Horngren\'s Cost Accounting: A Managerial Emphasis, 16th Global Edition Chapter 6 Questions and solutions PDF

Preview

Summary

CHAPTER 6MASTER BUDGET AND RESPONSIBILITY ACCOUNTING6-1 What are the four elements of the budgeting cycle? The budgeting cycle includes the following elements: a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expe...

Description

CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6-1

What are the four elements of the budgeting cycle? The budgeting cycle includes the following elements: a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. b. Providing a frame of reference, a set of specific expectations against which actual results can be compared. c. Investigating variations from plans. If necessary, corrective action follows investigation. d. Planning again, in light of feedback and changed conditions.

6-2 Define master budget. The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period. List five the key questions which must be considered by managers for developing successful strategies. What are our main objectives? How can we create value for our customers and differentiate ourselves from our competitors? Where is our market and who are our customers? What is the best organizational and financial structure for us? What are the alternative strategies and opportunities and their relevant risks?

6-3

“Budgets provide a framework for evaluating performance and improving learning.” Do you agree? Explain. Yes, budgets can help a company’s managers to measure and evaluate actual performance against predicted performance. When actual outcomes differ from budgeted or planned results, it prompts managers to investigate and find out the reason(s) for the variance(s). This exercise leads to an improved learning for future budgeting.

6-4

6-5 “Budgets can promote coordination and communication among subunits within the company.” Do you agree? Explain. Yes, budgets can promote coordination and communication among all aspects of production or service and all departments in a company. Budgets can provide a communication mechanism that seamlessly links all subunits and their employees, helping them understand their individual goals or objectives of the company. This understanding can facilitate coordination among individual departments within the company. “Budgets motivate managers and other employees to the company’s goals.” Do you agree? Explain. Yes, budgets create goals as well as challenges for managers and employees, and motivate them to improve their performances and to achieve their goals. Managers and employees regard not meeting their budgets as a failure and, therefore, they are motivated to work harder in order to avoid such situations.

6-6

6-7

Define rolling budget. Give an example.

6-1

A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling budget for April 2017 to March 2018, and so on. 6-8

Outline the steps in preparing an operating budget. The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget. 2. Prepare the production budget (in units). 3. Prepare the direct material usage budget and direct material purchases budget. 4. Prepare the direct manufacturing labor budget. 5. Prepare the manufacturing overhead budget. 6. Prepare the ending inventories budget. 7. Prepare the cost of goods sold budget. 8. Prepare the nonmanufacturing costs budget. 9. Prepare the budgeted income statement.

6-9 What is the usual starting point for the operating budget? Usually, a revenues budget is the starting point for the operating budget because the forecasted level of unit sales or revenues has a major impact on the production capacity, the inventory levels planned, and determines all of the costs required to support the budgeted revenues. 6-10 How can sensitivity analysis be used to increase the benefits of budgeting? How can sensitivity analysis be used to increase the benefits of budgeting? Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with changes in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate. 6-11 What is the key emphasis in Kaizen budgeting? The key emphasis in Kaizen budgeting is continuous improvement, resulting in cost reductions, during the budget period. 6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting. Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of parts, number of batches, and number of new products can be used with ABB. Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior. The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise. 6-13

6-14

What are some additional considerations that arise when budgeting in multinational companies?

6-2

Budgeting in multinational companies may involve budgeting in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareholders by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates and, where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations. In developing budgets for operations in different countries, they must also have good understanding of political, legal, and economic issues in those countries. 6-15 Explain why cash budgets are important. Cash budgets are significantly important for cash planning and control, especially to avoid having idle cash and unexpected cash deficiencies. The cash budget can help managers to not only identify the periods of idle cash and periods of cash shortage but also to determine necessary cash balances in line with their needs in any given period during the budget year. It allows managers to make appropriate decisions in terms of either using excess cash or financing from outside to achieve the company’s goals.

6-16 Master budget. Which of the following statements is correct regarding the components of the master budget? a. The cash budget is used to create the capital budget. b. Operating budgets are used to create cash budgets. c. The manufacturing overhead budget is used to create the production budget. d. The cost of goods sold budget is used to create the selling and administrative expense budget. SOLUTION Master budget. Choice "b" is correct. All of the operating budgets (like the sales budget, production budget, selling and administrative expense budget, etc.) are used to create financial budgets like the cash budget and the proforma financial statements. Of course, after cash budgets have been formulated, companies use this information to also adjust the operating budget. Choice "a" is incorrect. The capital budget is used to create the cash budget. Choice "c" is incorrect. The factory overhead budget is derived from the production budget. Choice "d" is incorrect. The cost of goods sold budget and the selling and administrative expense budget are completely independent of one another and both are usually determined based on the revenues budget. 6-17 Operating and financial budgets. Which of the following statements is correct regarding the drivers of operating and financial budgets? a. The sales budget will drive the cost of goods sold budget. b. The cost of goods sold budget will drive the units of production budget. c. The production budget will drive the selling and administrative expense budget. d. The cash budget will drive the production and selling and administrative expense budgets.

6-3

SOLUTION Operating and financial budgets. Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of the master budget, which includes both operating and financial budgets. The sales budget will drive the production budget, which in turn drives budgets for direct materials, direct labor, and factory overhead. All three of these budgets combine to form the cost of goods sold budget. Choice "b" is incorrect. The units of production budget drives the budgets for direct materials, direct labor, and manufacturing overhead. These three budgets combine to form the cost of goods sold budget. Choice "c" is incorrect. The selling and administrative expense budget is separate from the production budget, although both are driven by the sales budget. Choice "d" is incorrect. The cash budget is driven by the production and selling and administrative expense budgets. Of course, cash needs might affect the final production and selling budget. 6-18 Production budget. Superior Industries sales budget shows quarterly sales for the next year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000. Company policy is to have a target finished-goods inventory at the end of each quarter equal to 20% of the next quarter’s sales. Budgeted production for the second quarter of next year would be: 1. 7,200 units; 2. 8,800 units; 3. 12,000 units; 4. 10,400 units SOLUTION Production budget. Choice "2" is correct. 8,800 units are the budgeted production for the second quarter. The calculation proceeds with first determining the beginning inventory for the second quarter (20% × second quarter sales, 8,000 units = 1,600 units) and the ending inventory for the second quarter (20% × third quarter sales, 12,000 units = 2,400 units). We then use the following equation to calculate production for the second quarter: Beginning inventory + Production = Sales + Ending inventory Production = Sales + Ending inventory – Beginning inventory = 8,000 + 2,400 – 1,600 = 8,800 units Check: Second Quarter Beginning inventory (20% × 8,000) 1,600 units Add Production (plug) 8,800 units 10,400 units Deduct Sales 8,000 units Ending inventory (20% × 12,000) 2,400 units 6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility accounting system. Which of the following statements is/are correct for a responsibility accounting system.

6-4

I. In a cost center, managers are responsible for controlling costs but not revenue. II. The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. III. To be effective, a good responsibility accounting system must help managers to plan and to control. IV.Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. 1. I and II only are correct. 2. II and III only are correct. 3. I, II, and III are correct. 4. I, II and IV are correct. SOLUTION Responsibility centers. Choice "3" is correct. The question asks which of a series of statements is/are correct for a responsibility accounting system. "None of the above" is not an available option, and neither is "All of the above." Statement I says that, in a cost center, managers are responsible for controlling costs but not revenue. Statement I is correct. Statement II says that the idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. Statement II is correct. Statement III says that, to be effective, a good responsibility accounting system must help managers to plan and control. Planning without control and control without planning is not effective. Statement III is correct. Statement IV says that costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. Costs that are allocated are normally not controllable by the responsibility center manager. Statement IV is incorrect. 6-20 Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks’ cash budget for year 2. She has information on each of the following items: I. Wages due to workers accrued as of December 31, year 1. II. Limits on a line of credit that may be used to fund Jenks’ operations in year 2. III. The balance in accounts payable as of December 31, year 1, from credit purchases made in year 1. Which of the items above should Jacobs take into account when building the cash budget for year 2? a. I, II b. I, III c. II, III d. I, II, III SOLUTION Cash budget Choice "d" is correct. All of the elements listed should be considered when building the cash budget. Accrued wages will be factored into the determination of cash disbursements in year 2, which is part of the cash budget. Financing budgets, a component of the cash budget, cover how a company will fund its current operations. One of the methods the company may use is a line of 6-5

credit, which will have limits as to how much cash a company can access at a given time. The accounts payable balance is important as well, as eventually vendors must be paid in cash in year 2 for credit purchases made by the company in year 1. Choice "a" is incorrect. This choice leaves out accounts payable, which eventually must be paid with cash in year 2. Choice "b" is incorrect. This choice leaves out the analysis of limits on a line of credit that the company may need to fund its operations in year 2. Choice "c" is incorrect. This choice leaves out accrued wages, which will ultimately have to be paid by the company in year 2. 6-21 Sales budget, service setting. In 2017, Rouse & Sons, a small environmental-testing firm, performed 12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of radon-related health hazards is expected to result in a 6% increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in 2018. Required: 1. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse holds prices at 2017 levels. 2. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead test to $230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to maximize sales revenue? SOLUTION (15 min.) Sales budget, service setting. 1.

Rouse & Sons Radon Tests Lead Tests

2017 At 2017 Volume Selling Prices 12,200 $290 16,400 $240

Expected 2018 Change in Volume + 6% –10%

Expected 2018 Volume 12,932 14,760

Rouse & Sons Sales Budget For the Year Ended December 31, 2018

Radon Tests Lead Tests

Selling Price $290 $240

Units Sold 12,932 14,760

Total Revenues $3,750,280 3,542,400 $7,292,680

2.

Rouse & Sons Radon Tests Lead Tests

2017 Planned 2018 Expected 2018 Volume Selling Prices Change in Volume 12,200 $290 +6% 16,400 $230 –7%

6-6

Expected 2018 Volume 12,932 15,252

Rouse & Sons Sales Budget For the Year Ended December 31, 2018

Radon Tests Lead Tests

Selling Price Units Sold $290 12,932 $230 15,252

Total Revenues $3,750,280 3,507,960 $7,258,240

Expected revenues at the new 2018 prices are $7,258,240, which is lower than the expected 2018 revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in 2018. 6-22 Sales and production budget. The Albright Company manufactures ball pens and expects sales of 452,000 units in 2018. Albright estimates that its ending inventory for 2018 will be 65,400 pens. The beginning inventory is 46,500 pens. Compute the number of pens budgeted for production in 2018. (5 min.) Sales and production budget. Budgeted sales in units Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced

452,000 65,400 517,400 46,500 470,900

6-23 Direct material budget. Polyhidron Corporation produces 5-gallon plastic buckets. The company expects to produce 430,000 buckets in 2018. Polyhidron purchases high quality plastic granules for the production of buckets. Each pound of plastic granules produces two 5-gallon buckets. Target ending inventory of the company is 35,200 pounds of plastic granules; its beginning inventory is 22,500. Compute how many pounds of plastic granules need to be purchased in 2018. (5 min.)

Direct materials purchases budget.

Direct materials to be used in production (pounds): (430,000÷2) Add target ending direct materials inventory (pounds) Total requirements (pounds) Deduct beginning direct materials inventory (pounds) Direct materials to be purchased (pounds)

215,000 35,200 250,200 22,500 227,700

6-24 Material purchases budget. The Ceremicon Company produces teapots from stoneware clay. The company has prepared a sales budget of 150,000 units of teapots for a 3-month period. It has an inventory of 34,000 units of teapots on hand at December 31 and has estimated an inventory of 38,000 units of teapots at the end of the succeeding quarter. One unit of teapot needs 2 pounds of stoneware clay. The company has an inventory of 6-7

82,000 pounds of stoneware clay at December 31 and has a target ending inventory of 95,000 pounds of stoneware clay at the end of the succeeding quarter. How many pounds of direct materials (stoneware clay) should Ceremicon purchase during the 3 months ending March 31? (10 min.)

Budgeting material purchases.

Production Budget: Finished Goods (units) 150,000 38,000 188,000 34,000 154,000

Budgeted sales Add target ending teapots inventory Total requirements Deduct beginning teapots inventory Units to be produced Direct Materials (stoneware clay) Purchases Budget:

Direct materials needed for production (154,000  2) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased

Direct Materials (in pounds) 308,000 95,000 403,000 82,000 321,000

6-25 Revenues, production, and purchases budgets. The Deluxe Motorcar in northern California manufactures motor cars of all categories. Its budgeted sales for the most popular sedan model XE8 in 2018 is 4,000 units. Deluxe Motorcar has a beginning finished inventory of 600 units. Its ending inventory is 450 units. The present selling price of model XE8 to the distributors and dealers is $35,200. The company does not want to increase its selling price in 2018. Deluxe Motorcar does not produce tyres. It buys the tyres from an outside supplier. One complete car requires five tyres including the tyre for the extra wheel. The company’s target ending inventory is 400 tyres, and its beginning inventory is 350 tyres. The budgeted purchase price is $45 per tyre. Required: 1. 2. 3. 4.

Compute the budgeted revenues in dollars. Compute the number of cars that Deluxe Motorcar should produce. Compute the budgeted purchases of tyres in units and in dollars. What actions can Deluxe Motorcar’s managers take to reduce budgeted purchasing costs of tyres assuming the same budgeted sales for Model XE8?

SOLUTION (15–20 min....