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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions ManualCHAPTER 15FUNCTIONAL AND ACTIVITY-BASEDBUDGETINGI. Questions No. Planning and control are different, although related, concepts. Planning involves developing objectives and formulating steps to achieve those objectives. Control, by contrast, involve...

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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

CHAPTER 15 FUNCTIONAL AND ACTIVITY-BASED BUDGETING

I.

Questions 1. No. Planning and control are different, although related, concepts. Planning involves developing objectives and formulating steps to achieve those objectives. Control, by contrast, involves the means by which management ensures that the objectives set down at the planning stage are attained. 2. Budgets have a dual purpose, for planning and for following up the implementation of the plan. The great benefits from budgeting lie in the quick investigation of deviations and in the subsequent corrective action. Budgets should not be prepared in the first place if they are ignored, buried in files, or improperly interpreted. 3. Two major features of a budgetary program are (1) the accounting techniques which developed it and (2) the human factors which administer it. The human factors are far more important. The success of a budgetary system depends upon its acceptance by the company members who are affected by the budget. Without a thoroughly educated and cooperative management group at all levels of responsibility, budgets are a drain on the funds of the business and are a hindrance instead of help to efficient operations. 4. Manufacturing overhead costs are budgeted at normal operating capacity, and the costs are applied to the products using a predetermined rate. The predetermined rate is computed by dividing a factor that can be identified with both the products and the overhead into the overhead budgeted at the normal operating capacity. Budgets may also be used in costing products in a standard cost accounting system. 5. The production division operates to produce the products that are sold. Production and sales must be coordinated. Products must be manufactured so that they will be available to meet sales delivery dates. Activity of the production division will depend upon the sales that can be made. Also, the sales division is limited by the capabilities of the production department in manufacturing products. Successful operations depend upon a coordination of sales and production. 15-1

Chapter 15 Functional and Activity-Based Budgeting

6. Labor hour required for production can be translated into labor pesos by multiplying the number of hours budgeted by the appropriate labor rates. The rates to be used will depend upon the rates established for job classifications and the policy with respect to premium pay for overtime or shift differences. 7. A long-range plan for the acquisition of plant assets is broken down and entered in the current budget as the plan unfolds. The portion of the plan which is to be executed in the next year is included in the budget for that year. 8. A budget period is not limited to any particular unit of time. At a minimum, a budget should cover at least one operating cycle. For example, a budget should not cover a period when purchasing activity is high and omit the period when sales volume and cash collection are relatively high. The budget period should encompass the entire cycle extending from the purchasing operation to the subsequent sale of the products and the realization of the sales in cash. Ordinarily, a budget of operations is prepared for a year which in turn is divided into quarters and months. Long-term budgets, such as budgets for projects or capital investments, may extend five to ten years or more into the future. 9. A rolling budget or a progressive budget or sometimes called continuous budget, is a budget which is prepared throughout the year. As one month elapses, a budget is prepared for one more month in the future. At any one time for example, the company will have a budget for one year into the future, when July of one year is over, a budget for the following July will be added at the other end of the budget. This process of adding a new month as a month expires is continuous. 10. Variances that are revealed by a comparison of actual results with a budget are investigated if it appears that an investigation is warranted. The investigation may show that stricter control measures are needed or that some weaknesses in the operation should be corrected. It may also reveal that the budget plan should be revised. The comparison is one step in the control and direction of business operations. 11. A comparison of actual results with a budget can contribute information that can be applied in the preparation of better budgets in the future. Subsequent investigation of variances provides management with a better knowledge of operations. This knowledge can be applied in the preparation of more realistic budgets for subsequent fiscal periods. 12. A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets, i.e., the budget is not imposed from above. The major advantages are: (1) the views and judgments of 15-2

Functional and Activity-Based Budgeting Chapter 15

persons from all levels of an organization are represented in the final budget document; (2) budget estimates generally are more accurate and reliable, since they are prepared by those who are closest to the problems; (3) managers generally are more motivated to meet budgets which they have participated in setting; (4) self-imposed budgets reduce the amount of upward “blaming” resulting from inability to meet budget goals. One caution must be exercised in the use of self-imposed budgets. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack. 13. No, although this is clearly one of the purposes of the cash budget. The principal purpose is to provide information on probable cash needs during the budget period, so that bank loans and other sources of financing can be anticipated and arranged well in advance of the actual time of need. 14. Zero-based budgeting requires that managers start at zero levels every year and justify all costs as if all programs were being proposed for the first time. In traditional budgeting, by contrast, budget data are usually generated on an incremental basis, with last year’s budget being the starting point. II. Matching Type 1. 2. 3. 4. 5.

C H E F I

6. 7. 8. 9. 10.

A B J D G

III. Exercises Exercises 1 (Schedule of Expected Cash Collections) Requirement 1 July May sales: 15-3

August

September

Total

Chapter 15 Functional and Activity-Based Budgeting

P430,000 × 10% June sales: P540,000 × 70%, 10% July sales: P600,000 × 20%, 70%, 10% August sales: P900,000 × 20%, 70% September sales: P500,000 × 20% Total cash collections

P  43,000

P

43,000

378,000

P54,000

120,000

420,000

P  60,000

600,000

180,000

630,000

810,000

P541,000

P654,000

432,000

100,000 100,000 P790,000 P1,985,000

Notice that even though sales peak in August, cash collections peak in September. This occurs because the bulk of the company’s customers pay in the month following sale. The lag in collections that this creates is even more pronounced in some companies. Indeed, it is not unusual for a company to have the least cash available in the months when sales are greatest. Requirement 2 Accounts receivable at September 30: From August sales: P900,000 × 10%...................................................................... P  90,000 From September sales: P500,000 × (70% + 10%).................................................. 400,000 Total accounts receivable........................................................................................ P490,000

Exercise 2 (Production Budget)

Budgeted sales in units Add desired ending inventory* Total needs Less beginning inventory Required production

July 30,000

August 45,000

4,500 34,500 3,000 31,500

6,000 51,000 4,500 46,500

* 10% of the following month’s sales 15-4

Septembe r 60,000

Quarter 135,000

5,000 65,000 6,000 59,000

5,000 140,000 3,000 137,000

Functional and Activity-Based Budgeting Chapter 15

Exercise 3 (Materials Purchase Budget) First 60,000 ×  3 180,000

Required production of calculators Number of chips per calculator Total production needs—chips

Production needs—chips Add desired ending inventory— chips Total needs—chips Less beginning inventory—chips Required purchases—chips Cost of purchases at P2 per chip

Quarter – Year 2 Second Third 90,000 150,000 ×  3 ×  3 270,000 450,000

First 180,000

Second 270,000

Year 2 Third 450,000

54,000 234,000 36,000 198,000 P396,000

90,000 360,000 54,000 306,000 P612,000

60,000 510,000 90,000 420,000 P840,000

Fourth 100,000 ×  3 300,000

Fourth 300,000

Year 3 First 80,000 ×  3 240,000

Year 1,200,000

48,000 48,000 348,000 1,248,000 60,000 36,000 288,000 1,212,000 P576,000 P2,424,000

Exercise 4 (Direct Labor Budget) Requirement 1

As s umi ng t hatt he di r ectl aborwor kf or c ei sadj us t ed eac hquar t er ,t hedi r ec tl aborbudgetwoul dbe: Units to be produced Direct labor time per unit (hours)

1st 2nd 3rd 4th Quarter Quarter Quarter Quarter 5,000 4,400 4,500 4,900 ×

0.40

×

0.40 ×

0.40 ×

Year 18,800

0.40 ×

0.40

Total direct labor hours needed Direct labor cost per hour Total direct labor cost

2,000 1,760 1,800 1,960 7,520 × P11.00 × P11.00 × P11.00 × P11.00 × P11.00 P 22,000 P 19,360 P 19,800 P 21,560 P 82,720

Requirement 2 Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages are paid, the direct labor budget would be:

Units to be produced Direct labor time per unit (hours) Total direct labor hours needed

1st Quarter 5,000

2nd Quarter 4,400

× 0.40

× 0.40

× 0.40

× 0.40

× 0.40

2,000

1,760

1,800

1,960

7,520

15-5

3rd 4th Quarter Quarter 4,500 4,900

Year 18,800

Chapter 15 Functional and Activity-Based Budgeting Regular hours paid Overtime hours paid Wages for regular hours (@ P11.00 per hour) Overtime wages (@ P11.00 per hour × 1.5) Total direct labor cost

1,800 200

1,800 -

1,800 -

1,800 160

7,200 360

P19,800

P19,800

P19,800

P19,800

P79,200

3,300 P23,100

P19,800

P19,800

2,640 P22,440

5,940 P85,140

Exercise 5 (Manufacturing Overhead Budget) Requirement 1 Kiko Corporation Manufacturing Overhead Budget

Budgeted direct labor-hours Variable overhead rate Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead Less depreciation Cash disbursements for manufacturing overhead

1st Quarter 5,000 x P1.75 P 8,750 35,000 43,750 15,000

2nd Quarter 4,800 x P1.75 P 8,400 35,000 43,400 15,000

3rd Quarter 5,200 x P1.75 P 9,100 35,000 44,100 15,000

4th Quarter 5,400 x P1.75 P 9,450 35,000 44,450 15,000

Year 20,400 x P1.75 P 35,700 140,000 175,700 60,000

P28,750

P28,400

P29,100

P29,450

P115,700

Requirement 2 Total budgeted manufacturing overhead for the year (a) Total budgeted direct labor-hours for the year (b) Predetermined overhead rate for the year (a) ÷ (b)

P175,700 20,400 P 8.61

Exercise 6 (Selling and Administrative Budget) Helene Company Selling and Administrative Expense Budget

Budgeted unit sales Variable selling and administrative expense per unit Variable expense Fixed selling and administrative expenses: Advertising

1st Quarter 12,000

2nd Quarter 14,000

3rd Quarter 11,000

4th Quarter 10,000

Year 47,000

x P2.75 P33,000

x P2.75 P 38,500

x P2.75 P 30,250

x P2.75 P 27,500

x P2.75 P129,250

12,000

12,000

12,000

12,000

48,000

15-6

Functional and Activity-Based Budgeting Chapter 15 Executive salaries Insurance Property taxes Depreciation Total fixed selling and administrative expenses Total selling and administrative expenses Less depreciation Cash disbursements for selling and administrative expenses

40,000

40,000 6,000

40,000

40,000 6,000

16,000

16,000

6,000 16,000

16,000

160,000 12,000 6,000 64,000

68,000

74,000

74,000

74,000

290,000

101,000 16,000

112,500 16,000

104,250 16,000

101,500 16,000

419,250 64,000

P 85,000

P 96,500

P 88,250

P 85,500

P355,250

Exercise 7 (Cash Budget Analysis)

Cash balance, beginning Add collections from customers Total cash available Less disbursements: Purchase of inventory Operating expenses Equipment purchases Dividends Total disbursements Excess (deficiency) of cash available over disbursements

Financing: Borrowings Repayments (including interest) Total financing Cash balance, ending

Quarter (000 omitted) 1 2 3 4 P  9 * P 5 P 5 P 5 76 85 *

90 95

125 * 130

40 * 36 10 * 2 * 88

58 42 8 2 110

* 36 * 54 * * 8 * * 2 * * 100

(3)*

(15)

8 0 8 P5

20 * 0 20 P 5

100 105

Year P 9 391 * 400

32 * 48 10 2 * 92

166 180 * 36 * 8 390

30 *

13

10

—

—

28

(25) (25) P 5

(7)* (7) P 6

(32) (4 ) P 6

*Given.

IV. Problems Problem 1 (Schedule of Expected Cash Collections and Disbursements) Requirement 1

15-7

Chapter 15 Functional and Activity-Based Budgeting

September cash sales............................................................................................... P  7,400 September collections on account: July sales: P20,000 × 18%.................................................................................. 3,600 August sales: P30,000 × 70%............................................................................. 21,000 September sales: P40,000 × 10%........................................................................ 4,000 Total cash collections.............................................................................................. P36,000 Requirement 2 Payments to suppliers: August purchases (accounts payable).................................................................. P16,000 September purchases: P25,000 × 20%................................................................ 5,000 Total cash payments................................................................................................ P21,000 Requirement 3 COOKIE PRODUCTS Cash Budget For the Month of September Cash balance, September 1..................................................................................... P  9,000 Add cash receipts: Collections from customers................................................................................. 36,000 Total cash available before current financing.......................................................... 45,000 Less disbursements: Payments to suppliers for inventory.................................................................... P21,000 Selling and administrative expenses.................................................................... 9,000 * Equipment purchases.......................................................................................... 18,000 Dividends paid.................................................................................................... 3,000 Total disbursements................................................................................................. 51,000 Excess (deficiency) of cash available over disbursements...................................................................................................... (6,000) Financing: Borrowings.......................................................................................................... 11,000 Repayments......................................................................................................... 0 Interest................................................................................................................ 0 Total financing........................................................................................................ 11,000 Cash balance, September 30...................................................................................   P5,000 * P13,000 – P4,000 = P9,000. Problem 2 (Production and Purchases Budget) 15-8

Functional and Activity-Based Budgeting Chapter 15

Requirement 1 Production budget: Budgeted sales (units) Add desired ending inventory Total needs Less beginning inventory Required production

July 40,000 20,000 60,000 17,000 43,000

August 50,000 26,000 76,000 20,000 56,000

Septembe r 70,000 15,500 85,500 26,000 59,500

October 35,000 11,000 46,000 15,500 30,500

Requirement 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 decrease in sales during the last months of the year. Therefore, production is less than sales during these months to cut back on inventory levels.

Requirement 3

Raw materials purchases budget: Required production (units) Material P214 needed per unit Production needs (lbs.) Add desired ending inventory (lbs.) Total Material P214 needs Less beginning inventory (lbs.) Material P214 purchases (lbs.)

July 43,000 × 3 lbs. 129,000 84,000 213,000 64,500 148,500

August 56,000 × 3 lbs. 168,000 89,250 257,250 84,000 173,250

Septembe r 59,500 × 3 lbs. 178,500 45,750 * 224,250 89,250 135,000

Third Quarter 158,500 × 3 lbs. 475,500 45,750 521,250 64,500 456,750

* 30,500 units (October production) × 3 lbs. per unit= 91,500 lbs.; 91,500 lbs. × 0.5 = 45,750 lbs.

As shown in requirement (1), production is greatest in September. However, as shown in the raw material purchases budget, the purchases of materials is greatest a month earlier because materials must be on hand to support the heavy production scheduled for September. 15-9

Chapter 15 Functional and Activity-Based Budgeting

Problem 3 (Cash Budget; Income Statement; Balance Sheet) Requirement 1 Schedule of cash receipts: Cash sales—June.................................................................................................... P  60,000 Collections on accounts receivable: May 31 balance................................................................................................... 72,000 June (50% × 190,000)......................................................................................... 95,000 Total cash receipts.............................................................................................