Week Four Assignment

Chapter 6

Exercises

Overview of the budgeting process
Evaluate the comments that follow as being true or false. If the comment is false, briefly explain why.
1. When assessing current performance, a comparison of actual results against a predetermined budget is generally preferred over a comparison of the current period's actual results with those of the preceding period.
2. Lower level managers are inclined to work harder to achieve budgeted targets if the top–down (rather than the bottom–up) budget approach is used.
3. Virtually all budgets are 1 year in duration.
4. Land & Sea plans to sell 36,700 units of its single product during the coming year. If the beginning and ending finished goods inventories are 15,900 and 17,700 units, respectively, the company's production budget will reveal that 38,500 units should be manufactured.
5. The last step in the construction of a master budget is the preparation of a cash budget.
Schedule of cash collections
Sugarland Company sells a single product and anticipates opening a new facility in Charlotte on May 1 of the current year. Expected sales during the first 3 months of activity are as follows: May, $60,000; June, $80,000; and July, $85,000.

Thirty percent of all sales are for cash; the remaining 70% are on account. Credit sales have the following collection pattern:

Collected in the month of sale	60%
Collected in the month following sale	35
Uncollectible	5

1. Prepare a schedule of cash collections for May through July.
2. Compute the expected balance in Accounts Receivable as of July 31.
Direct material purchases budget
Bass Corporation manufactures a home video recorder that requires four No. S1326 circuit boards. Anticipated production of recorders for the upcoming year follows:

Quarter

Production (units)

First

8,000

Second

10,000

Third

12,000

Fourth

16,000
Bass wants to stock enough circuit boards to meet 30% of the following quarter's production needs. Circuit boards cost $2.50 each; the cost has been fairly stable during the past 6 months.
Assuming a beginning circuit board inventory of $23,750, prepare a direct material purchases budget for the first three quarters of the year.
Production and cash-outlay computations
RPR Inc. anticipates that 120,000 units of product K will be sold during May. Each unit of product K requires four units of raw material A. Actual inventories as of May 1 and budgeted inventories as of May 31 follow:
May 1

May 31
Product K (units)

55,000

60,000

Raw material A (units)

40,000

37,000
Each unit of raw material A costs $8; RPR pays for all purchases in the month of acquisition. Invoices that account for 80% of the cost of materials acquired will be paid within 10 days of receipt, entitling the company to a 2% cash discount.
1. Determine the number of units of product K to be manufactured in May.
2. Compute the May cash outlay for purchases of raw material A.

Abbreviated cash budget; financing emphasis
An abbreviated cash budget for Big Chuck Enterprises follows:

	July	August	September
Beginning cash balance	$ 10,000	$ ?	$ ?
Add: Cash receipts	50,000	63,000	71,000
Deduct: Cash payments	(64,000)	(58,000)	(64,000)
Cash excess (deficiency) before financing	$ (4,000)	$ ?	$ ?
Financing
Borrowing to maintain minimum balance
Principal repayment
Interest payment	?	?	?
Ending cash balance	$ ?	$ ?	$ ?

Big Chuck wants to maintain a $10,000 minimum cash balance at all times. Additional financing is available (and retired) in $1,000 multiples at a 12% interest rate. Assume that borrowings take place at the beginning of the month; retirements, in contrast, occur at the end of the month. Interest is paid at the time of repaying principal and computed on the portion of principal repaid.
1. Find the unknowns in Big Chuck's abbreviated cash budget.
2. Determine the outstanding loan balance as of September 30, after any repayments have been made.

Problems

Production and purchases budgets; purchasing policy
Mason Inc. manufactures and distributes various parts for lawn mowers. The company's main product, a bilateral assembly, requires five units of direct material at a cost of $0.60 per unit. To keep production moving smoothly, the firm must maintain a direct materials inventory equal to 70% of the following month's production needs. Sales projections in units for the past 6 months of 20X6 follow:

Month	Estimated sales
July	9,000
August	12,000
September	16,000
October	22,000
November	29,000
December	26,000

Management wants to carry a finished goods inventory equal to 40% of the following month's sales. On June 30, 20X6, the finished goods inventory totaled 3,200 assemblies. On the same date, 30,000 units of direct material were in the warehouse.
Instructions
1. Prepare a production budget for July through September.
2. Prepare a direct material purchases budget for July through September.
3. List several factors that could cause a change in the company's present direct material inventory policy.
Cash budget for service enterprise; analysis of operations
The Eastside Tennis Club frequently experiences cash flow difficulties, with its checking account often below a desired minimum balance of $12,000. The following information pertains to club operations for the upcoming year (20X2):

1) The directors anticipate that 400 memberships will be sold. Family memberships ($150) will comprise 60% of this total; the remainder are individual memberships ($50).
2) Members are assessed hourly fees for court time; the rate depends on whether usage occurs during "prime" time or "regular" time. The following hours and rates are expected:

Prime time

Regular time

Rate per hour

$ 10

$ 7

Hours of use

4,300

6,500
3) With the exception of accounts that total $2,500, all billings for memberships and court fees are expected to be collected during the year.
4) John Connors, club pro, is paid a salary of $20,000 plus 20% of all court fee revenues. Connors gives private lessons and expects to earn an additional $3,500. Lesson fees are paid directly to Connors by the participating members.
5) Expenses incurred during 20X1 were as follows: maintenance, $34,000; utilities, $13,500; and taxes, $6,200. Maintenance and utilities are expected to increase by 10% during 20X2; taxes should amount to $6,800. All expenses will be paid when incurred.
6) An examination of the club's records revealed outstanding accounts payable of $1,000 on January 1, 20X2. These amounts will be paid by the end of February.
7) The addition of one new court and improved lighting will cost $45,000. The club will pay $20,000 down, with the remaining balance financed by a shortterm note. Interest and principal payments during 20X2 will amount to $3,600.
8) The cash balance on January 1, 20X2, amounts to $5,000.

Instructions

1. Prepare a cash budget for 20X2 for the Eastside Tennis Club. Disregard financing (except for that noted in item 7) to meet minimum balance requirements.
2. Assume that the budget revealed an ending cash balance of $4,400. In light of the club's target minimum of $12,000, what actions could the directors take to improve the ending cash position?

Comprehensive budgeting
The balance sheet of Watson Company as of December 31, 20X1, follows:

WATSON COMPANY Balance Sheet December 31, 20X1
Assets
Cash		$ 4,595
Accounts receivable		10,000
Finished goods (575 units × $7.00)		4,025
Direct materials (2,760 units × $0.50)		1,380
Plant & equipment	$50,000
Less: Accumulated depreciation	10,000	40,000
Total assets		$ 60,000
Liabilities & Stockholders' Equity
Accounts payable to suppliers		$ 14,000
Common stock	$25,000
Retained earnings	21,000	46,000
Total liabilities & Stockholders' equity		$ 60,000

The following information has been extracted from the firm's accounting records:

1) All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first 5 months of 20X2 are as follows: January, 1,500 units; February, 1,600 units; March, 1,800 units; April, 2,000 units; and May, 2,100 units.
2) Management wants to maintain the finished goods inventory at 30% of the following month's sales.
3) Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next 6 months. Management wants to maintain the ending direct materials inventory at 60% of the following month's production needs.
4) Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.
5) Watson's product requires 30 minutes of direct labor time. Each hour of direct labor costs $7.

Instructions

1. Rounding computations to the nearest dollar, prepare the following for January through March:
  - 1) Sales budget
  - 2) Schedule of cash collections
  - 3) Production budget
  - 4) Direct material purchases budget
  - 5) Schedule of cash disbursements for material purchases
  - 6) Direct labor budget
2. Determine the balances in the following accounts as of March 31:
  - 1) Accounts Receivable
  - 2) Direct Materials
  - 3) Accounts Payable

Chapter 7

Exercises

Cost centers and profit centers
Crest Manufacturing produces a single product at its Albany plant. Units are processed through departments A and B and then sent to finished goods. The firm has a maintenance department that performs repair jobs for the manufacturing departments.

The maintenance operation has always been evaluated as a cost center. Now with a change in management, a switch to a profit center setup is being considered. Prices charged for repair jobs would be based on the maintenance department's cost of operations.

1. Discuss the difference between a cost center and a profit center.
2. Mike Mizer, the head of maintenance, has always operated with a cost minimization philosophy. Will the change to a profit center likely alter the quality of service provided by the maintenance department? Explain your answer.
3. How will the manufacturing department react to the maintenance department changing to a profit center?
Flexible budgets and performance reports
Home Products Inc. uses flexible budgeting for cost control and performance evaluations. A review of the company's master budget found that management expects to produce 8,000 units each month, resulting in annual expenditures for direct labor and supervisory salaries of $307,200 and $806,400, respectively. Supervisory salaries, a fixed cost, are spread evenly throughout the year. If October's production amounted to 7,800 units, and a $2,900 unfavorable direct labor variance was reported, determine
1. the actual direct labor cost that appeared in the October performance report.
2. the budgeted amount for supervisory salaries that appeared in the October performance report.
Variances for direct materials and direct labor
Banner Company manufactures flags of various countries. Each flag has a standard of 8 square feet of fabric and 3 hours of direct labor time. Information about recent production activity follows:

Actual cost of fabric: $4.50 per square foot
Fabric consumed: 32,080 square feet
Standard price per square foot of fabric: $4.25
Standard direct labor rate: $10.00 per hour
Actual direct labor rate: $10.20 per hour
Actual labor hours worked: 11,940
Actual production completed: 4,000 flags

1. Compute the materials price variance and the materials quantity variance.
2. Compute the labor rate variance and the labor efficiency variance.
Variance analysis: Working backward
Auto Lube performs oil changes and other minor maintenance services (e.g., tire pressure checks and fluid checks). The company advertises that all services are completed in 15 minutes. Eighty cars were serviced on a recent Saturday, resulting in the following labor variances: rate, $18U; efficiency, $64U. If the labor rate standard is $4 per hour, determine the
1. standard hours allowed for Saturday's work.
2. actual hours worked.
3. actual wage rate.
Overhead variances
Nova Manufacturing applies factory overhead to products on the basis of direct labor hours. At the beginning of the current year, the company's accountant made the following estimates for the forthcoming period:

Estimated variable overhead: $500,000
Estimated fixed overhead: $400,000
Estimated direct labor hours: 40,000

It is now 12 months later. Actual total overhead incurred in the manufacture of 7,900 units amounted to $895,100. Actual labor hours totaled 39,800. Assuming a direct labor standard of 5 hours per finished unit, calculate the following:

1. Variable overhead efficiency variance
2. Fixed overhead volume variance
3. Overhead spending variance

Problems

Basic flexible budgeting
Centron Inc. has the following budgeted production costs:

Direct materials	$0.40 per unit
Direct labor	1.80 per unit
Variable factory overhead	2.20 per unit
Fixed factory overhead
Supervision	$24,000
Maintenance	18,000
Other	12,000

The company normally manufactures between 20,000 and 25,000 units each quarter. Should output exceed 25,000 units, maintenance and other fixed costs are expected to increase by $6,000 and $4,500, respectively.

During the recent quarter ended March 31, Centron produced 25,500 units and incurred the following costs:

Direct materials	$ 10,710
Direct labor	47,175
Variable factory overhead	51,940
Fixed factory overhead
Supervision	24,500
Maintenance	23,700
Other	16,800
Total production costs	$174,825

Instructions
1. Prepare a flexible budget for 20,000, 22,500, and 25,000 units of activity.
2. Was Centron's experience in the quarter cited better or worse than anticipated? Prepare an appropriate performance report, and explain your answer.
3. Explain the benefit of using flexible budgets (as opposed to static budgets) in the measurement of performance.

Setting standards
Starr Manufacturing Corporation is considering the implementation of a standard costing system. The following information pertains to one of the company's products, HD-24:

Direct materials used*	$1,020,000
Direct labor†		348,000
Other traceable variable costs Blending costs	$ 148,000
Packaging materials	40,700
Miscellaneous	74,000	262,700
Total variable costs		$1,630,700
*240,000 gallons at $4.25 per gallon.
†58,000 hours at $6.00 per hour.

These costs were incurred in the production of 185,000 gallons of HD-24, which were packaged 4 gallons to a case. Starr has been experiencing problems with the quality of materials used and plans to change suppliers in the forthcoming period. The price per gallon of direct materials is expected to rise to $4.40. The company anticipates that HD-24 output will total 80% of the direct materials used in production; the remainder is lost through evaporation.
Management estimates that abnormal production problems in the prior period led to the incurrence of an additional 2,500 labor hours. These problems have been corrected and are not expected to recur. Other variable costs are anticipated to remain stable, with the exception of packaging materials. Packaging cost is expected to increase by $0.04 per gallon.
Instructions
1. By analyzing the data presented, compute an attainable standard variable cost for a case of HD-24.
2. Compare and contrast ideal and attainable standards. What benefits normally result from the use of attainable standards?
3. Discuss several problems that may be encountered in the standard-setting process by relying too heavily on past experience.
Variance analysis and interpretation
Imtex Manufacturing uses a standard costing system. The variable cost standards for product No. 628 follow:

Direct materials: 3.2 pounds @ $5

$16.00

Direct labor: 8.5 hours @ $8

68.00

Variable overhead: 8.5 hours @ $3

25.50

The company has been experiencing rough times of late, with constant complaints from customers about poor product quality. In addition, the production supervisor is very unhappy with the performance reports that he receives to monitor factory operations. A typical report appears as follows:

Imtex Manufacturing Performance Report for the Month Ended June 30, 20X3
	Actual	Standard	Variance
Direct costs*	$XX,XXX	$ XX,XXX	$ XX,XXX
Factory overhead	XX,XXX	XX,XXX	XX,XXX
Total	$ XX,XXX	$ XX,XXX	$ XX,XXX
*Direct materials + direct labor.

In an effort to improve product quality, the supervisor has campaigned for a change to a better supplier and the hiring of more competent employees. He has recently been given permission to pursue both of these alternatives. Actual data follow:

1) Direct materials purchased and consumed amounted to 6,000 pounds at $5.80 per pound.
2) Direct labor incurred in the manufacture of 2,000 completed units totaled 15,400 hours at $10.50 per hour.
3) Variable overhead incurred totaled $47,200.

Instructions

1. Suggest several ways that Imtex's performance report could be improved to provide better information for the supervisor.
2. Prepare a complete variance analysis for direct materials, direct labor, and variable overhead. Note: Compute the overhead spending variance with regard to variable overhead only.
3. Does the production supervisor's plan seem to be working? Discuss.

Basic flexible budgeting
Paragon Inc. normally manufactures between 36,000 and 42,000 units each month. A static budget based on 36,000 units and actual results for April follows:

	Budget	Actual
Direct materials	$172,800	$175,900
Direct labor	270,000	258,000
Variable factory overhead	115,200	109,000
Supervision	105,000	82,600
Insurance & taxes	60,000	61,500
Depreciation	84,000	88,000
	$807,000	$775,000

Conversations with Paragon's accountant revealed the following information:

1) April's production totaled 35,000 units.
2) Supervision, insurance and taxes, and depreciation are fixed costs.
3) Should production fall below 36,000 units, supervision costs are expected to be reduced by $20,000 because of temporary layoffs.

Instructions

1. Prepare a flexible budget for 36,000, 39,000, and 42,000 units of activity.
2. Prepare a performance report for April that can be used to judge Paragon's success or failure in meeting budgeted targets. Comment on your findings.
3. Explain the flexibility that is associated with a flexible budget.

Straightforward variance analysis
Arrow Enterprises uses a standard costing system. The standard cost sheet for product No. 549 follows:

Direct materials: 4 units @ $6.50	$ 26.00
Direct labor: 8 hours @ $8.50	68.00
Variable factory overhead: 8 hours @ $7.00	56.00
Fixed factory overhead: 8 hours @ $2.50	20.00
Total standard cost per unit	$170.00

The following information pertains to activity for December:

1) Direct materials acquired during the month amounted to 26,350 units at $6.40 per unit. All materials were consumed in operations.
2) Arrow incurred an average wage rate of $8.75 for 51,400 hours of activity.
3) Total overhead incurred amounted to $508,400. Budgeted fixed overhead totals $1.8 million and is spread evenly throughout the year.
4) Actual production amounted to 6,500 completed units.

Instructions

1. Compute Arrow's direct material variances.
2. Compute Arrow's direct labor variances.
3. Compute Arrow's variances for factory overhead.

Quarter	Production (units)
First	8,000
Second	10,000
Third	12,000
Fourth	16,000

	May 1	May 31
Product K (units)	55,000	60,000
Raw material A (units)	40,000	37,000

	Prime time	Regular time
Rate per hour	$ 10	$ 7
Hours of use	4,300	6,500

Direct materials: 3.2 pounds @ $5	$16.00
Direct labor: 8.5 hours @ $8	68.00
Variable overhead: 8.5 hours @ $3	25.50