CHAPTER 16

DISCUSSION QUESTIONS

Q16-1. A capital expenditure is an expenditure

intended to benefit future periods. It is normally associated with the acquisition or
improvement of plant assets. The real distinction between a capital and revenue expenditure is not the immediate charging of the
expenditure to income, as opposed to its
gradual amortization, but the length of time
required for its recovery in cash. Recoveries
of revenue expenditures, such as product
costs, are expected to take place in a matter
of weeks or, at the most, months. The financial recovery of capital expenditures is measured in terms of years.
Q16-2. Purposes of a research and development program are:
(a) A planned search for new knowledge pertaining to the industry without reference
to a specific application.
(b) Creation of a new product or improvement of an existing product.
(c) Invention of a new or improved process or
machinery to make a finished product or
component.
Reasons for a research and development
program are:
(a) To protect the sales dollar, that is, to meet
competition. Improving the quality of performance of products or achieving cost
savings in either operating or capital
expenditures falls into this category.
(b) To do research to promote new sales
dollars, either by entering a new market
or by significantly expanding an existing
market.
(c) To investigate problems with respect to
environmental protection, safety, working
conditions, etc.
Q16-3. Budgetary procedures for research and
development expenditures are designed to:
(a) force management to think about planned
expenditures;
(b) coordinate research and development
plans with the immediate and long-range
plans of the company;

Q16-4.

Q16-5.

Q16-6.

Q16-7.

16-1

(c) force the research and development staff

to consider major nonfinancial aspects of
the program, such as personnel, equipment, and facilities requirements.
A cash budget involves detailed estimates of
anticipated cash receipts and disbursements
for a specified period of time. It is designed to
assist management in coordinating cash flow
from operations as a basis for financial plans
and control. The cash budget provides a systematic approach to the synchronization of
cash resources with needs. It assists management in making intelligent decisions concerning capital expenditures, dividend policies,
investments, and other financial matters, and
often exerts a cautionary influence on any of
the above plans. Periodic reports comparing
actual with planned receipts and disbursements permit effective and continuous control of cash by signaling significant deviations
from the financial plans for the period.
(a) Nonmanufacturing businesses must plan
for the future just as carefully as manufacturing concerns. Seasonal patterns in
revenues and expenditures must be provided for, and required equipment
replacement and expansions must be
budgeted.
(b) Not-for-profit organizations generally
operate on relatively fixed incomes that
are received at one time. Such receipt
patterns are common for organizations
that rely on tax dollars for support. These
funds must be allocated throughout the
year in order to maintain operations.
Careful budget plans are a necessity for
such allocations.
PPBS stands for Planning, Programming,
Budgeting System, and is an analytical tool
focused on the output or final results rather
than input or initial dollars expended. The output is directly relatable to planned goals or
objectives.
Zero-base budgeting (ZBB) is a planning and
budgeting tool using cost-benefit analysis of

16-2

projects and functions to improve an organizations resource allocation. Budget requests

consist of decision packages that are analyzed, evaluated, and ranked in a priority order
based on cost-benefit analysis. Management
can then evaluate possible activities for the
coming period, selecting those that will best
achieve organizational goals.
Traditional budgeting tends to concentrate
on the differential change from the prior year,
assuming that existing activities are essential,
must be continued, are currently performed in
a cost-efficient and optimum manner, and will
be cost-effective in the coming year. Costs are
developed more on a line-item rather than an
activity basis. ZBB organizes all budget costs
in the form of activities and/or operations
(decision packages) and evaluates the effectiveness of each decision package as if it
were a new activity.
Q16-8. (a) Zero-base budgeting requires managers
to justify their entire budget requests. It
places the burden of proof on the manager to justify why any money at all
should be budgeted. It does this by starting with the assumption that zero will be
spent on each activity, so the budgeting
process begins with a base of zero.
(b) The two kinds of alternatives considered
for each activity are (1) different ways of
performing the activity and (2) different
levels of effort in performing the activity.
(c) A decision package includes an analysis
of an activitys cost and purpose, alternative courses of action, measures of performance of the activity, consequences of
not performing the activity, and the activitys benefits.
(d) A package identifies and describes one
activity in sufficient detail so that it can
be evaluated and compared with other
activities.
(e) Success in the implementation of zerobase budgeting requires the following:
1.
Linkage of zero-base budgeting with
short- and long-range planning
2.
Sustained support and commitment
from executive management
3.
Innovation by managers in developing decision packages
4.
Acceptance of zero-base budgeting
by persons who must perform the
budgeting work

Chapter 16

Q16-9. Prospective information should be provided in

external financial statements when it will
enhance the reliability of the users predictions.
Q16-10. PERT is particularly appropriate as a scheduling and controlling technique for projects
consisting of a large number of tasks, some
of which cannot be started until others are
complete, and some of which can be undertaken concurrently.
Conceptually, the reference is to a network of interdependent activities which, as a
group, require considerable time to complete. There is usually substantial set-up
time (and cost) associated with analyzing,
defining, and estimating each discrete project activity; thus, the benefit is in projects
requiring a considerable amount of time and
consisting of a relatively complex network.
PERT allows the user to update and revise
scheduled activities and thereby determine
the effects of changes on the overall project.
It is particularly appropriate when the timing
of individual activities and the project completion date are critical to success.
Q16-11. Slack is computed by subtracting the earliest expected time from the latest allowable
time. The earliest expected time is the earliest time that an activity can be expected to
start, because of its relationship to pending
activities. The latest allowable time is the
latest time that an activity may begin and
not delay completion of the project. Slack is
determinable only in relation to an entire
path through the network
Q16-12. PERT/cost is really an extension of PERT.
With time-options available, it seems advisable to assign cost to time and activities,
thereby providing total financial planning
and control by functional responsibility.
Q16-13. Computer support offers distinct advantages
to PERT users. PERT is a mathematicallyoriented technique and is therefore ideally
suited to the high-speed response of computers for deriving the critical path, slack
times, and costs, and for storing and reporting results to management. Revisions to all
schedule elements, whether during the initial estimating phase or during the active
project phase, can be updated and the
revised results promptly reported.
Computer support is helpful in dealing with
large, complex networks of interdependencies

Chapter 16

and when project control requires timely

progress reporting against the updated
plan. Most program packages offer a variety of reporting features and formats,
including graphic network display as well
as printed reports at various summary levels. Current reporting provides information
to project managers, enabling quick reaction to deviations.

16-3

Q16-14. The traditional budget focuses on one set of

assumptions. The probabilistic budget provides for evaluating several sets of assumptions, including the probability of each and a
composite expected value, range, and standard deviation for each budget element.

16-4

Chapter 16

EXERCISES
E16-1

Beginning cash balance ................................................

Budgeted cash receipts:
Collect accounts receivable:
November credit sales:
($60,000 10%) ................................
December credit sales:
($70,000 60%) ................................
($70,000 10%) ................................
January credit sales:
($50,000 25%) ................................
($50,000 60%) ................................
($50,000 10%) ................................
February credit sales:
($60,000 25%) ................................
($60,000 60%) ................................
March credit sales:
($70,000 25%) ................................
Total cash receipts ............................................
Cash available during month ........................................
Budgeted cash disbursements:
Pay accounts payable:
December purchases:
($20,000 80%) ................................
January purchases:
($15,000 20%) ................................
($15,000 80%) ................................
February purchases:
($25,000 20%) ................................
($25,000 80%) ................................
March purchases:
($20,000 20%) ................................
Payroll .................................................................
Miscellaneous cash expenses..........................
Debt retirement ..................................................
Total cash disbursements........................
Ending cash balance .....................................................

January
$ 6,000

February March
$20,500
$26,500

$ 6,000
42,000
$ 7,000
12,500
30,000
$ 5,000
15,000
36,000

$60,500
$66,500

$52,000
$72,500

17,500
$58,500
$85,000

$16,000
3,000
$12,000
5,000
$20,000

21,000
6,000

22,000
7,000

$46,000
$20,500

$46,000
$26,500

4,000
23,000
6,000
26,000
$79,000
$ 6,000

Chapter 16

E16-2

16-5

Finished Goods

Units required to meet sales budget............................

Add desired ending inventory (20% of
following months sales) ...................................
Total units required ........................................................
Less estimated beginning inventory
(20% of current months sales) ........................
Planned production........................................................

April
9,000

May
10,000

June
12,000

2,000
11,000

2,400
12,400

2,200
14,200

1,800
9,200

2,000
10,400

2,400
11,800

April

May

June

27,600

31,200

35,400

12,480
40,080

14,160
45,360

11,040
29,040

12,480
32,880

Materials
Units required to meet planned production
(planned production 3)...................................
Add desired ending inventory (40% of following
months production requirements) ..................
Total materials required ..........................................
Less estimated beginning inventory (40% of
current months requirements).........................
Planned purchases ...................................

Cash disbursements during May for payment of accounts payable for material
purchases:
1/3 29,040 $20 .98 =
$189,728
2/3 32,880 $20 .98 =
429,632
$619,360
CGA-Canada (adapted). Reprint with permission.

16-6

Chapter 16

E16-3 Par production budget:

Units required to meet sales budget ..........................

Add desired ending inventory.....................................
Total units required ......................................................
Less beginning inventory ............................................
Planned production ......................................................

June
50,000
3,000
53,000
5,000
48,000

July
30,000
3,000
33,000
3,000
30,000

June

July

Tee purchases budget:

Units required for production:

48,000 3 .............................................................
30,000 3 .............................................................
Add desired ending inventory.....................................
Less beginning inventory ............................................
Units to be purchased..................................................

144,000
14,000
158,000
20,000
138,000

90,000
11,000
101,000
14,000
87,000

Cash disbursements in July for purchases of Tee:

138,000 $5 1/3 .98 =
87,000 $5 2/3 .98 =

$225,400
284,200
$509,600
CGA-Canada (adapted). Reprint with permission.

Chapter 16

E16-4
(1)

Cash
Cash

Cash
Cash

Cash

16-7

JAMESTOWN COMPANY
Cash Budget
For July
balance, July 1.................................................................
receipts:
June sales ($30,000 48%) .........................................
July sales ($40,000 50%) ..........................................
available ...........................................................................
disbursements:
June purchases ($10,000 75%) ................................
July purchases ($15,000 25%)..................................
Other marketing and administrative expenses .........
Income tax.....................................................................
Dividends ......................................................................
balance, July 31...............................................................

*Calculation of June income tax:

Sales ...........................................................................................
Cost of goods sold ...................................................................
Gross profit ...............................................................................
Commercial expenses:
Depreciation .............................................. $5,000
Other marketing and administrative ....... 9,000
Taxable income..........................................................................
Income tax ($4,000 40%) .......................................................
(2)

$ 5,000
$14,400
20,000

$ 7,500
3,750
10,000
1,600
15,000

34,400
$39,400

37,850
$1,550

$30,000
12,000
$18,000

14,000
$4,000
$1,600

Since the desired minimum cash balance is $5,000, arrangements should be

made to borrow $3,450 ($5,000 $1,550).
CGA-Canada (adapted). Reprint with permission.

16-8

Chapter 16

E16-5
(1)
PERT network:
Start

Finish
1

(2)

Alternate paths and times and the critical path and the expected project time:
1-2-5-6-7
= 11 weeks
critical path
1-2-3-5-6-7
= 10 weeks
1-2-3-4-5-6-7 = 10 weeks

(3)

The two activities in question are 3-4 and 4-5. If these activities were eliminated,
there would be no effect on the critical path or the expected completion time
because 3-4 and 4-5 are not on the critical path.

Chapter 16

16-9

E16-6
(1)

(2)

Activity
1-2
1-3
1-4
2-6
3-5
4-5
5-6
Path
1-2-6
1-4-5-6
1-3-5-6

(to
1
2
1
2
4
3
4

tm(4)
2(4)
6(4)
4(4)
11(4)
6(4)
4(4)
5(4)

tes
2 + 10.67
3.83 + 4 + 5
5.83 + 6 + 5

tp)
3
9
6
18
8
5
6

= Total
12
35
23
64
36
24
30

Total te
12.67
12.83
16.83

6
6
6
6
6
6
6
6

te
2.00
5.83
3.83
10.67
6.00
4.00
5.00

critical path

CGA-Canada (adapted). Reprint with permission.

16-10

Chapter 16

E16-7
(1)

6
1
6
1
6
1
6
1
6
1
6
1
6
1
6
1
10
1
10
1
10
1

(2)
Event
1
2
3
4
5
6
7
8
9

+
2
+
2
+
2
+
2
+
2
+
2
+
2
+
2
+
3
+
3
+
3

11
11
8
8
8
0
0
0
3
3
3

+
5
+
5
+
4
+
4
+
4
+
3
+
3
+
3
+
4
+
4
+
4

5
5
9
9
13
3
3
3
9
9
13

+
6
+
6
+
6
+
6
+
8
+
4
+
4
+
4
+
6
+
6
+
8

Earliest Expected
Time
0
6
10
14
17
23
27
27
30

4
1
4
1

+
7
+
8
+
7
+
8

= 29
9

= 25
9

= 30 critical path
9

= 26
9

2
9
9
13
4
1

= 29
9
+
6
+
6
+
8
+
7
+
8

4
1

+
7
+
8

= 25
9

= 21
9
= 24

9
3

= 29
9

= 25
9

= 28
9

Latest Allowable
Time
0
6
11
14
18
23
27
28
30

Slack
Time
0
0
1
0
1
0
0
1
0

CGA-Canada (adapted). Reprint with permission.

Chapter 16

16-11

E16-8
(1)

te = (to + 4tm + tp) 6 = (1 + (4 2) + 9) 6 = 3 days

(2)
6

4
4

7
6

3
6

(3)
Path
0-1-2-6-7
0-1-3-4-6-7
0-1-3-4-7
0-1-3-5-7

=
=
=
=

Time Required
4+3+6+5
4+4+3+3+5
4+4+3+6
4+4+6+6

=
=
=
=

18
19
17
20

days
days
days
days

The critical path is 0-1-3-5-7, because it requires the greatest total time (20 days).
(4)

Critical path time ..........................................................

Less time required after event 2:
Activity 2-6 ...........................................................
Activity 6-7 ...........................................................
Maximum time to event 2 ............................................
Estimated time to event 2:
Activity 0-1 ...........................................................
Activity 1-2 ...........................................................
Slack time at event 2 ...........................................

20 days
6 days
5 days

4 days
3 days

11 days
9 days

7 days
2 days

16-12

Chapter 16

PROBLEMS
P16-1
(1)

Budgeted cash disbursements during June:

Purchase of materials:
$103,500
May (11,2501 $20 46%) .........................
2
131,544
June (12,180 $20 54%)........................
Marketing, general, and administrative expenses:
May ($51,5503 46%) .................................
$23,713
4
26,622
June ($49,300 54%) ................................
Wages and salaries .............................................
Total ......................................................................

50,335
37,9005
$323,279

1 May

14,820 units
11,900
26,720 units
15,470
11,250 units

2 June

15,600 units
11,400
27,000 units
14,820
12,180 units

31 ending inventory (11,400 130%)..................

May production .............................................................
Materials needed in May ..............................................
April 30 ending inventory ($309,400 $20) ...............
May purchases..............................................................
30 ending inventory (12,000 130%) ................
June production............................................................
Materials needed in June.............................................
May 31 ending inventory..............................................
June purchases ............................................................

3 ($357,000

May sales 15%) $2,000 depreciation = $51,550

4 ($342,000

June sales 15%) $2,000 depreciation = $49,300

5 Accrued

payroll on June 1........................................... $ 3,300

Payroll earned during June...........................
38,000
$41,300
Accrued payroll on June 30 ..........................
3,400
Cash paid out for payroll ..............................
$37,900

(2)

$235,044

Budgeted cash collections during May:

March sales ($354,000 9%) ..............................
April sales ($363,000 97% 60%) ...................
April sales ($363,000 25%) ..............................
Total ......................................................................

$ 31,860
211,266
90,750
$333,876

Chapter 16

P16-1 (Concluded)
(3)
Budgeted units of inventory to be purchased during July:
July 31 ending inventory (12,200 130%) ........
15,860 units
July production....................................................
12,000
Materials needed in July:....................................
27,860 units
June 30 ending inventory (12,000 130%) .......
15,600
July purchases.....................................................
12,260 units

16-13

16-14

Chapter 16

P16-2
April
$ 100,000

May
$ 100,000

June
$ 100,000

Beginning cash balance ..................................................................

Cash receipts during month:
Collections of accounts receivable:
February sales:
($2,000,000 40%) ......................................................
March sales:
($1,800,000 60%) ......................................................
($1,800,000 40%) ......................................................
April sales:
($2,200,000 60%) ......................................................
($2,200,000 40%) ......................................................
May sales:
($2,500,000 60%) ......................................................
Total cash collections.......................................................
Cash available for use during month .............................................
Cash disbursements during month:
Accounts payable for purchases:
February purchases:
($2,000,000 February sales 50% 40% 20%) ....
($1,800,000 March sales 50% 60% 20%) .........
March purchases:
($1,800,000 March sales 50% 40% 80%) .........
($2,200,000 April sales 50% 60% 80%)............
($1,800,000 March sales 50% 40% 20%) .........
($2,200,000 April sales 50% 60% 20%)............
April purchases:
($2,200,000 April sales 50% 40% 80%)............
($2,500,000 May sales 50% 60% 80%).............
($2,200,000 April sales 50% 40% 20%)............
($2,500,000 May sales 50% 60% 20%).............
May purchases:
($2,500,000 May sales 50% 40% 80%).............
($2,800,000 June sales 50% 60% 80%) ...........
Wages (20% of current sales):
April ($2,200,000 20%) ...................................................
May ($2,500,000 20%) ....................................................
June ($2,800,000 20%) ...................................................
General and administrative expenses:
Salaries (1/12 $480,000).................................................
Promotion (1/12 $660,000).............................................
Property taxes (1/4 $240,000) .......................................
Insurance (1/12 $360,000)..............................................
Utilities (1/12 $300,000)..................................................
Income taxes ($1,020,000 income 40% tax rate) ...............
Total cash disbursements.......................................................
Cash balance before borrowing or investment .............................
Cash to be borrowed (or invested) .................................................

40,000
55,000
0
30,000
25,000
408,000
$2,002,000
$ (22,000)
122,000

40,000
55,000
0
30,000
25,000
0
$1,806,000
$ 334,000
(234,000)

40,000
55,000
60,000
30,000
25,000
0
$2,080,000
$ 400,000
(300,000)

Ending cash balance .......................................................................

$ 100,000

$ 100,000

$ 100,000

$ 800,000
1,080,000
$ 720,000
1,320,000
$ 880,000

$1,880,000
$1,980,000

$2,040,000
$2,140,000

1,500,000
$2,380,000
$2,480,000

80,000
108,000
288,000
528,000
$

72,000
132,000
352,000
600,000
$

88,000
150,000
400,000
672,000

440,000
500,000
560,000

Chapter 16

16-15

P16-3
MAYNE MANUFACTURING COMPANY
Cash Budget
For the Years Ending March 31
20B

20C
$ 75,000

Balance of cash at beginning .....................

0
Cash generated from operations:
Collections from customers
Schedule A............................................. $825,000
$1,065,000
Disbursements:
Direct materialsSchedule B .............. $220,000
$ 245,000
Direct labor ............................................ 300,000
360,000
Variable overhead.................................. 100,000
120,000
Fixed costs ............................................ 130,000
130,000
Total disbursements..................................... $750,000
$ 855,000
Excess of cash collections over cash
disbursements from operations ..........
$ 75,000
210,000
Cash available from operations .................
$ 75,000
$285,000
Cash received from liquidation of existing
accounts receivable and inventories .
90,000
0
Total cash available......................................
$165,000
$285,000
Payments to general creditors
(liquidation proceeds)...........................
90,000
270,0002
Balance of cash at end ................................
$ 75,0001
$ 15,000
1This

amount could have been used to pay general creditors or carried forward to the
beginning of the next year.

2($600,000

60%) $90,000

16-16

Chapter 16

P16-3 (Concluded)
Schedule ACollections from customers:
Sales ..............................................................................
Beginning accounts receivable...................................
Total...........................................................................
Less ending accounts receivable ...............................
Collections from customers ........................................

20B
20C
$900,000 $1,080,000
0
75,000
$900,000 $1,155,000
75,000
90,000
$825,000 $1,065,000

Schedule BDisbursements for direct materials:

Direct materials required for production ...................

Required ending inventory ..........................................
Total...........................................................................
Less beginning inventory ............................................
Purchases......................................................................
Beginning accounts payable .......................................
Total...........................................................................
Less ending accounts payable ...................................
Disbursements for direct materials ............................
312,000
415,000

20B
$200,000
40,0003
$240,000
0
$240,000
0
$240,000
20,000
$220,000

20C
$240,000
50,0004
$290,000
40,000
$250,000
20,000
$270,000
25,000
$245,000

units 2/12 = 2,000; 2,000 $20 per unit = $40,000

units 2/12 = 2,500; 2,500 $20 per unit = $50,000

P16-4
Production Budget:
Required to meet sales forecast:
January ($360,000 sales $150 per unit)..........
2,400
February ($450,000 sales $150 per unit) ........
3,000
March ($480,000 sales $150 per unit) .............
3,200
Desired finished goods ending inventory:
((($600,000 April sales $150 per unit) 10%) + 100)
Total quantity of product to produce..........................
Direct Materials Purchases Budget:
Materials required for production (9,100 units $20)
Desired materials ending inventory ...........................
Total direct materials purchases during first quarter

8,600
500
9,100
$182,000
2,000
$ 184,000

Chapter 16

16-17

P16-4 (Concluded)
Cash Budget for First Quarter Ending March 31, 20A:
January 1, cash balance ..............................................
Cash receipts:
Investment by owner ...........................................
Mortgage taken out .............................................
Collections of accounts receivable:
January sales:
($360,000 30% 80% 98%) ..............
($360,000 30% 20%)..........................
($360,00 30%) .......................................
($360,000 38%) .....................................
February sales:
($450,000 30% 80% 98%) ..............
($450,000 30% 20%)..........................
($450,000 30%) .....................................
March sales:
($480,000 30% 80% 98%) ..............
($480,000 30% 20%)..........................
Total cash available for use during quarter ...............
Cash disbursements:
Accounts payable ................................................
Direct labor ((9,100 $30) - $7,500) ...................
Variable overhead (9,100 $15) .........................
Factory rent ($10 5,000 capacity 3) .............
Sales commissions (8,600 units $8)...............
Office rentals ($12,000 3).................................
Interest payment ($150,000 2% 3)................
Payment of principal on long-term note ...........
Equipment purchases .........................................
March cash balance before current financing...........
Current financing required ..........................................
Desired March 31 cash balance ..................................

$50,000
150,000

84,672
21,600
108,000
136,800
105,840
27,000
135,000
112,896
28,800

$184,000
265,500
136,500
150,000
68,800
36,000
9,000
30,000
150,000

960,608
$ 960,608

1,029,800
$ (69,162)
84,162
$ 15,000

16-18

Chapter 16

P16-5
(1)

TRIPLE-F HEALTH CLUB

Budgeted Statement of Income (Cash Basis)
For the Year Ending October 31, 20C
(000s omitted)

Cash revenue:
Annual membership fees, $355 1.1 1.03......................................
Lesson and class fees, $234 $234 ..................................................
$180
Miscellaneous, $2.0 $2.....................................................................
$1.5
Total cash revenue......................................................................
Cash expenses:
Managers salary and benefits, $36 1.15 ........................................
Regular employees wages and benefits, $190 1.15......................
Lesson and class employee wages and benefits, $195 1.3 1.15
Towels and supplies, $16 1.25.........................................................
Utilities (heat and light), $22 1.25....................................................
Mortgage interest, $360 .09...............................................................
Miscellaneous, $2 1.25 .....................................................................
Total cash expenses ...................................................................
Cash income .....................................................................................................
Cash payments:
Mortgage payment ...............................................................................
Accounts payable balance at 10/31/B ................................................
Accounts payable on equipment at 10/31/B......................................
Planned new equipment purchase.....................................................
Total cash payments...................................................................
Cash surplus.....................................................................................................
Beginning cash balance ..................................................................................
Cash available for working capital and to acquire property ........................
(2)

$402.2
304.2
2.7
$709.1
$ 41.4
218.5
291.5
20.0
27.5
32.4
2.5
$633.8
$ 75.3
$ 30.0
2.5
15.0
25.0
$ 72.5
$ 2.8
8.3
10.1

Operating problems that Triple-F Health Club could experience in 20C include:
(a) The lessons and classes contribution to cash will decrease because the
projected wage increase for lesson and class employees is not made up by
the increased volume of lessons and classes.
(b) Operating expenses are increasing faster than revenues from membership
fees.
(c) Triple-F seems to have a cash management problem. Although there
appears to be enough cash generated for the club to meet its obligations,
past due amounts occur. Perhaps the cash balance may not be large
enough for day-to-day operating purposes.

Chapter 16

16-19

P16-5 (Concluded)
(3)
Jane Crowes concern with regard to the boards expansion goals are justified.
The 20C budget projections show only a minimal increase of $2.8 in the cash
balance. The total cash available is well short of the $60.0 annual additional
cash needed for the land purchase over and above the clubs working capital
needs; however, it appears that the new equipment purchases can be made on
an annual basis. If the board desires to purchase the adjoining property, it is
going to have to consider significant increases in fees or other methods of
financing, such as membership bonds or additional mortgage debt.
P16-6
(1) Schedule of budgeted cash receipts by month for the third quarter of 20A (000s
omitted):
Billings
Receipts
Actual/
Percentages
Estimated
Amount
Class
Timing
Month
May ..............
$5,000
90%
20%
May ..............
5,000
10
40
June.............
5,000
90
50
June.............
5,000
10
40
June.............
5,000
90
20
June.............
5,000
10
40
July ..............
4,500
90
20
July ..............
4,500
10
10
July ..............
4,500
90
50
July ..............
4,500
10
40
July ..............
4,500
90
20
July ..............
4,500
10
40
August.........
5,000
90
20
August.........
5,000
10
10
August.........
5,000
90
50
August.........
5,000
10
40
September ..
5,500
90
20
September ..
5,500
10
10
Total receipts from billings
Endowment fund income
Total cash receipts

July
$ 900
200
2,250
200

August

September

$ 900
200
810
45
2,025
180
$ 810
180
900
50

$4,405
175
$4,580

$4,255
175
$4,430

2,250
200
990
55
$4,485
175
$4,660

16-20

Chapter 16

P16-6 (Concluded)
(2)

Schedule of budgeted cash disbursements by month for the third quarter of 20A
(000s omitted):
Disbursements
July
August September
Salaries
Variable:
$4,500 20%..........................................
$ 900
$5,000 20%..........................................
$1,000
$5,500 20%..........................................
$ 1,100
Total variable ................................
$ 900
$1,000
$ 1,100
Fixed ................................................................
1,500
1,500
1,500
Total salaries .........................................
$2,400
$2,500
$ 2,600
Purchases of previous month ...................................
1,200
1,250
1,500
Interest .........................................................................

450
Depreciation (not relevant) ........................................

Total cash disbursements..........................................

$3,600
$3,750
$ 4,550
(3)

(000 omitted)
Cash balanceJuly 1, 20A............................
Cash receipts in third quarter:
July .......................................................
August ....................................................
September..............................................
Total cash available........................................
Cash disbursements in third quarter:
July .......................................................
August ....................................................
September..............................................
Projected cash balanceSeptember 30, 20A
Minimum end-of-month cash balance required
($1,850 10%) .......................................
Cash available to acquire capital items .......
Capital expenditures planned for October 1, 20A
Amount of borrowing necessary on October 1, 20A

$
$4,580
4,430
4,660

$3,600
3,750
4,550

300

13,670
$13,970

11,900
$ 2,070
185
$ 1,885
(3,700)
$(1,815)

Chapter 16

16-21

P16-7
(1)
1
1
1
1
(2)

Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

10

3
+
3
+
2
+
2

10

6
+
4
+
4
+
5

10

Activities
A, B
A, B
A, B
A, B
A, B
F, C, D, E
F, C, D, E
F, C, D, E
F, C, D, E
F, C, D, E
F, C, D, I
F, C, D, I
H, C, I
H, C, I
H, C, I
H, G, I
H, G, I
H, G, I
H, G, I
H, G, I
H
H

22 critical path

20

17

20

7
7
7
7
Cost

$ 800
$ 800
$ 800
$ 800
$ 800
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000
$2,000

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

$ 800
$ 800
$ 800
$ 800
$ 800
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,000
$1,000
$1,000
$1,000
$1,000

+ $ 500
+ $ 500
+ $ 500
+ $ 500
+ $ 500
+ $ 500
+ $ 500
+ $3,000
+ $3,000
+ $3,000
+ $3,000
+ $3,000
+ $3,000
+ $3,000
+ $3,000

+
+
+
+
+
+
+

$2,000
$2,000
$2,000
$2,000
$2,000
$3,000
$3,000

=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=

$1,600
$1,600
$1,600
$1,600
$1,600
$6,000
$6,000
$6,000
$6,000
$6,000
$7,000
$7,000
$6,500
$6,500
$6,500
$6,000
$6,000
$6,000
$6,000
$6,000
$2,000
$2,000

CGA-Canada (adapted). Reprint with permission.

16-22

Chapter 16

P16-8
(1)
G
3
w
$1 ee
,2 ks
00

00

1 week
$600

4
w
$2 ee
,5 k s
00

s
ek
we ,700
$1

ek
we 00
$8

3
w
$1 ee
,4 k s
00

Path
A-B-E-G-H
A-B-E-F-H
A-B-D-E-G-H
A-B-D-E-F-H
A-C-D-E-G-H
A-C-D-E-F-H

Finish

(2)

s
ek
we ,300
$1

eek

ks

,5

$1

e
we

Start

5w

2
w
$1 ee
,0 ks
00

=
=
=
=
=
=

2
2
2
2
1
1

Time Required
+5+3+3
+5+4+3
+2+1+3+3
+2+1+4+3
+4+1+3+3
+4+1+4+3

=
=
=
=
=
=

13
14
11
12
12
13

weeks
weeks
weeks
weeks
weeks
weeks

The critical path is A-B-E-F-H, because it is the longest path.

(3)

The total cost of the project as planned is:

Activity
A-B ..................................
A-C ..................................
B-D ..................................
B-E ..................................
C-D ..................................
D-E ..................................
E-F ..................................
E-G ..................................
F-H ..................................
G-H ..................................
Total normal cost.............

Normal Cost
$ 1,000
800
1,500
5,100
2,500
600
1,700
1,200
1,400
1,300
$17,100

Chapter 16

16-23

P16-8 (Concluded)
(4)

Since the critical path requires 14 weeks, at least 2 weeks must be cut from the
project in order to complete it in 12 weeks. As originally planned (determined
from requirement (2)), the following three paths require more than 12 weeks:
Path
A-B-E-G-H
A-B-E-F-H
A-C-D-E-F-H

=
=
=

Time Required
2+5+3+3
2+5+4+3
1+4+1+4+3

=
=
=

13 weeks
14 weeks
13 weeks

The first place to start reducing time is the critical path, A-B-E-F-H, because the
largest amount of time must be cut from this path. In this project, each activity
on the critical path can be crashed, so the first activity to crash should be the
one that has the smallest crash cost per week. By crashing activity F-H, which
costs $2,800, path A-B-E-F-H is shortened by one week to 13 weeks. In addition,
since activity F-H is on path A-C-D-E-F-H, it is shortened to the required 12
weeks. Now one more week must be cut from activity A-B-E-F-H and from activity A-B-E-G-H to bring each path and the total project down to 12 weeks. The
activity that costs the least to crash and that is common to both paths is activity B-E, which will cost $5,200 to crash one week. The only other way to reduce
both paths by one week would be to crash one activity on each path (activity EG for $4,600 or G-H for $2,300 on path A-B-E-G-H and also activity E-F on path
A-B-E-F-H for $3,700), which will result in a minimum additional cost of $6,000.
Therefore, the minimum cost to reduce the total project time from 14 weeks to 12
weeks is $8,000, resulting from reducing activity B-E and F-H by one week each
for costs of $2,800 and $5,200, respectively. Since the minimum additional cost
of cutting two weeks off of the total time required to complete the project is
$8,000, the minimum total cost of completing the project in 12 weeks is $25,100
($17,100 normal cost from requirement (3) plus $8,000 additional cost).

16-24

Chapter 16

P16-9
(1)

The normal critical path is:

3
+
5
+
1
+
1
+
1
= 11 weeks
A
B
E
H
K
L
The normal cost to be incurred in opening the store is the sum of the normal cost
of all 14 activities$85,000.

(2)

The minimum time in which the store could be opened is 8 weeks at an additional cost of $11,500, or a total cost of $96,500 ($85,000 + $11,500).
Potential
Alternative
Expected
Time
New
Paths
Time
Reduction
Time
A-B-E-H-K-L
11 weeks
4 (A-B, B-E)
7 weeks
A-C-F-I-K-L
7

7
A-C-F-J-K-L
10
2 (F-J, J-K)
8
A-D-G-J-K-L
7
2 (D-G, J-K)
5
The new critical path becomes A-C-F-J-K-L.
Reduced-time programs would be initiated on the following activities:
Activities
A-B
B-E
F-J
J-K

Reduced
Time
1 week
3
2
1

Reduced
Cost
$ 4,500
3,500
2,000
1,500
$11,500

The activity D-G reduction is excluded because it would not contribute to reducing the total project time.
(3)

The store should be opened on the normal schedule because the cost ($11,500)
exceeds the benefit ($6,000). The reduced program would save 3 weeks at a cost
of $11,500, while the earlier opening can be expected to yield an operating
income of $2,000 per week, or a total of $6,000.

Chapter 16

16-25

C16-1
(1)

(2)

(3)

(4)

Network analysis forces the company to plan ahead and develop a detailed plan
for project completion. It presents a visualization of all individual tasks and their
interrelationships. Network analysis provides management with timely information for controlling schedules, shows the effects on the entire project of changes
made to individual activities, and allows for the continual updating of project
progress.
Disadvantages of network analysis as a means of organizing and coordinating projects include the use of probabilistic schedules that may be highly subjective, a bias toward overly optimistic time estimates often based on
management expectations, and the need for cooperation among a large number
of units to establish consistent priorities. A disproportionate amount of management time and effort may be required for planning for the benefit received; there
may be other alternatives that could be more effective.
Norm Robertson would be concerned with the delay in activity A-D because it
would shift the critical path from Start-B-C-F-I-J-Finish. Shiela Neils estimate of
the time for activity A-D (10 to 12 weeks) results in Start-A-D-G-J-Finish requiring 23 to 25 weeks. Furthermore, Neils comment that activity A-D cannot start
until after activity B-E means that B-E becomes part of this new critical path,
making the critical path Start-B-E-A-D-G-J-Finish with a time requirement of 28
to 30 weeks. Thus, the change in the relationship of the activities would change
the critical path even more, so that the project will be completed 8 to 10 weeks
later than the original estimate.
Norm Robertson developed the PERT diagram for the Vector-12 project with
inadequate input. Robertson should have consulted all the departments involved
in the project to ensure that the expected times required to complete the activities were attainable. Because Neil was not consulted, the time required for activity A-D was incorrect, and the relationship between activities A-D and B-E was
missing from the network.
The behavior problems that could arise within Caltron Inc. as a consequence of
the planning of the Vector-12 project include:
(a)
A lack of commitment to the project on the part of the department directors, particularly Neil, because of their exclusion from the planning
process.
(b)
Conflict among the department directors that could affect future working
relationships.
(c)
A lack of goal congruence among the departments involved.