 163,000 326,000
9 Total materials 1,345 lbs. 377,000 btls. 754,000 ltrs.
10 Direct materials unit price × $80 × $0.08 × $0.06
Total direct materials to be
11
purchased $107,600 $ 30,160 $ 45,240

Coke® Sprite®
*Production in liters (bottles × 2 liters/bottle)......... 428,000 326,000
Divide by 100.............................................................. ÷ 100 ÷ 100
4,280 3,260
Multiply by concentrate pounds per 100 liters....... × 0.20 × 0.15
Concentrate pounds required for production........ 856 489

205
Ex. 22–11

A B C D
1 SURE GRIP TIRE COMPANY
2 Direct Materials Purchases Budget
3 For the Year Ending December 31, 2010
4 Rubber Steel Belts Total
5 Pounds required for production:
6 Passenger tires1 1,260,000 lbs. 168,000 lbs.
2
7 Truck tires 1,050,000 150,000
Plus desired inventory,
8
December 31, 2010 40,000 10,000
9 Total 2,350,000 lbs. 328,000 lbs.
Less estimated inventory,
10
January 1, 2010 46,000 8,000
11 Total units purchased 2,304,000 lbs. 320,000 lbs.
12 Unit price × $3.20 × $4.20
Total direct materials to be
13
purchased $7,372,800 $1,344,000 $8,716,800
14
15 1Rubber: 42,000 units × 30 lbs. per unit = 1,260,000 lbs.
16 Steel belts: 42,000 units × 4 lbs. per unit = 168,000 lbs.
17 2Rubber: 15,000 units × 70 lbs. per unit = 1,050,000 lbs.
18 Steel belts: 15,000 units × 10 lbs. per unit = 150,000 lbs.

Ex. 22–12
A B C
1 HAMMER RACKET COMPANY
2 Direct Labor Cost Budget
3 For the Month Ending October 31, 2010
Forming Assembly
4
Department Department
5 Hours required for production:
6 Junior1 1,900 3,040
7 Pro Striker2 7,735 14,365
8 Total 9,635 17,405
9 Hourly rate × $16.00 × $12.00
10 Total direct labor cost $154,160 $208,860
11
12 1Junior: 0.25 hr. × 7,600 = 1,900 hrs.
13 0.40 hr. × 7,600 = 3,040 hrs.
14 2Pro Striker: 0.35 hr. × 22,100 = 7,735 hrs.
15 0.65 hr. × 22,100 = 14,365 hrs.

206
Ex. 22–13

A B C
1 SLEEP-EZ SUITES, INC.
2 Direct Labor Cost Budget
3 For a Weekday or a Weekend Day
4 Weekday Weekend Day
5 Room occupancy
6 Room capacity 250 250
7 Occupied percent (occupancy) × 72% × 48%
8 (a) Rooms occupied 180 120
9 Housekeeping
10 (b) No. of minutes to clean a room 40 40
11 Total minutes [(a) × (b)] 7,200 4,800
12 Total hours (/60 min.) 120 80
13 Labor rate per hour ×$10.00 ×$10.00
14 (c) Housekeeping daily labor budget $ 1,200 $ 800
15 Restaurant staff
16 Base restaurant staff 5 5
17 Incremental 60 room blocks [(a)/60] 3 2
18 Total staff 8 7
19 Total hours (× 8 hours) 64 56
20 Labor rate per hour × $8.00 × $8.00
21 (d) Restaurant staff daily labor budget $ 512 $ 448
22 Total daily labor budget [(c) + (d)] $ 1,712 $ 1,248

207
Ex. 22–14

a.
A B C
1 LEVI STRAUSS & CO.
2 Production Budget
3 January 2010
4 (assumed data)
5 Dockers® 501 Jeans®
24,70 53,60
6 Expected units to be sold
0 0
7 Plus January 31 desired inventory 410 _1,890
8 Total units 25,110 55,490
_1,49
9 Less January 1 estimated inventory
_1,110 0
24,00 54,00
10 Total units to be produced
0 0

b.
A B C D E F
1 LEVI STRAUSS & CO.
2 Direct Labor Cost Budget
3 January 2010
4 (assumed data)
5 Inseam Outerseam Pockets Zipper Total
6 Dockers®1 43,200 52,800 16,800 24,000
7 501 Jeans®2 64,800 81,000 48,600 32,400
8 Total minutes 108,000 133,800 65,400 56,400
Total direct labor hours
9
(/60 minutes) 1,800 2,230 1,090 940
10 × Direct labor rate × $12.50 × $12.50 ×$16.00 ×$16.00
11 Total direct labor cost $ 22,500 $ 27,875 $17,440 $15,040 $82,855
12
13 1(24,000/10 pairs) × 18 min. = 43,200 min.
14 (24,000/10 pairs) × 22 min. = 52,800 min.
15 (24,000/10 pairs) × 7 min. = 16,800 min.
16 (24,000/10 pairs) × 10 min. = 24,000 min.
17 2(54,000/10 pairs) × 12 min. = 64,800 min.
18 (54,000/10 pairs) × 15 min. = 81,000 min.
19 (54,000/10 pairs) × 9 min. = 48,600 min.
20 (54,000/10 pairs) × 6 min. = 32,400 min.

208
Ex. 22–15

A B C
1 VENUS CANDY COMPANY
2 Factory Overhead Cost Budget
3 For the Month Ending September 30, 2010
4 Variable factory overhead costs:
5 Manufacturing supplies $ 15,000
6 Power and light 44,000
7 Production supervisor wages 132,000
8 Production control salaries 35,000
9 Materials management salaries 38,000
10 Total variable factory overhead costs $264,000
11 Fixed factory overhead costs:
12 Factory insurance $ 26,000
13 Factory depreciation 21,000
14 Total fixed factory overhead costs 47,000
15 Total factory overhead costs $311,000

Note: Advertising expenses, sales commissions, and executive officer salaries are
selling and administrative expenses.

209
Ex. 22–16

A B C D
1 DELEWARE CHEMICAL COMPANY
2 Cost of Goods Sold Budget
3 For the Month Ending September 30, 2011
4 Finished goods inventory, September 1 $ 18,4001
5 Work in process inventory, September 1 $ 12,100
6 Direct materials:
7 Direct materials inventory, September 1 $ 14,600
8 Direct materials purchases 1,800,0002
9 Cost of direct materials available for use $1,814,600
Less direct materials inventory,
10
September 30 16,100
Cost of direct materials placed in
11
production $1,798,500
12 Direct labor 210,000
13 Factory overhead 325,000
14 Total manufacturing costs 2,333,500
15 Total work in process during the period $2,345,600
Less work in process inventory,
16
September 30 13,000
17 Cost of goods manufactured 2,332,600
18 Cost of finished goods available for sale $2,351,000
Less finished goods inventory,
19
September 30 17,0003
20 Cost of goods sold $2,334,000
21
22 1$9,800 + $8,600
23 225,000 barrels × $72 per barrel
24 3$9,100 + $7,900

210
Ex. 22–17
A B C D
1 SWISS CERAMICS INC.
2 Cost of Goods Sold Budget
3 For the Month Ending June 30, 2010
4 Finished goods inventory, June 1, 2010 $ 9,500
5 Work in process inventory, June 1, 2010 $ 2,800
6 Direct materials:
7 Direct materials inventory, June 1, 2010 $ 8,280
8 Direct materials purchases 158,160
9 Cost of direct materials available for use $166,440
Less direct materials inventory,
10
June 30, 2010 10,450
Cost of direct materials placed in
11
production $155,990
12 Direct labor 184,000
13 Factory overhead 86,100
14 Total manufacturing costs 426,090
15 Total work in process during the period $428,890
Less work in process inventory,
16
June 30, 2010 1,880
17 Cost of goods manufactured 427,010
18 Cost of finished goods available for sale $436,510
Less finished goods inventory,
19
June 30, 2010 11,090
20 Cost of goods sold $425,420

211
Ex. 22–18

A B C D
1 PETJOY WHOLESALE INC.
2 Schedule of Collections from Sales
3 For the Three Months Ending July 31, 2008
4 May June July
5 Receipts from cash sales:
6 Cash sales (10% × current month’s sales) $ 36,000 $ 45,000 $ 60,000
7 May sales on account:
8 Collected in May ($324,0001 × 50%) 162,000
9 Collected in June ($324,000 × 35%) 113,400
10 Collected in July ($324,000 × 15%) 48,600
11 June sales on account:
12 Collected in June ($405,0002 × 50%) 202,500
13 Collected in July ($405,000 × 35%) 141,750
14 July sales on account:
15 Collected in July ($540,0003 × 50%) 270,000
16 Total cash collected $198,000 $360,900 $520,350
17
18 1
$360,000 × 90% = $324,000
19 2
$450,000 × 90% = $405,000
20 3
$600,000 × 90% = $540,000

212
Ex. 22–19

A B C D
1 OFFICE MATE SUPPLIES INC.
2 Schedule of Collections from Sales
3 For the Three Months Ending October 31, 2010
4 August September October
5 Receipts from cash sales:
6 Cash sales (25% × current month’s sales) $ 62,500 $ 72,500 $ 67,500
7 July sales on account:
Collected in August (Accounts
8
Receivable balance) 200,000
9 August sales on account:
10 Collected in August ($187,5001 × 20%) 37,500
11 Collected in September ($187,500 × 80%) 150,000
12 September sales on account:
13 Collected in September ($217,5002 × 20%) 43,500
14 Collected in October ($217,500 × 80%) 174,000
15 October sales on account:
16 Collected in October ($202,5003 × 20%) _______ 40,500
17 $300,000 $266,000 $282,000
18
19 1$250,000 × 75% = $187,500
20 2$290,000 × 75% = $217,500
21 3$270,000 × 75% = $202,500

213
Ex. 22–20

A B C D
1 EXCEL LEARNING SYSTEMS INC.
2 Schedule of Cash Payments for Selling and Administrative Expenses
3 For the Three Months Ending August 31, 2010
4 June July August
5 June expenses:
6 Paid in June ($92,4001 × 60%) $55,440
7 Paid in July ($92,400 × 40%) $36,960
8 July expenses:
9 Paid in July ($85,5002 × 60%) 51,300
10 Paid in August ($85,500 × 40%) $34,200
11 August expenses:
12 Paid in August ($75,4003 × 60%) 45,240
13 Total cash payments $55,440 $88,260 $79,440
14
15 1
$117,400 – $25,000
16 2
$110,500 – $25,000
17 3
$100,400 – $25,000

Note: Insurance, property taxes, and depreciation are expenses that do not result in
cash payments in June, July, or August.

214
Ex. 22–21

A B C D
1 REJUVENATION PHYSICAL THERAPY INC.
2 Schedule of Cash Payments for Operations
3 For the Three Months Ending September 30, 2011
4 July August September
5 Payments of prior month’s expense 1
$24,000 $ 30,270 $ 33,210
6 Payment of current month’s expense2 70,630 77,490 90,090
7 Total payment $94,630 $107,760 $123,300
8
9 1
$24,000, given as Accrued Expenses Payable, July 1
10 $30,270 = ($112,000 – $11,100) × 30%
11 $33,210 = ($121,800 – $11,100) × 30%
12 2
$70,630 = ($112,000 – $11,100) × 70%
13 $77,490 = ($121,800 – $11,100) × 70%
14 $90,090 = ($139,800 – $11,100) × 70%

Note: Insurance and depreciation are expenses that do not result in cash payments in
July, August, and September.

Ex. 22–22
A B C D E
1 GARDENEER TOOLS INC.
2 Capital Expenditures Budget
3 For the Four Years Ending December 31, 2010–2013
4 2010 2011 2012 2013
5 Building $ 7,000,000 $ 6,000,000 $ 5,200,0001
6 Equipment 1,700,000 $ 200,000 1,000,000
7 Information systems 900,0002
8 Total $ 7,000,000 $7,700,000 $ 1,100,000 $ 6,200,000
9
10 1$13,000,000 × 40% = $5,200,000
11 2$1,600,000 × 0.75 × 0.75 = $900,000

215
 PROBLEMS

Prob. 22–1A

1.
Increase (Decrease)
Unit Sales, Year Ended 2010 Actual Over Budget
Budget Actual Sales Amount Percent
Home Alert System:
United States..................... 24,300 25,272 972 4.00%
Europe................................ 6,700 6,834 134 2.00%
Asia..................................... 5,900 5,723 (177) –3.00%
Business Alert System:
United States..................... 14,900 15,645 745 5.00%
Europe................................ 6,400 6,336 (64) –1.00%
Asia..................................... 4,200 4,326 126 3.00%

2.
2011
2010 Percentage Budgeted
Actual Increase Units
Units (Decrease) (rounded)
Home Alert System:
United States..................... 25,272 4.00% 26,283
Europe................................ 6,834 2.00% 6,971
Asia..................................... 5,723 –3.00% 5,551
Business Alert System:
United States.................... 15,645 5.00% 16,427
Europe............................... 6,336 –1.00% 6,273
Asia................................... 4,326 3.00% 4,456

216
Prob. 22–1A Concluded

3.
A B C D
1 GUARDIAN DEVICES INC.
2 Sales Budget
3 December 31, 2011

4 Unit Sales Unit Selling

Product and Area Volume Price Total Sales
5 Home Alert System:
6 United States 26,283 $270 $ 7,096,410
7 Europe 6,971 270 1,882,170
8 Asia 5,551 270 1,498,770
9 Total 38,805 $10,477,350
10 Business Alert System:
11 United States 16,427 $880 $14,455,760
12 Europe 6,273 880 5,520,240
13 Asia 4,456 880 3,921,280
14 Total 27,156 $23,897,280
15 Total revenue from sales $34,374,630

217
Prob. 22–2A

1.
A B C D
1 REGAL FURNITURE COMPANY
2 Sales Budget
3 For the Month Ending August 31, 2010
Unit Sales Unit Selling
4 Product and Area Volume Price Total Sales
5 King:
6 Northern Domestic 5,500 $750 $ 4,125,000
7 Southern Domestic 3,200 690 2,208,000
8 International 1,450 780 1,131,000
9 Total 10,150 $ 7,464,000
10 Prince:
11 Northern Domestic 6,900 $520 $ 3,588,000
12 Southern Domestic 4,000 580 2,320,000
13 International 900 600 540,000
14 Total 11,800 $ 6,448,000
15 Total revenue from sales $13,912,000

2.

A B C
1 REGAL FURNITURE COMPANY
2 Production Budget
3 For the Month Ending August 31, 2010
4 Units
5 King Prince
6 Expected units to be sold 10,150 11,800
7 Plus desired inventory, August 31, 2010 800 400
8 Total 10,950 12,200
9 Less estimated inventory, August 1, 2010 950 280
10 Total units to be produced 10,000 11,920

218
Prob. 22–2A Continued

3.
A B C D E F
1 REGAL FURNITURE COMPANY
2 Direct Materials Purchases Budget
3 For the Month Ending August 31, 2010
4 Direct Materials
Fabric Wood Filler Springs
5 (sq. yds.) (lineal ft.) (cu. ft.) (units) Total
Required units for
6
production:
7 King 50,0001 350,0002 38,0003 140,0004
8 Prince 41,7205 298,0006 38,1447 119,2008
Plus desired inventory,
9
August 31, 2010 4,300 6,200 3,100 7,500
10 Total 96,020 654,200 79,244 266,700
Less estimated inventory,
11
August 1, 2010 4,500 6,000 2,800 6,700
Total units to be
12
purchased 91,520 648,200 76,444 260,000
13 Unit price × $12.00 × $8.00 × $3.50 × $4.50
Total direct materials to be
14
purchased $1,098,240 $5,185,600 $267,554 $1,170,000 $7,721,394
15
16 1
10,000 × 5 yds. = 50,000 sq. yds.
17 2
10,000 × 35 lineal ft. = 350,000 lineal ft.
18 3
10,000 × 3.8 cu. ft. = 38,000 cu. ft.
19 4
10,000 × 14 units = 140,000 units
20 5
11,920 × 3.5 sq. yds. = 41,720 sq. yds.
21 6
11,920 × 25 lineal ft. = 298,000 lineal ft.
22 7
11,920 × 3.2 cu. ft. = 38,144 cu. ft.
23 8
11,920 × 10 units = 119,200 units

219
Prob. 22–2A Concluded

4.
A B C D E
1 REGAL FURNITURE COMPANY
2 Direct Labor Cost Budget
3 For the Month Ending August 31, 2010
Framing Cutting Upholstery
4
Department Department Department Total
5 Hours required for production:
6 King1 25,000 15,000 24,000
7 Prince2 21,456 5,960 23,840
8 Total 46,456 20,960 47,840
9 Hourly rate × $12.00 × $11.00 × $14.00
10 Total direct labor cost $557,472 $230,560 $669,760 $1,457,792
11
12 1
This line is calculated as 10,000 King chairs from the production budget multiplied by
13 the hours per unit in each department estimated for the King chairs. 25,000 = 10,000 ×
14 2.5; 15,000 = 10,000 × 1.5; 24,000 = 10,000 × 2.4
15 2
This line is calculated as 11,920 Prince chairs from the production budget multiplied by
16 the hours per unit in each department estimated for the Prince chairs. 21,456 = 11,920 ×
17 1.8; 5,960 = 11,920 × 0.5; 23,840 = 11,920 × 2.0

220
Prob. 22–3A

1.
A B C D
1 HEADS UP ATHLETIC CO.
2 Sales Budget
3 For the Month Ending January 31, 2010
4 Unit Sales Unit Selling
Volume Price Total Sales
5 Batting Helmet 3,700 $ 70 $ 259,000
6 Football Helmet 7,200 142 1,022,400
7 Total revenue from sales $1,281,400

2.
A B C
1 HEADS UP ATHLETIC CO.
2 Production Budget
3 For the Month Ending January 31, 2010
4 Units
Batting Football
5
Helmet Helmet
6 Expected units to be sold 3,700 7,200
7 Plus desired inventory, January 31, 2010 290 520
8 Total 3,990 7,720
9 Less estimated inventory, January 1, 2010 310 420
10 Total units to be produced 3,680 7,300

221
Prob. 22–3A Continued

3.
A B C D
1 HEADS UP ATHLETIC CO.
2 Direct Materials Purchases Budget
3 For the Month Ending January 31, 2010
4 Plastic Foam Lining Total
5 Units required for production:
6 Batting Helmet 4,4161 1,8402
7 Football Helmet 20,440 3
10,2204
Plus desired units of inventory,
8
January 31, 2010 1,240 450
9 Total 26,096 12,510
Less estimated units of inventory,
10
January 1, 2010 800 520
11 Total units to be purchased 25,296 11,990
12 Unit price × $7.50 × $5.00
Total direct materials to be
13
purchased $189,720 $59,950 $249,670
14
15 1
3,680 × 1.20 lbs.
16 2
3,680 × 0.50 lb.
17 3
7,300 × 2.80 lbs.
18 4
7,300 × 1.40 lbs.

222
Prob. 22–3A Continued

4.
A B C D
1 HEADS UP ATHLETIC CO.
2 Direct Labor Cost Budget
3 For the Month Ending January 31, 2010
Molding Assembly
4
Department Department Total
5 Hours required for production:
6 Batting Helmet 7361 1,8402
7 Football Helmet 2,1903
4,7454
8 Total 2,926 6,585
9 Hourly rate × $15 × $13
10 Total direct labor cost $43,890 $85,605 $129,495
11
12 1
3,680 × 0.20 hr.
13 2
3,680 × 0.50 hr.
14 3
7,300 × 0.30 hr.
15 4
7,300 × 0.65 hr.

5.
A B C
1 HEADS UP ATHLETIC CO.
2 Factory Overhead Cost Budget
3 For the Month Ending January 31, 2010
4 Indirect factory wages $115,000
5 Depreciation of plant and equipment 32,000
6 Power and light 18,000
7 Insurance and property tax 8,700
8 Total $173,700

223
Prob. 22–3A Continued

6.
A B C D
1 HEADS UP ATHLETIC CO.
2 Cost of Goods Sold Budget
3 For the Month Ending January 31, 2010
Finished goods inventory,
4
January 1, 2010 $ 34,1701
5 Work in process, January 1, 2010 $ 12,500
6 Direct materials:
Direct materials inventory,
7
January 1, 2010 $ 8,6002
8 Direct materials purchases 249,670
9 Cost of direct materials available for use $258,270
Less direct materials inventory,
10
January 31, 2010 11,5503
Cost of direct materials placed in
11
production $246,720
12 Direct labor 129,495
13 Factory overhead 173,700
14 Total manufacturing costs 549,915
15 Total work in process during period $562,415
16 Less work in process, January 31, 2010 13,500
17 Cost of goods manufactured 548,915
18 Cost of finished goods available for sale $583,085
Less finished goods inventory,
19
January 31 40,0204
20 Cost of goods sold $543,065
21
22 1
Batting helmet (310 × $33.00) $ 10,230
23 Football helmet (420 × $57.00) 23,940
24 Finished goods inventory, January 1, 2010 $ 34,170
25 2
Plastic (800 × $7.50) $ 6,000
26 Foam lining (520 × $5.00) 2,600
27 Direct materials inventory, January 1, 2010 $ 8,600
28 3
Plastic (1,240 × $7.50) $ 9,300
29 Foam lining (450 × $5.00) 2,250
30 Direct materials inventory, January 31, 2010 $ 11,550
31 4
Batting helmet (290 × $34.00) $ 9,860
32 Football helmet (520 × $58.00) 30,160
33 Finished goods inventory, January 31, 2010 $ 40,020

224
Prob. 22–3A Concluded

7.
A B C
1 HEADS UP ATHLETIC CO.
2 Selling and Administrative Expenses Budget
3 For the Month Ending January 31, 2010
4 Selling expenses:
5 Sales salaries expense $275,300
6 Advertising expense 139,500
7 Telephone expense—selling 3,200
8 Travel expense—selling 46,200
9 Total selling expenses $464,200
10 Administrative expenses:
11 Office salaries expense $ 83,100
12 Depreciation expense—office equipment 5,800
13 Telephone expense—administrative 900
14 Office supplies expense 4,900
15 Miscellaneous administrative expense 5,200
16 Total administrative expenses 99,900
17 Total operating expenses $564,100

8.
A B C
1 HEADS UP ATHLETIC CO.
2 Budgeted Income Statement
3 For the Month Ending January 31, 2010
4 Revenue from sales $1,281,400
5 Cost of goods sold 543,065
6 Gross profit $ 738,335
7 Operating expenses:
8 Selling expenses $464,200
9 Administrative expenses 99,900
10 Total operating expenses 564,100
11 Income from operations $ 174,235
12 Other income:
13 Interest revenue $ 14,500
14 Other expenses:
15 Interest expense 17,400 (2,900)
16 Income before income tax $ 171,335
17 Income tax expense 51,401
18 Net income $ 119,934

225
Prob. 22–4A

1.
A B C D
1 DASH SHOES INC.
2 Cash Budget
3 For the Three Months Ending June 30, 2010
4 June July August
5 Estimated cash receipts from:
6 Cash sales $ 12,000 $ 15,000 $ 20,000
7 Collection of accounts receivable a 101,400 106,800 124,200
8 Dividends 3,500 _______ _______
9 Total cash receipts $116,900 $121,800 $144,200
10 Estimated cash payments for:
11 Manufacturing costsb $ 41,600 $ 54,000 $ 62,600
12 Selling and administrative expenses 35,000 40,000 45,000
13 Capital expenditures 48,000
14 Other purposes:
15 Note payable (including interest) 61,800
16 Income tax 18,000
17 Dividends _______ _______ 8,000
18 Total cash payments $ 76,600 $112,000 $225,400
19 Cash increase or (decrease) $ 40,300 $ 9,800 $ (81,200)
20 Cash balance at beginning of month 45,000 85,300 95,100
21 Cash balance at end of month $ 85,300 $ 95,100 $ 13,900
22 Minimum cash balance 35,000 35,000 35,000
23 Excess or (deficiency) $ 50,300 $ 60,100 $ (21,100)

(Continues)

226
Prob. 22–4A Concluded

24 Computations:
25 aCollections of accounts receivable: June July August
26 April sales $ 38,4001
27 May sales 63,0002 $ 42,0003
28 June sales 64,8004 $ 43,2005
29 July sales 81,0006
30 Total $101,400 $106,800 $124,200
31 1
$96,000 × 40% = $38,400
32 2
$105,000 × 60% = $63,000
33 3
$105,000 × 40% = $42,000
34 4
$120,000 × 90% × 60% = $64,800
35 5
$120,000 × 90% × 40% = $43,200
36 6
$150,000 × 90% × 60% = $81,000
37 bPayments for manufacturing costs: June July August
Payment of accounts payable, beginning
38
of month balancec $ 8,000 $ 8,400 $ 11,400
39 Payment of current month’s costd 33,600 45,600 51,200
40 Total $ 41,600 $ 54,000 $ 62,600
c
41 Accounts payable, June 1 balance = $8,000
42 ($50,000 – $8,000) × 20% = $8,400
43 ($65,000 – $8,000) × 20% = $11,400
44 d($50,000 – $8,000) × 80% = $33,600
45 ($65,000 – $8,000) × 80% = $45,600
46 ($72,000 – $8,000) × 80% = $51,200

2. The budget indicates that the minimum cash balance will not be maintained in
August. This is due to the capital expenditures and note repayment requiring
significant cash outflows during this month. This situation can be corrected by
borrowing and/or by the sale of the marketable securities, if they are held for such
purposes. At the end of June and July, the cash balance will exceed the minimum
desired balance, and the excess could be considered for temporary investment.

227
Prob. 22–5A

1.
A B C D
1 WEBSTER PUBLISHING CO.
2 Budgeted Income Statement
3 For the Year Ending December 31, 2011
4 Sales $3,200,0001
5 Cost of goods sold:
6 Direct materials $800,0002
7 Direct labor 249,6003
8 Factory overhead 186,0004
9 Cost of goods sold 1,235,600
10 Gross profit $1,964,400
11 Operating expenses:
12 Selling expenses:
13 Sales salaries and commissions $524,6005
14 Advertising 112,400
15 Miscellaneous selling expense 72,4006
16 Total selling expenses $709,400
17 Administrative expenses:
18 Office and officers salaries $275,4007
19 Supplies 35,9008
20 Miscellaneous administrative expense 50,0009
21 Total administrative expenses 361,300
22 Total operating expenses 1,070,700
23 Income before income tax $ 893,700
24 Income tax expense 280,000
25 Net income $ 613,700
26
27 1
32,000 units × $100
28 2
32,000 units × $25
29 3
32,000 units × $7.80
30 4
(32,000 units × $4.50) + $32,000 + $10,000
31 5
(32,000 units × $12.80) + $115,000
32 6
(32,000 units × $2.00) + $8,400
33 7
(32,000 units × $6.25) + $75,400
34 8
(32,000 units × $1.00) + $3,900
35 9
(32,000 units × $1.50) + $2,000

228
Prob. 22–5A Concluded

2.
A B C D
1 WEBSTER PUBLISHING CO.
2 Budgeted Balance Sheet
3 December 31, 2011
4 Assets
5 Current assets:
6 Cash $414,3001
7 Accounts receivable 232,400
8 Inventories:
9 Finished goods $148,900
10 Work in process 32,700
11 Materials 52,500 234,100
12 Prepaid expenses 4,000
13 Total current assets $ 884,800
14 Property, plant, and equipment:
15 Plant and equipment $750,0002
16 Less accumulated depreciation 283,0003 467,000
17 Total assets $1,351,800
18 Liabilities
19 Current liabilities:
20 Accounts payable $ 182,500
21 Stockholders’ Equity
22 Common stock $450,000
23 Retained earnings 719,3004
24 Total stockholders’ equity 1,169,300
25 Total liabilities and stockholders’ equity $1,351,800
26
27 1
Cash balance, December 31, 2011:
28 Balance, January 1, 2011 $ 118,600
29 Cash from operations:
30 Net income $613,700
31 Depreciation of plant and equipment 32,000 645,700
32 Less: Dividends to be paid in 2011 $180,000
33 Plant and equipment to be acquired in 2011 170,000 (350,000)
34 Balance, December 31, 2011 $ 414,300
35 2
$580,000 + $170,000 = $750,000
36 3
$251,000 + $32,000 = $283,000
37 4
Retained earnings balance, December 31, 2011:
38 Balance, January 1, 2011 $ 285,600
39 Plus net income for 2011 613,700
40 $ 899,300
Less dividends to be declared in 2011
41
(30,000 × $1.50 × 4 qtrs.) 180,000
42 Balance, December 31, 2011 $ 719,300

229
Prob. 22–1B

1.
Increase (Decrease)
Unit Sales, Year Ended 2010 Actual Over Budget
Budget Actual Sales Amount Percent
8" x 10" Frame:
East................................ 28,000 29,680 1,680 6.00%
Central.......................... 24,000 23,040 (960) –4.00%
West............................... 32,500 33,150 650 2.00%
12" x 16" Frame:
East................................ 15,000 15,300 300 2.00%
Central.......................... 9,500 9,405 (95) –1.00%
West............................... 14,000 14,700 700 5.00%

2.
2011
2010 Percentage Budgeted
Actual Increase Units
Units (Decrease) (rounded)
8" x 10" Frame:
East................................ 29,680 6.00% 31,461
Central.......................... 23,040 –4.00% 22,118
West............................... 33,150 2.00% 33,813
12" x 16" Frame:
East................................ 15,300 2.00% 15,606
Central.......................... 9,405 –1.00% 9,311
West............................... 14,700 5.00% 15,435

230
Prob. 22–1B Concluded

3.
A B C D
1 VAN GOGH FRAME COMPANY
2 Sales Budget
3 For the Year Ending December 31, 2011
Unit Sales Unit Selling
4
Product and Area Volume Price Total Sales
5 8″ × 10″ Frame:
6 East 31,461 $16.00 $ 503,376
7 Central 22,118 16.00 353,888
8 West 33,813 16.00 541,008
9 Total 87,392 $1,398,272
10 12″ × 16″ Frame:
11 East 15,606 $26.00 $ 405,756
12 Central 9,311 26.00 242,086
13 West 15,435 26.00 401,310
14 Total 40,352 $1,049,152
15 Total revenue from sales $2,447,424

231
Prob. 22–2B

1.
A B C D
1 OUTDOOR GOURMET GRILL COMPANY
2 Sales Budget
3 For the Month Ending July 31, 2010
Unit Sales Unit Selling
4
Product and Area Volume Price Total Sales
5 Backyard Chef:
6 Maine 5,000 $750 $ 3,750,000
7 Vermont 4,200 800 3,360,000
8 New Hampshire 4,600 850 3,910,000
9 Total 13,800 $11,020,000
10 Master Chef:
11 Maine 1,800 $1,500 $ 2,700,000
12 Vermont 1,600 1,600 2,560,000
13 New Hampshire 1,900 1,700 3,230,000
14 Total 5,300 $ 8,490,000
15 Total revenue from sales $19,510,000

2.
A B C
1 OUTDOOR GOURMET GRILL COMPANY
2 Production Budget
3 For the Month Ending July 31, 2010
4 Units
5 Backyard Chef Master Chef
6 Expected units to be sold 13,800 5,300
7 Plus desired inventory, July 31, 2010 1,600 500
8 Total 15,400 5,800
9 Less estimated inventory, July 1, 2010 1,400 600
10 Total units to be produced 14,000 5,200

232
Prob. 22–2B Continued

3.
A B C D E F
1 OUTDOOR GOURMET GRILL COMPANY
2 Direct Materials Purchases Budget
3 For the Month Ending July 31, 2010
Burner Sub-
4 Grates Stainless assemblies Shelves
(units) Steel (lbs.) (units) (units) Total
Required units for
5
production:
6 Backyard Chef 42,0001 280,0002 28,0003 70,0004
7 Master Chef 31,2005 234,0006 20,8007 31,2008
Plus desired inventory,
8
July 31, 2010 800 2,100 550 350
9 Total 74,000 516,100 49,350 101,550
Less estimated inventory,
10
July 1, 2010 1,000 1,800 500 300
Total units to be
11
purchased 73,000 514,300 48,850 101,250
12 Unit price × $20.00 × $6.00 × $105.00 × $7.00
Total direct materials to be
13
purchased $1,460,000 $3,085,800 $5,129,250 $708,750 $10,383,800
14
15 1
14,000 × 3 grates = 42,000 grates
16 2
14,000 × 20 lbs. = 280,000 lbs.
17 3
14,000 × 2 subassemblies = 28,000 subassemblies
18 4
14,000 × 5 shelves = 70,000 shelves
19 5
5,200 × 6 grates = 31,200 grates
20 6
5,200 × 45 lbs. = 234,000 lbs.
21 7
5,200 × 4 subassemblies = 20,800 subassemblies
22 8
5,200 × 6 shelves = 31,200 shelves

233
Prob. 22–2B Concluded

4.
A B C D E
1 OUTDOOR GOURMET GRILL COMPANY
2 Direct Labor Cost Budget
3 For the Month Ending July 31, 2010
Stamping Forming Assembly
4
Department Department Department Total
5 Hours required for production:
6 Backyard Chef1 8,400 11,200 21,000
7 Master Chef2 4,160 7,800 13,000
8 Total 12,560 19,000 34,000
9 Hourly rate × $18 × $14 × $12
10 Total direct labor cost $226,080 $266,000 $408,000 $900,080
11
12 1
This line is calculated as 14,000 Backyard Chef units from the production budget
13 multiplied by the hours per unit in each department estimated for the Backyard Chef.
14 8,400 = 14,000 × 0.6; 11,200 = 14,000 × 0.8; 21,000 = 14,000 × 1.5
15 2
This line is calculated as 5,200 Master Chef units from the production budget multiplied
16 by the hours per unit in each department estimated for the Master Chef. 4,160 = 5,200 ×
17 0.8; 7,800 = 5,200 × 1.5; 13,000 = 5,200 × 2.5

234
Prob. 22–3B

1.
A B C D
1 FEATHERED FRIENDS INC.
2 Sales Budget
3 For the Month Ending December 31, 2010
Unit Sales Unit Selling
4
Volume Price Total Sales
5 Bird House 32,500 $50 $1,625,000
6 Bird Feeder 21,300 85 1,810,500
7 Total revenue from sales $3,435,500

2.
A B C
1 FEATHERED FRIENDS INC.
2 Production Budget
3 For the Month Ending December 31, 2010
4 Units
5 Bird House Bird Feeder
6 Expected units to be sold 32,500 21,300
7 Plus desired inventory, December 31, 2010 3,600 1,800
8 Total 36,100 23,100
9 Less estimated inventory, December 1, 2010 3,100 1,900
10 Total units to be produced 33,000 21,200

235
Prob. 22–3B Continued

3.
A B C D
1 FEATHERED FRIENDS INC.
2 Direct Materials Purchases Budget
3 For the Month Ending December 31, 2010
4 Wood Plastic Total
5 Units required for production:
6 Bird House 26,4001 16,5002
7 Bird Feeder 25,440 3
15,9004
Plus desired units of inventory,
8
December 31, 2010 2,900 3,400
9 Total 54,740 35,800
Less estimated units of inventory,
10
December 1, 2010 2,400 3,600
11 Total units to be purchased 52,340 32,200
12 Unit price × $6.00 × $0.80
Total direct materials to be
13
purchased $314,040 $25,760 $339,800
14
15 1
33,000 × 0.80 ft.
16 2
33,000 × 0.50 lb.
17 3
21,200 × 1.20 ft.
18 4
21,200 × 0.75 lb.

236
Prob. 22–3B Continued

4.
A B C D
1 FEATHERED FRIENDS INC.
2 Direct Labor Cost Budget
3 For the Month Ending December 31, 2010
Fabrication Assembly
4
Department Department Total
5 Hours required for production:
6 Bird House 6,6001 9,9002
7 Bird Feeder 8,480 3
7,4204
8 Total 15,080 17,320
9 Hourly rate × $15 × $11
10 Total direct labor cost $226,200 $190,520 $416,720
11
12 1
33,000 × 0.20 hr.
13 2
33,000 × 0.30 hr.
14 3
21,200 × 0.40 hr.
15 4
21,200 × 0.35 hr.

5.
A B C
1 FEATHERED FRIENDS INC.
2 Factory Overhead Cost Budget
3 For the Month Ending December 31, 2010
4 Indirect factory wages $750,000
5 Depreciation of plant and equipment 185,000
6 Power and light 47,000
7 Insurance and property tax 15,400
8 Total $997,400

237
Prob. 22–3B Continued

6.
A B C D
1 FEATHERED FRIENDS INC.
2 Cost of Goods Sold Budget
3 For the Month Ending December 31, 2010
Finished goods inventory,
4
December 1, 2010 $ 156,6001
5 Work in process, December 1, 2010 $ 27,000
6 Direct materials:
Direct materials inventory,
7
December 1, 2010 $ 17,2802
8 Direct materials purchases 339,800
9 Cost of direct materials available for use $357,080
Less direct materials inventory,
10
December 31, 2010 20,1203
Cost of direct materials placed in
11
production $336,960
12 Direct labor 416,720
13 Factory overhead 997,400
14 Total manufacturing costs 1,751,080
15 Total work in process during period $1,778,080
16 Less work in process, December 31, 2010 32,400
17 Cost of goods manufactured 1,745,680
18 Cost of finished goods available for sale $1,902,280
Less finished goods inventory,
19
December 31, 2010 171,0004
20 Cost of goods sold $1,731,280
21
22 1
Bird House (3,100 × $26) $ 80,600
23 Bird Feeder (1,900 × $40) 76,000
24 Finished goods inventory, December 1, 2010 $ 156,600
25 2
Wood (2,400 × $6.00) $ 14,400
26 Plastic (3,600 × $0.80) 2,880
27 Direct materials inventory, December 1, 2010 $ 17,280
28 3
Wood (2,900 × $6.00) $ 17,400
29 Plastic (3,400 × $0.80) 2,720
30 Direct materials inventory, December 31, 2010 $ 20,120
31 4
Bird House (3,600 × $27) $ 97,200
32 Bird Feeder (1,800 × $41) 73,800
33 Finished goods inventory, December 31, 2010 $ 171,000

238
Prob. 22–3B Concluded

7.
A B C
1 FEATHERED FRIENDS INC.
2 Selling and Administrative Expenses Budget
3 For the Month Ending December 31, 2010
4 Selling expenses:
5 Sales salaries expense $645,000
6 Advertising expense 149,700
7 Telephone expense—selling 4,800
8 Travel expense—selling 41,200
9 Total selling expenses $ 840,700
10 Administrative expenses:
11 Office salaries expense $211,100
12 Depreciation expense—office equipment 5,200
13 Telephone expense—administrative 1,500
14 Office supplies expense 3,500
15 Miscellaneous administrative expense 5,000
16 Total administrative expenses 226,300
17 Total operating expenses $1,067,000

8.
A B C
1 FEATHERED FRIENDS INC.
2 Budgeted Income Statement
3 For the Month Ending December 31, 2010
4 Revenue from sales $3,435,500
5 Cost of goods sold 1,731,280
6 Gross profit $1,704,220
7 Operating expenses:
8 Selling expenses $840,700
9 Administrative expenses 226,300
10 Total operating expenses 1,067,000
11 Income from operations $ 637,220
12 Other income:
13 Interest revenue $ 16,900
14 Other expenses:
15 Interest expense 11,600 5,300
16 Income before income tax $ 642,520
17 Income tax expense 224,882
18 Net income $ 417,638

239
Prob. 22–4B
1.
A B C D
1 SEDONA HOUSEWARES INC.
2 Cash Budget
3 For the Three Months Ending May 31, 2010
4 March April May
5 Estimated cash receipts from:
6 Cash sales $ 65,000 $ 73,200 $ 85,000
7 Collection of accounts receivable a
570,000 589,500 636,660
8 Dividends 1,800 ______ ________
9 Total cash receipts $636,800 $662,700 $ 721,660
10 Estimated cash payments for:
11 Manufacturing costsb $320,000 $341,000 $ 393,000
12 Selling and administrative expenses 175,000 225,000 245,000
13 Capital expenditures 160,000
14 Other purposes:
15 Note payable (including interest) 124,500
16 Income tax 46,000
17 Dividends _______ _______ 12,000
18 Total cash payments $495,000 $612,000 $ 934,500
19 Cash increase or (decrease) $141,800 $ 50,700 $(212,840)
20 Cash balance at beginning of month 30,000 171,800 222,500
21 Cash balance at end of month $171,800 $222,500 $ 9,660
22 Minimum cash balance 40,000 40,000 40,000
23 Excess or (deficiency) $131,800 $182,500 $ (30,340)

(Continues)

240
Prob. 22–4B Concluded

24 Computations:
25 aCollections of accounts receivable: March April May
26 January sales $150,0001
27 February sales 420,0002 $180,0003
28 March sales 409,5004 $175,5005
29 April sales 461,1606
30 Total $570,000 $589,500 $636,660
31 1
$500,000 × 30% = $150,000
32 2
$600,000 × 70% = $420,000
33 3
$600,000 × 30% = $180,000
34 4
$650,000 × 90% × 70% = $409,500
35 5
$650,000 × 90% × 30% = $175,500
36 6
$732,000 × 90% × 70% = $461,160
37 Payments for manufacturing costs:
b
March April May
Payment of accounts payable, beginning
38
of month balancec $ 60,000 $ 65,000 $ 69,000
39 Payment of current month’s costd 260,000 276,000 324,000
40 Total $320,000 $341,000 $393,000
41 cAccounts payable, February 1 balance = $60,000
42 ($350,000 – $25,000) × 20% = $65,000
43 ($370,000 – $25,000) × 20% = $69,000
44 d($350,000 – $25,000) × 80% = $260,000
45 ($370,000 – $25,000) × 80% = $276,000
46 ($430,000 – $25,000) × 80% = $324,000

2. The budget indicates that the minimum cash balance will not be maintained in
May. This is due to the capital expenditures and note repayment requiring
significant cash outflows during this month. This situation can be corrected by
borrowing and/or by the sale of the marketable securities, if they are held for such
purposes. At the end of March and April, the cash balance will exceed the
minimum desired balance, and the excess could be considered for temporary
investment.

241
Prob. 22–5B

1.
A B C D
1 SPRING GARDEN SOAP CO.
2 Budgeted Income Statement
3 For the Year Ending December 31, 2011
4 Sales $1,170,0001
5 Cost of goods sold:
6 Direct materials $202,5002
7 Direct labor 123,7503
8 Factory overhead 134,7504
9 Cost of goods sold 461,000
10 Gross profit $ 709,000
11 Operating expenses:
12 Selling expenses:
13 Sales salaries and commissions $132,0005
14 Advertising 60,000
15 Miscellaneous selling expenses 50,0006
16 Total selling expenses $242,000
17 Administrative expenses:
18 Office and officers salaries $102,9507
19 Supplies 22,0008
Miscellaneous administrative
20
expense 30,0009
21 Total administrative expenses 154,950
22 Total operating expenses 396,950
23 Income before income tax $ 312,050
24 Income tax expense 90,000
25 Net income $ 222,050
26
27 1
225,000 units × $5.20
28 2
225,000 units × $0.90
29 3
225,000 units × $0.55
30 4
(225,000 units × $0.35) + $48,000 + $8,000
31 5
(225,000 units × $0.40) + $42,000
32 6
(225,000 units × $0.20) + $5,000
33 7
(225,000 units × $0.15) + $69,200
34 8
(225,000 units × $0.08) + $4,000
35 9
(225,000 units × $0.12) + $3,000

242
Prob. 22–5B Concluded

2.
A B C D
1 SPRING GARDEN SOAP CO.
2 Budgeted Balance Sheet
3 December 31, 2011
4 Assets
5 Current assets:
6 Cash $219,0501
7 Accounts receivable 112,300
8 Inventories:
9 Finished goods $76,700
10 Work in process 24,300
11 Materials 54,100 155,100
12 Prepaid expenses 3,400
13 Total current assets $489,850
14 Property, plant, and equipment:
15 Plant and equipment $450,0002
16 Less accumulated depreciation 188,4003 261,600
17 Total assets $751,450
18 Liabilities
19 Current liabilities:
20 Accounts payable $ 59,000
21 Stockholders’ Equity
22 Common stock $190,000
23 Retained earnings 502,4504
24 Total stockholders’ equity 692,450
25 Total liabilities and stockholders’ equity $751,450
26
27 1
Cash balance, December 31, 2011:
28 Balance, January 1, 2011 $100,000
29 Cash from operations:
30 Net income $222,050
31 Depreciation of plant and equipment 48,000 270,050
32 Less: Dividends to be paid in 2011 (19,000 × $1 × 4 qtrs.) $ 76,000
33 Plant and equipment to be acquired in 2011 75,000 (151,000)
34 Balance, December 31, 2011 $219,050
35 2
$375,000 + $75,000 = $450,000
36 3
$140,400 + $48,000 = $188,400
37 4
Retained earnings balance, December 31, 2011:
38 Balance, January 1, 2011 $356,400
39 Plus net income for 2011 222,050
40 $578,450
41 Less dividends to be declared in 2011 (19,000 × $1 × 4 qtrs.) 76,000
42 Balance, December 31, 2011 $502,450

243
 SPECIAL ACTIVITIES

Activity 22–1

Deon should reject Lori’s request to charge the convention-related costs against
July’s budget. This is just one example of many attempts to slide expenses into
different budget periods than when actually incurred. This is a common issue that
controllers face. Often, operating managers will attempt to accelerate future
expenditures into low-expenditure months or delay present expenditures into future
periods in order to avoid going over budget. These attempts to “slide” expenditures
should not be supported, or else the whole concept of the budget will begin to
become an accounting game. The integrity of the budget process must be defended
by the controller. Thus, expenditures should be accrued to the period in which the
benefit is received. Deon should reassure Lori that management will not take a single
month’s results as an indication of either good or poor management. Month-to-month
variation should be expected. Rather, management will take a long-term perspective
and evaluate whether the department is staying within budget over a longer period of
time. Abnormal month-to-month variations from budget can “wash out” over time.

Activity 22–2

a. The hospital’s new budget method is clearly an example of a flexible budget. The
budget changes with changes in underlying activity, such as patient-days.
Patient-days are the number of patients multiplied by the number of days in the
hospital. As the number of patient-days changes, it would be reasonable to
expect that the hospital’s variable costs should also change. In addition, the last
quote suggests that the new budget approach is a monthly continuous budget.
The budget helps the managers plan month-by-month expenditures.
b. The advantage of a flexible budget is to accurately plan variable costs of the
hospital with changes in the underlying activity base. Using a static budget would
create actual deviations from budget that would be difficult to interpret. Managers
would not be able to determine if the deviations were the result of cost
(in)efficiencies or whether they were due to changes in activity level. A flexible
budget causes the budget to “flex” with changes in underlying activity level so
that any remaining actual deviations from budget can more clearly be identified
with (in)efficiency or other special causes. The continuous budget also provides
timely information to managers so that they can adjust actual spending patterns
to the budgeted amounts.

244
Activity 22–3

a. The budget information indicates that the actual expenditures by the Operations
Department exceeded what was planned by $12,000. The bank manager may ask
the operations manager why the travel and training expenditures exceeded the
plan by a total of $20,000. It may be that the additional expenditures were
necessary, but an explanation is in order.
b. The bank manager does not know if the actual resources consumed by the
Operations Department are the right amount of resources for doing the right
things. In other words, this budget doesn’t say anything about the actual work of
the Operations Department and how much cost this work consumes. The bank
manager doesn’t have a good sense if there is waste in the department or not.
The $12,000 excess expenditure over budget raises several questions. If the
department did twice as much work as planned, then the $12,000 is a bargain. If,
on the other hand, the department did much less work than planned, then the
$12,000 understates how poorly the department used resources. Again, how
much work the department actually did is unknown, so these questions cannot be
answered. A flexible budget would provide more information about the work of
the department. Examples of the kind of work conducted by the department
might include processing credit card statements, processing checking
statements, processing loan repayments, and correcting errors.

The budget doesn’t indicate why there was more travel and training than
expected. Maybe the department introduced a new computer system, and all
employees needed off-site training in order to use the system. This would explain
the additional spending on travel and training. The training needed to be done,
regardless of the budget.

The lower than expected overtime may be a favorable result. However, there may
have been less overtime because employees were involved in more training days
than expected or performed less work than planned. Again, a flexible budget
would provide more information for evaluating the department’s performance.

245
Activity 22–4

Domino’s could use a master budget to plan operations consistent with the sales
forecast. The sales forecast could be used to develop the production budget for pizzas.
The sales and production budgets would be identical since there would be no finished
goods inventory for cooked pizzas. The sales (production) budget would be used to
develop a direct materials purchases budget. For example, the pizza ingredients,
packaging materials, beverages, and other materials could be planned from the sales
budget. In addition, the cost of delivery fuel (driver reimbursement for gas) could be
planned from the sales budget. The sales (production) budget could also be used to
develop the direct labor budget for cooks, counter staff, dough making labor, and
drivers. Much of the overhead is related to the number of restaurants, rather than the
number of pizzas sold. That is, the number of restaurant locations will drive
management salaries, rent, utilities, insurance, and other overhead costs. The drivers
own the delivery vehicles; thus, vehicle depreciation and maintenance costs are not
part of Domino’s overhead budget.

The budget process could be used to direct and coordinate all the various restaurants.
In this way, all the managers would be operating under the same set of assumptions.
The actual performance of the company and the individual stores could be compared
with the budget in order to provide all levels of the organization appropriate feedback
and control. This feedback can be used to adjust operations to any changes that may
be occurring. Thus, if sales are expanding faster or slower than planned, costs could
be brought into line rapidly. This would help prevent the company from becoming
either short of drivers and food due to sales outpacing projections or overbuilding
stores before sales have materialized in sufficient volume to justify the cost.

246
Activity 22–5

a. The amount of actual expenditures was less than budget for the first 10 months of
the budget year. As the end of the budget year-end neared, the manager spent the
remaining excess budget and, as a result, went over the budget for May and June.
The amount spent for the year was equal to the total amount budgeted, because
the average difference between the actual and budget is zero. Thus, the managers
did not spend more than was originally authorized for the year. However, the data
indicate that the managers spent the available annual authorization in the last two
months to avoid losing the excess to the general fund. This is an example of a
“spend it or lose it” mentality. The manager is, in a sense, holding back spending
during the year to create a small cushion, or reserve. If an emergency arises, then
the manager has resources available to address it. If the emergency doesn’t arise,
then the manager uses the amount held back in a flurry of year-end spending,
some of which is likely to be wasteful.
b. The budget system encourages this type of wasteful behavior. The budget could
be redesigned in a number of ways. The budget could be designed to flex with
underlying activity and adjusted monthly. Thus, the manager would always have
budgeted resources for changes in underlying activity. For example, if the
number of prisoners in the jail increased, then the budget would increase
proportionately. A manager with the flexible budget would be less likely to
“reserve” the budget during the year, since an activity change would be
automatically reflected in the monthly budget. That is, the inherent slack in the
static budget could be reduced, knowing that activity changes are automatically
accommodated by the flexible budget. The budget system might also allow a
manager to make a request for additional funds after the budget year has begun.
In this scenario, the manager would not need to hold back spending for
emergencies, because emergencies could be handled with a separate request.
For example, if the town had a natural disaster, then the police and fire
departments could request additional funding to meet the need. Lastly, the
budget could be designed to encourage thrift. For example, the budget could be
designed so that the manager could carry forward a portion of the unspent
budget of a previous year. Such a system would reward departmental thrift by
allowing the department to keep a portion of the savings for future needs. This
would reduce the need for aggressive year-end spending, since a portion of the
unspent amount could roll forward to the next year. This would cause the
manager to spend money when needed, not just to avoid the year-end take back.

247
Activity 22–6

Most states have home pages and budget information available online. The bud-get
information will usually be fairly easy to identify. The solution to the activity for
Tennessee for fiscal year 2004 is as follows. (The students should be using more
recent information; so this is only a guide.)
1.

Where Your State Tax Dollar Comes From

Tobacco, Beer, &

Alcoholic Beverages Sales Tax 61¢
1¢
All Other Taxes
5¢

Insurance & Banking

4¢

Franchise & Excise

11¢

Gross Receipts &

Privilege 5¢
Motor Vehicle
Income & Inheritance 2¢
2¢
Gasoline Taxes 9¢

Fiscal Year 2004–2005

248
Activity 22–6 Concluded

2.

Where Your State Tax Dollar Goes

Education 40¢
Business & Economic
Development 1¢

Resources &
Regulation 3¢

Health & Social Cities &

Services 31¢ Counties 6¢

Transportation 8¢

Law, Safety &

General Correction 9¢
Government 2¢

Fiscal Year 2004–2005

3. Tennessee’s budget is in balance. That is, state revenues equal state

expenditures. Most states are legally required to have balanced budgets.

249