AF2110 Management Accounting 1
Assignment 08 Suggested Solutions
Exercise 8-10 (45 minutes)
1. Production budget:
Septem-
July August ber October
Budgeted unit sales............... 35,000 40,000 50,000 30,000
Add desired units of ending
finished goods inventory...... 11,000 13,000 9,000 7,000
Total needs........................... 46,000 53,000 59,000 37,000
Less units of beginning
finished goods inventory..... 10,000 11,000 13,000 9,000
Required production in units... 36,000 42,000 46,000 28,000
2. During July and August the company is building inventories in
anticipation of peak sales in September. Therefore, production exceeds
sales during these months. In September and October inventories are
being reduced in anticipation of a forthcoming decrease in sales.
Therefore, production is less than sales during these months.
Exercise 8-10 (continued)
3. Direct materials budget:
Septem- Third
July August ber Quarter
Required production in units of finished goods....... 36,000 42,000 46,000 124,000
Units of raw materials needed per unit of finished
goods................................................................ × 3 cc × 3 cc × 3 cc × 3 cc
Units of raw materials needed to meet production. . 108,000 126,000 138,000 372,000
Add desired units of ending raw materials
inventory........................................................... 63,000 69,000 42,000 * 42,000
Total units of raw materials needed....................... 171,000 195,000 180,000 414,000
Less units of beginning raw materials inventory...... 54,000 63,000 69,000 54,000
Units of raw materials to be purchased.................. 117,000 132,000 111,000 360,000
* 28,000 units (October production) × 3 cc per unit = 84,000 cc;
84,000 cc × 1/2 = 42,000 cc.
As shown in part (1), production is greatest in September; however, as shown in the raw material
purchases budget, purchases of materials are greatest a month earlier—in August. The reason for the
large purchases of materials in August is that the materials must be on hand to support the heavy
production scheduled for September.
Problem 8-27 (120 minutes)
1. Schedule of expected cash collections:
April May June Quarter
Cash sales.................... $36,000 * $43,200 $54,000 $133,200
Credit sales1.................. 20,000 * 24,000 28,800 72,800
Total collections............ $56,000 * $67,200 $82,800 $206,000
1
40% of the preceding month’s sales.
* Given.
2. Merchandise purchases budget:
April May June Quarter
Budgeted cost of goods
sold1............................ $45,000 * $ 54,000 * $67,500 $166,500
Add desired ending
merchandise
inventory2.................... 43,200 * 54,000 28,800 * 28,800
Total needs..................... 88,200 * 108,000 96,300 195,300
Less beginning
merchandise inventory.. 36,000 * 43,200 54,000 36,000
Required purchases......... $52,200 * $ 64,800 $42,300 $159,300
1
For April sales: $60,000 sales × 75% cost ratio = $45,000.
2
At April 30: $54,000 × 80% = $43,200.
At June 30: July sales $48,000 × 75% cost ratio × 80% = $28,800.
* Given.
Schedule of expected cash disbursements—merchandise purchases
April May June Quarter
March purchases............. $21,750 * $ 21,750 *
April purchases............... 26,100 * $26,100 * 52,200 *
May purchases................ 32,400 $32,400 64,800
June purchases............... 21,150 21,150
Total disbursements........ $47,850 * $58,500 $53,550 $159,900
* Given.
Problem 8-27 (continued)
3. Cash budget:
April May June Quarter
Beginning cash balance. . $ 8,000 * $ 4,350 $ 4,590 $ 8,000
Add collections from
customers................... 56,000 * 67,200 82,800 206,000
Total cash available....... 64,000 * 71,550 87,390 214,000
Less cash
disbursements:
For inventory.............. 47,850 * 58,500 53,550 159,900
For expenses.............. 13,300 * 15,460 18,700 47,460
For equipment............ 1,500 * 0 0 1,500
Total cash
disbursements............. 62,650 * 73,960 72,250 208,860
Excess (deficiency) of
cash available over
disbursements............. 1,350 * (2,410) 15,140 5,140
Financing:
Borrowings................. 3,000 7,000 0 10,000
Repayments................ 0 0 (10,000) (10,000)
Interest ($3,000 ×
1% × 3 + $7,000 ×
1% × 2)................... 0 0 (230) (230)
Total financing............... 3,000 7,000 (10,230) (230)
Ending cash balance...... $ 4,350 $ 4,590 $ 4,910 $ 4,910
* Given.
Problem 8-27 (continued)
4.
Shilow Company
Income Statement
For the Quarter Ended June 30
Sales ($60,000 + $72,000 + $90,000)........ $222,000
Cost of goods sold:
Beginning inventory (Given).................... $ 36,000
Add purchases (Part 2)........................... 159,300
Goods available for sale.......................... 195,300
Ending inventory (Part 2)........................ 28,800 166,500 *
Gross margin............................................ 55,500
Selling and administrative expenses:
Commissions (12% of sales)................... 26,640
Rent ($2,500 × 3).................................. 7,500
Depreciation ($900 × 3).......................... 2,700
Other expenses (6% of sales)................. 13,320 50,160
Net operating income................................ 5,340
Interest expense (Part 4)........................... 230
Net income............................................... $ 5,110
* A simpler computation would be: $222,000 × 75% = $166,500.
Problem 8-27 (continued)
5.
Shilow Company
Balance Sheet
June 30
Assets
Current assets:
Cash (Part 4)............................................................... $ 4,910
Accounts receivable ($90,000 × 40%)........................... 36,000
Inventory (Part 2)........................................................ 28,800
Total current assets........................................................ 69,710
Building and equipment—net
($120,000 + $1,500 – $2,700)...................................... 118,800
Total assets.................................................................... $188,510
Liabilities and Stockholders’ Equity
Accounts payable (Part 2: $42,300 × 50%). . $ 21,150
Stockholders’ equity:
Common stock (Given).............................. $150,000
Retained earnings*................................... 17,360 167,360
Total liabilities and stockholders’ equity........ $188,510
* Beginning retained earnings..................... $12,250
Add net income....................................... 5,110
Ending retained earnings.......................... $17,360
Problem 8-28 (60 minutes)
1. The sales budget for the third quarter:
Month
July August September Quarter
Budgeted units sales..... 30,000 70,000 50,000 150,000
Selling price per unit...... × $12 × $12 × $12 × $12
Budgeted sales.............. $360,000 $840,000 $600,000 $1,800,000
The schedule of expected cash collections from sales:
Accounts receivable,
June 30:
$300,000 × 65%...... $195,000 $ 195,000
July sales:
$360,000 × 30%,
65%........................ 108,000 $234,000 342,000
August sales:
$840,000 × 30%,
65%........................ 252,000 $546,000 798,000
September sales:
$600,000 × 30%...... 180,000 180,000
Total cash collections. . $303,000 $486,000 $726,000 $1,515,000
2. The production budget for July-October:
July August September October
Budgeted unit sales................ 30,000 70,000 50,000 20,000
Add desired units of ending
finished goods inventory...... 10,500 7,500 3,000 1,500
Total needs........................... 40,500 77,500 53,000 21,500
Less units of beginning
finished goods inventory...... 4,500 10,500 7,500 3,000
Required production in units... 36,000 67,000 45,500 18,500
Problem 8-28 (continued)
3. The direct materials budget for the third quarter:
July August September Quarter
Required production in units of
finished goods............................. 36,000 67,000 45,500 148,500
Units of raw materials needed per
unit of finished goods................... × 4 × 4 × 4 × 4
Units of raw materials needed to
meet production.......................... 144,000 268,000 182,000 594,000
Add desired units of ending raw
materials inventory...................... 134,000 91,000 37,000 37,000
Total units of raw materials
needed........................................ 278,000 359,000 219,000 631,000
Less units of beginning raw
materials inventory...................... 72,000 134,000 91,000 72,000
Units of raw materials to be
purchased................................... 206,000 225,000 128,000 559,000
Unit cost of raw materials............... × $0.80 × $0.80 × $0.80 × $0.80
Cost of raw materials to be
purchased................................... $164,800 $180,000 $102,400 $447,200
*18,500 units (October) × 4 feet per unit = 74,000 feet
74,000 feet × ½ = 37,000 feet
Problem 8-28 (continued)
3. The schedule of expected cash disbursements for materials purchases:
July August September Quarter
Accounts payable,
June 30........................ $ 76,000 $ 76,000
July purchases:
$164,800 × 50%, 50%. 82,400 $ 82,400 164,800
August purchases:
$180,000 × 50%, 50%. 90,000 $ 90,000 180,000
September purchases:
$102,400 × 50%.......... 51,200 51,200
Total cash disbursements. $158,400 $172,400 $141,200 $472,000
Case 8-30 (45 minutes)
1. The budgetary control system has several important shortcomings that
reduce its effectiveness and may cause it to interfere with good
performance. Some of the shortcomings are explained below.
a. Lack of Coordinated Goals. Emory had been led to believe high-
quality output is the goal; it now appears low cost is the goal.
Employees do not know what the goals are and thus cannot make
decisions that further the goals.
b. Influence of Uncontrollable Factors. Actual performance relative to
budget is greatly influenced by uncontrollable factors (i.e., rush
orders, lack of prompt maintenance). Thus, the variance reports
serve little purpose for performance evaluation or for locating
controllable factors to improve performance. As a result, the system
does not encourage coordination among departments.
c. The Short-Run Perspectives. Monthly evaluations and budget
tightening on a monthly basis results in a very short-run perspective.
This results in inappropriate decisions (i.e., inspect forklift trucks
rather than repair inoperative equipment, fail to report supplies
usage).
d. System Does Not Motivate. The budgetary system appears to focus
on performance evaluation even though most of the essential factors
for that purpose are missing. The focus on evaluation and the
weaknesses take away an important benefit of the budgetary system
—employee motivation.
2. The improvements in the budgetary control system should correct the
deficiencies described above. The system should:
a. more clearly define the company’s objectives.
b. develop an accounting reporting system that better matches
controllable factors with supervisor responsibility and authority.
c. establish budgets for appropriate time periods that do not change
monthly simply as a result of a change in the prior month’s
performance.
The entire company from top management down should be educated in
sound budgetary procedures.
(Unofficial CMA Solution, adapted)
Case 8-31 (120 minutes)
a.
1. Sales budget:
April May June Quarter
Budgeted unit sales...... 65,000 100,000 50,000 215,000
Selling price per unit.... × $10 × $10 × $10 × $10
Total sales................... $650,000 $1,000,000 $500,000 $2,150,000
b. Schedule of expected cash collections:
February sales (10%)... $ 26,000 $ 26,000
March sales
(70%, 10%).............. 280,000 $ 40,000 320,000
April sales
(20%, 70%, 10%)..... 130,000 455,000 $ 65,000 650,000
May sales
(20%, 70%).............. 200,000 700,000 900,000
June sales (20%)......... 100,000 100,000
Total cash collections. . . $436,000 $695,000 $865,000 $1,996,000
c. Merchandise purchases budget:
Budgeted unit sales...... 65,000 100,000 50,000 215,000
Add desired ending
merchandise
inventory.................. 40,000 20,000 12,000 12,000
Total needs................. 105,000 120,000 62,000 227,000
Less beginning
merchandise
inventory.................. 26,000 40,000 20,000 26,000
Required purchases...... 79,000 80,000 42,000 201,000
Cost of purchases at
$4 per unit................ $316,000 $320,000 $168,000 $ 804,000
d. Budgeted cash disbursements for merchandise purchases:
Accounts payable.......... $100,000 $ 100,000
April purchases............. 158,000 $158,000 316,000
May purchases.............. 160,000 $160,000 320,000
June purchases............. 84,000 84,000
Total cash payments..... $258,000 $318,000 $244,000 $ 820,000
Case 8-31 (continued)
2. Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
April May June Quarter
Beginning cash balance...... $ 74,000 $ 50,000 $ 50,000 $ 74,000
Add collections from
customers....................... 436,000 695,000 865,000 1,996,000
Total cash available........... 510,000 745,000 915,000 2,070,000
Less cash disbursements:
Merchandise purchases. . . 258,000 318,000 244,000 820,000
Advertising..................... 200,000 200,000 200,000 600,000
Rent............................... 18,000 18,000 18,000 54,000
Salaries.......................... 106,000 106,000 106,000 318,000
Commissions (4% of
sales).......................... 26,000 40,000 20,000 86,000
Utilities........................... 7,000 7,000 7,000 21,000
Equipment purchases...... 0 16,000 40,000 56,000
Dividends paid................ 15,000 0 0 15,000
Total cash disbursements... 630,000 705,000 635,000 1,970,000
Excess (deficiency) of cash
available over
disbursements................ (120,000) 40,000 280,000 100,000
Financing:
Borrowings..................... 170,000 10,000 0 180,000
Repayments................... 0 0 (180,000) (180,000)
Interest
($170,000 × 1% × 3 +
$10,000 × 1% × 2)...... 0 0 (5,300) (5,300)
Total financing.................. 170,000 10,000 (185,300) (5,300)
Ending cash balance.......... $ 50,000 $ 50,000 $ 94,700 $ 94,700
Case 8-31 (continued)
3. Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Sales (Part 1 a.)........................................ $2,150,000
Variable expenses:
Cost of goods sold @ $4 per unit............. $860,000
Commissions @ 4% of sales.................... 86,000 946,000
Contribution margin.................................. 1,204,000
Fixed expenses:
Advertising ($200,000 × 3)..................... 600,000
Rent ($18,000 × 3)................................ 54,000
Salaries ($106,000 × 3).......................... 318,000
Utilities ($7,000 × 3).............................. 21,000
Insurance ($3,000 × 3).......................... 9,000
Depreciation ($14,000 × 3)..................... 42,000 1,044,000
Net operating income................................ 160,000
Interest expense (Part 2).......................... 5,300
Net income............................................... $ 154,700
Case 8-31 (continued)
4. Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Cash.............................................................................. $ 94,700
Accounts receivable (see below)...................................... 500,000
Inventory (12,000 units @ $4 per unit)............................ 48,000
Prepaid insurance ($21,000 – $9,000).............................. 12,000
Property and equipment, net
($950,000 + $56,000 – $42,000).................................. 964,000
Total assets.................................................................... $1,618,700
Liabilities and Stockholders’ Equity
Accounts payable, purchases (50% × $168,000).............. $ 84,000
Dividends payable........................................................... 15,000
Common stock............................................................... 800,000
Retained earnings (see below)........................................ 719,700
Total liabilities and stockholders’ equity............................ $1,618,700
Accounts receivable at June 30:
10% × May sales of $1,000,000............ $100,000
80% × June sales of $500,000.............. 400,000
Total.................................................... $500,000
Retained earnings at June 30:
Balance, March 31................................ $580,000
Add net income (part 3)........................ 154,700
Total.................................................... 734,700
Less dividends declared......................... 15,000
Balance, June 30.................................. $719,700
