Strategic Cost Management 3eSM Chapter 08 PDF

Preview

Summary

8- © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.CHAPTER 8BUDGETING FOR PLANNING AND CONTROLDISCUSSION QUESTIONS Budgets are the quantitative expressions of plans. Budgets are used to translate ...

Description

CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL DISCUSSION QUESTIONS 1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms.

percentage to yield the amount of cash expected. 8. If the vice president of sales is a pessimistic individual, one might expect that she or he would underestimate sales for the coming year. In your role as head of the budget process, you might increase the budgeted sales figure to take out the individual bias.

2. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned performance. Budgets are the standards, and they are compared with actual costs and revenues to provide feedback.

9. If the factory controller is a particularly optimistic individual, it is possible that the costs for direct materials, direct labor, and overhead could be underestimated. For example, an optimistic person might assume that everything will go well (e.g., that there will be no problems in obtaining an adequate supply of materials at the lowest possible price). As head of the budget process, you might allow for somewhat higher costs to more accurately reflect reality.

3. Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation, and improves the functions of communication and coordination. 4. The master budget is the collection of all individual area and activity budgets. Operating budgets are concerned with the income-generating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures.

10. The learning curve is the relationship between unit costs of production and increasing number of units. As time goes on, the number of units produced in a time period will increase and the cost per unit will decrease. The budgets affected will be the direct materials purchases budget, the direct labor budget, and the overhead budget.

5. The sales forecast is a critical input for building the sales budget. It, however, is not necessarily equivalent to the sales budget. Upon receiving the sales forecast, management may decide that the firm can do better or needs to do better than the forecast is indicating. Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increasing advertising). This adjustment then becomes the sales budget.

11. Small firms often do not engage in a comprehensive master budgeting process. (Personally, we believe that is a mistake. The budgeting process helps management more fully understand the business and helps them to plan for the coming year.) Even small businesses create cash budgets, however, because cash flow is critically important. For example, it is possible to have positive operating income, but negative cash flow (e.g., if sales on account are high, but customers are slow to pay). Negative cash flow could put a company out of business in short order.

6. Yes. All budgets essentially are founded on the sales budget. The production budget depends on the level of planned sales. The manufacturing budgets, in turn, depend on the production budget. The same is true for the financial budgets since sales is a critical input for budgets in that category. 7. An accounts receivable aging schedule gives the proportion of accounts receivable that are, on average, collected in the months following sale. It is important in creating the cash budget, since the sales on account for past months can be multiplied by the appropriate

12. The master budget has been criticized for the following reasons: it does not recognize the interdependencies among departments, it is static, and it is results rather than process oriented. These criticisms are especially 8-1

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14. A flexible budget is (1) a budget for various levels of activity or (2) a budget for the actual level of activity. The first type of flexible budget is used for planning and sensitivity analysis. The second type of budget is used for control, since the actual costs of the actual level of activity can be compared with the planned costs for the actual level of activity.

apparent when companies are in a competitive, dynamic environment. When the environment changes slowly, if at all, the master budget would do a good job of both planning and control. 13. A static budget is one that is not adjusted for changes in activity. Using a static budget for control can be a real problem. For example, suppose that the master (static) budget is based on the production and sale of 100,000 units, but that only 90,000 units are actually produced and sold. Further suppose that the budgeted variable cost of goods sold was $2,000,000, and that the actual variable cost of goods sold was $1,890,000. It looks as if the company spent less than expected for variable manufacturing costs. However, the budgeted variable cost was $20 per unit ($2,000,000/100,000), and the actual variable cost per unit is $21 per unit ($1,890,000/90,000). Not adjusting the budget for changes in activity level can mislead managers about efficiency.

15. The activity-based budget starts with output, determines the activities necessary to create that output, and then determines the resources necessary to support the activities. This differs from the traditional master budgeting process in that the master budget leaps directly from output to resources. Some of the resource levels are assumed to be fixed. This makes them independent of volume changes and hides the drivers that actually do affect the fixed resources. As a result, the budget format does not support the creation of value and the thinking that would go into determining the sources of waste.

8-2 © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CORNERSTONE EXERCISES Cornerstone Exercise 8.1 1.

FlashKick Company Sales Budget For the First Quarter January

February

March

Quarter

Practice ball: Units ................... Unit price ........... Sales...................

50,000 × $8.75 $437,500

58,000 × $8.75 $507,500

80,000 × $8.75 $ 700,000

188,000 × $8.75 $1,645,000

Match ball: Units ................... Unit price ........... Sales...................

7,000 × $16.00 $112,000

7,500 × $16.00 $120,000

13,000 × $16.00 $ 208,000

27,500 × $16.00 $ 440,000

Total sales .............

$549,500

$627,500

$ 908,000

$2,085,000

2.

FlashKick Company Sales Budget For the First Quarter January

February

March

Quarter

Practice ball: Units ................... Unit price ........... Sales...................

50,000 × $8.75 $437,500

58,000 × $8.75 $507,500

80,000 × $8.75 $ 700,000

188,000 × $8.75 $1,645,000

Match ball: Units ................... Unit price ........... Sales...................

4,200 × $16.00 $67,200

4,500 × $16.00 $ 72,000

7,800 × $16.00 $ 124,800

16,500 × $16.00 $ 264,000

Tournament ball: Units ................... Unit price ........... Sales...................

2,800 × $45.00 $126,000

3,000 × $45.00 $135,000

5,200 × $48.00 $ 249,600

11,000 × $46.42* $ 510,600

Total sales .............

$630,700

$714,500

$1,074,400

$2,419,600

* $510,600/11,000 = $46.42 (rounded)

Cornerstone Exercise 8.2 1.

Production budget for practice balls: Unit sales ...................................... Desired ending inventory ........... Total needed .......................... Less: Beginning inventory ......... Units produced ......................

January 50,000 11,600 61,600 3,100 58,500

February 58,000 16,000 74,000 11,600 62,400

March 80,000 20,000 100,000 16,000 84,000

January 7,000 1,500 8,500 400 8,100

February 7,500 2,600 10,100 1,500 8,600

March 13,000 3,600 16,600 2,600 14,000

Production budget for match balls: Unit sales ...................................... Desired ending inventory ........... Total needed .......................... Less: Beginning inventory ......... Units produced ...................... 2.

In order to construct a production budget for April, you would need May sales. This is due to the calculation of desired ending inventory, which is 20 percent of the next period’s sales.

Cornerstone Exercise 8.3 1.

Direct materials purchases budget for practice balls: Polyvinyl chloride panels: Units produced ............................................... Direct materials per unit ................................ Direct materials for production................ Desired ending inventory* ............................. Total needed............................................... Less: Beginning inventory** ......................... Direct materials purchases ......................

January February 58,500 62,400 × 0.7 × 0.7 40,950 43,680 8,736 11,760 49,686 55,440 8,190 8,736 41,496 46,704

*Desired ending inventory = 0.20 × next month’s production needs; January ending inventory = 0.20 × 43,680 = 8,736; February ending inventory = 0.20 × (84,000 × 0.7 sq. yd.) = 11,760 **Beginning inventory for January equals ending inventory for December = 0.20 × 40,950 = 8,190

Cornerstone Exercise 8.3

(Concluded)

Bladder and valve: Units produced ............................................... Direct materials per unit ................................ Direct materials for production ............... Desired ending inventory* ............................. Total needed............................................... Less: Beginning inventory** ......................... Direct materials purchases ......................

January 58,500 × 1 58,500 12,480 70,980 11,700 59,280

February 62,400 × 1 62,400 16,800 79,200 12,480 66,720

*Desired ending inventory = 0.20 × next month’s production needs; January ending inventory = 0.20 × 62,400 = 12,480; February ending inventory = 0.20 × (84,000 × 1) = 16,800 **Beginning inventory for January equals ending inventory for December = 0.20 × 58,500 = 11,700 Glue: Units produced ............................................... Direct materials per unit ................................ Direct materials for production ............... Desired ending inventory* ............................. Total needed............................................... Less: Beginning inventory** ......................... Direct materials purchases ......................

January 58,500 × 3 175,500 37,440 212,940 35,100 177,840

February 62,400 × 3 187,200 50,400 237,600 37,440 200,160

*Desired ending inventory = 0.20 × next month’s production needs; January ending inventory = 0.20 × 187,200 = 37,440; February ending inventory = 0.20 × (84,000 × 3) = 50,400 **Beginning inventory for January equals ending inventory for December = 0.20 × 175,500 = 35,100 2.

If the desired ending inventory percentage decreases, then less would be ordered to satisfy the decreased need for materials on hand.

Cornerstone Exercise 8.4 1. Number of wrong numbers = Total calls × Percent = 5,000 × 0.10 = 500 Number of answering machine calls = Total calls × Percent = 5,000 × 0.15 = 750 Number of alumni contact calls = Total calls × Percent = 5,000 × 0.75 = 3,750 Minutes for wrong numbers (500 × 3)............................. Minutes for answering machine calls (750 × 2) ............. Minutes for alumni contact calls (3,750 × 10) ................ Total minutes .....................................................................  60 Minutes per hour ....................................................... Total student hours ...........................................................  Number of students ....................................................... Total hours per volunteer .................................................  3 Hours per night ............................................................ Total nights of calling ..................................................

1,500 1,500 37,500 40,500 ÷ 60 675 ÷ 15 45 ÷ 3 15

2. Minutes for wrong numbers (500 × 1) ............................. Minutes for answering machine calls (750 × 0) ............. Minutes for alumni contact calls (3,750 × 8) .................. Total minutes .....................................................................  60 Minutes per hour ....................................................... Total student hours ...........................................................  Number of students ....................................................... Total hours per volunteer .................................................  3 Hours per night ............................................................ Total nights of calling ..................................................

500 0 30,000 30,500 ÷ 60 508.33 ÷ 15 33.89 ÷ 3 11.30

Cornerstone Exercise 8.5 1. Direct labor hours = Budgeted unit × Budgeted direct labor hours per unit = 120,000 × 1.3 = 156,000 direct labor hours Variable overhead = Supplies + Gas = $216,000 + $50,000 = $266,000 Variable overhead rate = $266,000/156,000 = $1.71 per direct labor hour (rounded)

Budgeted fixed overhead: Indirect labor ......................................................... Supervision............................................................ Depreciation on equipment ................................. Depreciation on the building ............................... Rental of special equipment ................................ Electricity ............................................................... Telephone .............................................................. Landscaping service ............................................ Other overhead ..................................................... Total fixed overhead .......................................

$176,000 73,500 47,000 40,000 11,000 28,900 4,300 1,200 50,000 $431,900

2. Overhead Budget Budgeted direct labor hours ..................................... Variable overhead rate ............................................... Budgeted variable overhead ..................................... Budgeted fixed overhead .......................................... Total budgeted overhead .....................................

For the Year 156,000 × $1.71 $266,760 431,900 $698,660

Fixed overhead rate = $431,900/156,000 = $2.77 per direct labor hour Total overhead rate = $698,660/156,000 = $4.48 per direct labor hour 3. Overhead Budget Budgeted direct labor hours* ................................... Variable overhead rate ............................................... Budgeted variable overhead ..................................... Budgeted fixed overhead .......................................... Total budgeted overhead .....................................

For the Year 153,400 × $1.71 $262,314 431,900 $694,214

*Budgeted direct labor hours = 118,000 × 1.3 = 153,400 Fixed overhead rate = $431,900/153,400 = $2.82 per direct labor hour Total overhead rate = $694,214/153,400 = $4.53 per direct labor hour

Cornerstone Exercise 8.6 1. Unit costs: Direct materials ...................................... Direct labor ............................................. Overhead: Budgeted variable overhead ........... Budgeted fixed overhead ................ Total cost per unit .......................................

$1.67 0.56 0.72 1.80 $4.75

Total ending inventory cost = Units ending inventory* × Unit cost = 31,000 × $4.75 = $147,250 *Units ending inventory = Beginning inventory + Units produced – Units sales = (16,000 + 300,000) – 285,000 = 31,000 2. If the number of units sold increases to 290,000, there will be 5,000 fewer units in ending inventory, and the cost of ending inventory will decrease to $123,500 (26,000 units in ending inventory × $4.75).

Cornerstone Exercise 8.7 1. Budgeted direct materials ($1.67 × 300,000) Budgeted direct labor($0.56 × 300,000) Budgeted overhead [($0.72 + $1.80) × 300,000] Total budgeted manufacturing cost 2. Direct materials....................................................... Direct labor .............................................................. Overhead ................................................................. Total manufacturing cost ...................................... Add: Beginning inventory, finished goods*........ Less: Ending inventory, finished goods ............. Cost of goods sold .................................................

$ 501,000 168,000 756,000 $1,425,000 $ 501,000 168,000 756,000 $1,425,000 76,000 147,250 $1,353,750

*Beginning finished goods inventory = 16,000 × $4.75 = $76,000 3. If the cost of beginning inventory of finished goods was only $75,200, the cost of goods sold would decrease to $1,352,950.

Cornerstone Exercise 8.8 1. Hair-Again Marketing Expense Budget For the Year Ended December 31 Quarter 1 Quarter 2 Budgeted unit sales................... 5,000 15,000 Unit variable expense*.............. × $0.45 × $0.45 Total variable expense .............. $ 2,250 $ 6,750 Fixed marketing expense: Internet ads ........................... $ 7,600 $ 7,600 Television time....................... 10,000 10,000 Telephone operators .............. 4,000 4,000 Travel .................................... 3,000 3,000 Total fixed expense ................... $24,600 $24,600 Total marketing expense ........... $26,850 $31,350

Quarter 3 Quarter 4 Total 40,000 35,000 95,000 × $0.45 × $0.45 × $0.45 $18,000 $15,750 $ 42,750 $ 7,600 25,000 4,000 3,000 $39,600 $57,600

$ 7,600 $ 30,400 25,000 70,000 4,000 16,000 3,000 12,000 $39,600 $ 128,400 $55,350 $171,150

*Unit variable expense = Selling price × 3% Commission = ($15 × 0.03) = $0.45 2. If the cost of internet ads rises to $15,000 in Quarters 2, 3, and 4, the fixed marketing expense in those quarters will be $7,400 higher, as will the total marketing expense. There will be no impact on variable marketing expense.

Cornerstone Exercise 8.9 1. Green Earth Landscaping Company Administrative Expense Budget For the Summer Months Salaries ............................................ Insurance ......................................... Depreciation..................................... Accounting services .......................... Total administrative expense

June $ 9,600 2,500 3,700 500 $16,300

July $ 9,600 2,500 3,700 500 $16,300

August $ 9,600 2,500 3,700 500 $16,300

Total $28,800 7,500 11,100 1,500 $48,900

2. The increase in insurance rates at the beginning of July will increase the total administrative cost by $100 in July and August.

Cornerstone Exercise 8.10 1. Coral Seas Jewelry Company Budgeted Income Statement For the Coming Year Sales .............................................................. Less: Cost of goods sold ........................... Gross margin ............................................... Less: Marketing expense .................................. Administrative expense .......................... Operating income .............