Assignment Material

Questions

1. 6-1. What are the four elements of the budgeting cycle?
2. 6-2. Define master budget.
3. 6-3. “Strategy, plans, and budgets are unrelated to one another.” Do you agree? Explain.
4. 6-4. “Budgeted performance is a better criterion than past performance for judging managers.” Do you agree? Explain.
5. 6-5. “Production managers and marketing managers are like oil and water. They just don’t mix.” How can a budget assist in reducing conflicts between these two areas?
6. 6-6. “Budgets meet the cost–benefit test by pushing managers to act differently.” Do you agree? Explain.
7. 6-7. Define rolling budget. Give an example.
8. 6-8. Outline the steps in preparing an operating budget.
9. 6-9. “The sales forecast is the cornerstone for budgeting.” Do you agree? Explain.
10. 6-10. How can sensitivity analysis be used to increase the benefits of budgeting?
11. 6-11. Define Kaizen budgeting.
12. 6-12. Describe how nonoutput-based cost drivers can be incorporated into budgeting.
13. 6-13. Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.
14. 6-14. What are some additional considerations when budgeting in multinational companies?
15. 6-15. “Cash budgets must be prepared before the operating income budget.” Do you agree? Explain.

Multiple-Choice Questions

1. 6-16. MASTER BUDGET. Which of the following statements is correct regarding the components of the master budget?
   1. a. The cash budget is used to create the capital budget.
   2. b. Operating budgets are used to create cash budgets.
   3. c. The manufacturing overhead budget is used to create the production budget.
   4. d. The cost of goods sold budget is used to create the selling and administrative expense budget.
2. 6-17. OPERATING AND FINANCIAL BUDGETS. Which of the following statements is correct regarding the drivers of operating and financial budgets?
   1. a. The sales budget will drive the cost of goods sold budget.
   2. b. The cost of goods sold budget will drive the units of production budget.
   3. c. The production budget will drive the selling and administrative expense budget.
   4. d. The cash budget will drive the production and selling and administrative expense budgets.
3. 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. What would be the budgeted production for the second quarter of next year?
   1. 1. 7,200 units;
   2. 2. 8,800 units;
   3. 3. 12,000 units;
   4. 4. 10,400 units
4. 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.
   1. i. In a cost center, managers are responsible for controlling costs but not revenue.
   2. 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.
   3. iii. To be effective, a good responsibility accounting system must help managers to plan and to control.
   4. iv. Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager.
      1. 1. I and II only are correct.
      2. 2. II and III only are correct.
      3. 3. I, II, and III are correct.
      4. 4. I, II, and IV are correct.
5. 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:
   1. i. Wages due to workers accrued as of December 31, year 1.
   2. ii. Limits on a line of credit that may be used to fund Jenks’ operations in year 2.
   3. iii. The balance in accounts payable as of December 31, year 1, from credit purchases made in year 1.
6. Which of the items above should Jacobs take into account when building the cash budget for year 2?
   1. a. I and II
   2. b. I and III
   3. c. II and III
   4. d. I, II, and III

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Exercises

1. 6-21. SALES BUDGET, SERVICE SETTING. In 2020, Rouse & Sons, a small environmental-testing firm, performed 10,800 radon tests for $310 each and 15,400 lead tests for $220 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 13% 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 $210 per test, he will have to face only a 5% decline in lead-test sales in 2021.
   1. Required
   2. 1. Prepare a 2021 sales budget for Rouse & Sons assuming that Rouse holds prices at 2020 levels.
   3. 2. Prepare a 2021 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead test to $210. Should Rouse lower the price of a lead test in 2021 if the company’s goal is to maximize sales revenue?
2. 6-22. SALES AND PRODUCTION BUDGET. The Coby Company expects sales in 2021 of 201,000 units of serving trays. Coby’s beginning inventory for 2021 is 13,000 trays, and its target ending inventory is 29,000 trays. Compute the number of trays budgeted for production in 2021.
3. 6-23. DIRECT MATERIAL BUDGET. Hartley Co. produces wine. The company expects to produce 2,510,000 two-liter bottles of Chablis in 2021. Hartley purchases empty glass bottles from an outside vendor. Its target ending inventory of such bottles is 80,000; its beginning inventory is 55,000. For simplicity, ignore breakage. Compute the number of bottles to be purchased in 2021.
4. 6-24. MATERIAL PURCHASES BUDGET. The McGrath Company has prepared a sales budget of 42,000 finished units for a 3-month period. The company has an inventory of 13,000 units of finished goods on hand at December 31 and has a target finished-goods inventory of 15,000 units at the end of the succeeding quarter.
5. It takes 3 gallons of direct materials to make one unit of finished product. The company has an inventory of 61,000 gallons of direct materials at December 31 and has a target ending inventory of 53,000 gallons at the end of the succeeding quarter. How many gallons of direct materials should McGrath Company purchase during the 3 months ending March 31?
6. 6-25. REVENUES, PRODUCTION, AND PURCHASES BUDGETS. The Yucatan Co. in Mexico has a division that manufactures bicycles. Its budgeted sales for Model XG in 2021 are 95,000 units. Yucatan’s target ending inventory is 7,000 units, and its beginning inventory is 11,000 units. The company’s budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle.
7. Yucatan buys all its wheels from an outside supplier. No defective wheels are accepted. A separate division of the company orders the extra wheels Yucatan needs for replacement parts. The company’s target ending inventory is 14,000 wheels, and its beginning inventory is 16,000 wheels. The budgeted purchase price is 400 pesos per wheel.
8. Required
   1. 1. Compute the budgeted revenues in pesos.
   2. 2. Compute the number of bicycles that Yucatan should produce.
   3. 3. Compute the budgeted purchases of wheels in units and in pesos.
   4. 4. What actions can Yucatan’s managers take to reduce budgeted purchasing costs of wheels assuming the same budgeted sales for Model XG?
9. 6-26. REVENUES AND PRODUCTION BUDGET. Saphire, Inc., bottles and distributes mineral water from the company’s natural springs in northern Oregon. Saphire markets two products: 12-ounce disposable plastic bottles and 1-gallon reusable plastic containers.
10. Required
    1. 1. For 2021, Saphire marketing managers project monthly sales of 500,000 12-ounce bottles and 130,000 1-gallon containers. Average selling prices are estimated at $0.30 per 12-ounce bottle and $1.60 per 1-gallon container. Prepare a revenues budget for Saphire, Inc., for the year ending December 31, 2021.
    2. 2. Saphire begins 2021 with 980,000 12-ounce bottles in inventory. The vice president of operations requests that ending inventory of 12-ounce bottles on December 31, 2021, be no less than 660,000 bottles. Based on sales projections as budgeted previously, what is the minimum number of 12-ounce bottles Saphire must produce during 2021?
    3. 3. The VP of operations requests that ending inventory of 1-gallon containers on December 31, 2021, be 300,000 units. If the production budget calls for Saphire to produce 1,200,000 1-gallon containers during 2021, what is the beginning inventory of 1-gallon containers on January 1, 2021?
11. 6-27. BUDGETING; DIRECT MATERIAL USAGE, MANUFACTURING COST, AND GROSS MARGIN. Xander Manufacturing Company manufactures blue rugs using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost of $6 per gallon. All other materials are indirect. At the beginning of the year, Xander has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost-flow method.

1. Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
2. Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools—one for dyeing and the other for weaving. Dyeing overhead is allocated to products based on machine-hours (MH). Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH).
3. Xander budgets 0.2 machine-hours to dye each skein in the dyeing process. There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour.
4. The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:

1. 1. Required
   2. 1. Prepare a direct materials usage budget in both units and dollars.
   3. 2. Calculate the budgeted overhead allocation rates for dyeing and weaving.
   4. 3. Calculate the budgeted unit cost of a blue rug for the year.
   5. 4. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels).
   6. 5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
   7. 6. Find the budgeted gross margin for blue rugs under each sales assumption.
   8. 7. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs?
   9. 8. How might top management at Xander use the budget developed in requirements 1–6 to better manage the company?
2. 6-28. BUDGETING, SERVICE COMPANY. Stevens Snow Removal (SSR) Company provides snow removal services to commercial clients. The company has enjoyed considerable growth in recent years due to a successful marketing campaign and new relationships with commercial real-estate developers. SSR owner Jason Stevens makes sales calls himself and quotes on jobs based on square feet of plowed surface. SSR hires freelance truck owners to plow the parking lots using SSR snowplow attachments, and pays them $40 per hour. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead is allocated based on direct labor-hours (DLH).
3. Jason Stevens estimates that his snow removers will work a total of 2,000 jobs during the year. Each job averages 5,000 square feet of plowed surface and requires 6 direct labor-hours. The following table presents the budgeted overhead costs for 2021:

1. 1. Required
   2. 1. Prepare a direct labor budget in both hours and dollars.
   3. 2. Calculate the budgeted overhead allocation rate based on the budgeted quantity of the cost drivers.
   4. 3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average 5,000-square-feet snow-removal job.
   5. 4. Prepare a revenues budget for the year, assuming that SSR charges customers $0.08 per square foot.
   6. 5. Calculate the budgeted operating income.
   7. 6. What actions can Stevens take if sales should decline to 1,800 jobs annually?
2. 6-29. BUDGETS FOR PRODUCTION AND DIRECT MANUFACTURING LABOR. (CMA, adapted) DeWitt Company makes and sells artistic frames for pictures of weddings, graduations, and other special events. Ron Bahar, the controller, is responsible for preparing DeWitt’s master budget and has accumulated the following information for 2021:

1. In addition to wages, direct manufacturing labor-related costs include pension contributions of $0.40 per hour, worker’s compensation insurance of $0.10 per hour, employee medical insurance of $0.50 per hour, and Social Security taxes. Assume that as of January 1, 2021, the Social Security tax rates are 7.5% for employers and 7.5% for employees. The cost of employee benefits paid by DeWitt on its direct manufacturing employees is treated as a direct manufacturing labor cost.
2. DeWitt has a labor contract that calls for a wage increase to $12 per hour on April 1, 2021. New labor-saving machinery has been installed and will be fully operational by March 1, 2021. DeWitt expects to have 16,000 frames on hand at December 31, 2020, and it has a policy of carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second following month’s sales.
   1. Required
   2. 1. Prepare a production budget and a direct manufacturing labor cost budget for DeWitt Company by month and for the first quarter of 2021. You may combine both budgets in one schedule. The direct manufacturing labor cost budget should include labor-hours and show the details for each labor-cost category.
   3. 2. What actions has the budget process prompted DeWitt’s management to take?
   4. 3. How might DeWitt’s managers use the budget developed in requirement 1 to better manage the company?
3. 6-30 ACTIVITY-BASED BUDGETING. The Jerico store of Jiffy Mart, a chain of small neighborhood convenience stores, is preparing its activity-based budget for January 2021. Jiffy Mart has three product categories: soft drinks (35% of cost of goods sold [COGS]), fresh produce (25% of COGS), and packaged food (40% of COGS). The following table shows the four activities that consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver amount budgeted to be consumed by each activity in January 2021.

1. 1. Required
   2. 1. What is the total budgeted indirect cost at the Jerico store in January 2021? What is the total budgeted cost of each activity at the Jerico store for January 2021? What is the budgeted indirect cost of each product category for January 2021?
   3. 2. Which product category has the largest fraction of total budgeted indirect costs?
   4. 3. Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an activity-based approach to budgeting over, say, allocating indirect costs to products based on cost of goods sold?
2. 6-31. KAIZEN APPROACH TO ACTIVITY-BASED BUDGETING (CONTINUATION OF 6-30). Jiffy Mart has a Kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of 2021. Each successive month, the budgeted cost-driver rate decreases by 0.4% relative to the preceding month. So, for example, February’s budgeted cost-driver rate is 0.996 times January’s budgeted cost-driver rate, and March’s budgeted cost-driver rate is 0.996 times the budgeted February rate. Jiffy Mart assumes that the budgeted amount of cost-driver usage remains the same each month.
   1. Required
   2. 1. What are the total budgeted cost for each activity and the total budgeted indirect cost for March 2021?
   3. 2. What are the benefits of using a Kaizen approach to budgeting? What are the limitations of this approach, and how might Jiffy Mart management overcome them?
3. 6-32. RESPONSIBILITY AND CONTROLLABILITY. Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair fountains), and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own tools.
   1. 1. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materials costs in May are higher than budgeted.
   2. 2. Utility costs in the supply warehouse for August are higher than budgeted. Investigation reveals that the air conditioners were left on each evening and on weekends, in violation of company policy. When approached about the issue, the manager complained that the warehouse is too hot in the mornings during the summer if the air conditioners are not allowed to run continually.
   3. 3. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the driver has been driving the van for personal use.
   4. 4. Regency Mall, one of Prestige’s fountain service customers, calls the service people only for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer.
   5. 5. Prestige’s sales representatives have recently written contracts with five new customers in a city 50 miles away. Currently, Prestige does not bill for travel time to maintenance jobs. A recent profitability analysis shows that when a single client in that city is serviced, the company loses money on that call.
   6. 6. The cost of health insurance for service technicians has increased by 40% this year, which caused the actual health insurance costs to greatly exceed the budgeted health insurance costs for the service technicians.
4. Required
5. For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest ways to solve the problem or to improve the situation.
6. 6-33. RESPONSIBILITY, CONTROLLABILITY, AND STRETCH TARGETS. Consider each of the following independent situations for Sunshine Tours, a company owned by David Bartlett that sells motor coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and employs 12 drivers, 1 maintenance technician, 3 sales representatives, and an office manager. Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are visiting their destinations). The maintenance technician and office manager are both full-time salaried employees. The sales representatives work on straight commission.
   1. 1. One of the motor coach drivers seems to be reaching his destinations more quickly than any of the other drivers and is reporting longer idle time.
   2. 2. Sunshine Tours allows motor coach drivers to select meal stops on long distance trips. Drivers are encouraged to discuss the stop locations with the client’s trip contact in advance to ensure that the restaurant meets customer expectations. A recent investigation has shown that one driver only stops at a particular restaurant chain. Customer satisfaction surveys for that driver’s trips have shown decreased satisfaction regarding the meal stops. It is suspected that the driver is receiving kickbacks from the restaurant in return for steering customers to them.
   3. 3. Regular preventive maintenance of the motor coaches has been proven to improve fuel efficiency and reduce overall operating costs by averting costly repairs. During busy months, however, it is difficult for the maintenance technician to complete all of the maintenance tasks within his 40-hour workweek.
   4. 4. David Bartlett has read about stretch targets, and he believes that a change in the compensation structure of the sales representatives may improve sales. Rather than a straight commission of 10% of sales, he is considering a system where each representative is given a monthly goal of 50 contracts. If the goal is met, the representative is paid a 12% commission. If the goal is not met, the commission falls to 8%. Currently, each sales representative averages 45 contracts per month.
   5. 5. Fuel consumption has increased significantly in recent months. David Bartlett is considering ways to promote improved fuel efficiency and reduce harmful emissions using stretch environmental targets, where drivers and the maintenance mechanic would receive a bonus if fuel consumption falls below 90% of budgeted fuel usage per mile driven.
7. Required
8. For situations 1–3, discuss which employee has responsibility for the related costs and the extent to which costs are controllable and by whom. What are the risks or costs to the company? What can be done to solve the problem or improve the situation? For situations 4 and 5, describe the potential benefits and costs of establishing stretch targets.
9. 6-34. CASH FLOW ANALYSIS, SENSITIVITY ANALYSIS. HealthMart is a retail store selling home oxygen equipment. HealthMart also services home oxygen equipment, for which the company bills customers monthly. HealthMart has budgeted for increases in service revenue of $200 each month due to a recent advertising campaign. The forecast of sales and service revenue for March–June 2021 is as follows:

1. Almost all of the sales revenues of the oxygen equipment are credit card sales; cash sales are negligible. The credit card company deposits 97% of the revenues recorded each day into HealthMart’s account overnight. For the servicing of home oxygen equipment, 60% of oxygen services billed each month is collected in the month of the service, and 40% is collected in the month following the service.
   1. Required
   2. 1. Calculate the cash that HealthMart expects to collect in April, May, and June 2021 from sales and service revenues. Show calculations for each month.
   3. 2. HealthMart has budgeted expenditures for May of $11,000 and requires a minimum cash balance of $250 at the end of each month. It has a cash balance on May 1 of $400.
      1. a. Given your answer to requirement 1, will HealthMart need to borrow cash to cover its payments for May and maintain a minimum cash balance of $250 at the end of May?
      2. b. Assume (independently for each situation) that (1) May total revenues might be 10% lower or that (2) total costs might be 5% higher. Under each of those two scenarios, show the total net cash for May and the amount HealthMart would have to borrow to cover its cash payments for May and maintain a minimum cash balance of $250 at the end of May. (Again, assume a balance of $400 on May 1.)
   4. 3. Why do HealthMart’s managers prepare a cash budget in addition to the revenue, expenses, and operating income budget? Has preparing the cash budget been helpful? Explain briefly.

Problems

1. 6-35. BUDGET SCHEDULES FOR A MANUFACTURER. Hale Specialties manufactures, among other things, woolen blankets for the athletic teams of the two local high schools. The company sews the blankets from fabric and sews on a logo patch purchased from the licensed logo store site. The teams are as follows:
   1. • Broncos, with red blankets and the Broncos logo
   2. • Rams, with black blankets and the Rams logo
2. Also, the black blankets are slightly larger than the red blankets.
3. The budgeted direct-cost inputs for each product in 2020 are as follows:

1. Data pertaining to the direct materials for March 2020 are as follows:

1. Unit cost data for direct-cost inputs pertaining to February 2020 and March 2020 are as follows:

1. Manufacturing overhead (both variable and fixed) is allocated to each blanket on the basis of budgeted direct manufacturing labor-hours per blanket. The budgeted variable manufacturing overhead rate for March 2020 is $17 per direct manufacturing labor-hour. The budgeted fixed manufacturing overhead for March 2020 is $14,625. Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods.
2. Data relating to finished-goods inventory for March 2020 are as follows:

1. Budgeted sales for March 2020 are 140 units of the Broncos blankets and 195 units of the Rams blankets. The budgeted selling prices per unit in March 2020 are $305 for the Broncos blankets and $378 for the Rams blankets. Assume the following in your answer:
   1. • Work-in-process inventories are negligible and ignored.
   2. • Direct materials inventory and finished-goods inventory are costed using the FIFO method.
   3. • Unit costs of direct materials purchased and finished goods are constant in March 2020.
   4. Required
   5. 1. Prepare the following budgets for March 2020:
      1. a. Revenues budget
      2. b. Production budget in units
      3. c. Direct material usage budget and direct materials purchases budget
      4. d. Direct manufacturing labor costs budget
      5. e. Manufacturing overhead costs budget
      6. f. Ending inventories budget (direct materials and finished goods)
      7. g. Cost of goods sold budget
   6. 2. Suppose Hale Specialties decides to incorporate continuous improvement into its budgeting process. Describe two areas where it could incorporate continuous improvement into the budget schedules in requirement 1.
2. 6-36. BUDGETED COSTS, KAIZEN IMPROVEMENTS, ENVIRONMENTAL COSTS. US Apparel (USA) manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following:

1. Budgeted sales and selling price per unit are as follows:

1. USA has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs $1.25 per ounce. The company would still need 4 ounces of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company $130,000 if it continues to use the harmful but less expensive dye.
   1. Required
   2. 1. Given the preceding information, would USA be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.)
   3. 2. If USA chooses to be environmentally responsible and switches to the new dye, the changes in the process will allow production managers to implement Kaizen costing. If USA can reduce fabric and labor costs each by 1% per month on all the shirts it manufactures, by how much will overall costs decrease at the end of 12 months? (Round to the nearest dollar for calculating cost reductions.)
   4. 3. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan?
2. 6-37. REVENUE AND PRODUCTION BUDGETS. (CPA, adapted) The Chen Corporation manufactures and sells two products: Thingone and Thingtwo. In July 2019, Chen’s budget department gathered the following data to prepare budgets for 2020:
3. 2020 Projected Sales

1. 2020 Inventories in Units

1. The following direct materials are used in the two products:

1. Projected data for 2020 for direct materials are:

1. Projected direct manufacturing labor requirements and rates for 2020 are:

1. Manufacturing overhead is allocated at the rate of $24 per direct manufacturing labor-hour.
2. Required
3. Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare the following budgets for 2020:
   1. 1. Revenues budget (in dollars)
   2. 2. What questions might the CEO ask the marketing manager when reviewing the revenues budget? Explain briefly.
   3. 3. Production budget (in units)
   4. 4. Direct material purchases budget (in quantities)
   5. 5. Direct material purchases budget (in dollars)
   6. 6. Direct manufacturing labor budget (in dollars)
   7. 7. Budgeted finished-goods inventory at December 31, 2020 (in dollars)
   8. 8. What questions might the CEO ask the production manager when reviewing the production, direct materials, and direct manufacturing labor budgets?
   9. 9. How does preparing a budget help Chen Corporation’s top management better manage the company?
4. 6-38. BUDGETED INCOME STATEMENT. (CMA, adapted) Spin Cycle Company is a manufacturer of commercial-grade exercise bikes that are sold to hotels and health clubs. Maintaining the bikes is an important area of customer satisfaction. Because of increased industry competition, Spin Cycle’s financial performance has suffered. However, the introduction of a new model and a predicted upturn in the economy are leading Spin Cycle’s managers to predict improved performance in 2021. The following income statement shows results for 2020:

1. Spin Cycle’s management team is preparing the 2021 budget and is studying the following information:
   1. 1. Selling prices of bikes are expected to increase by 15% due to the introduction of the new model. The selling price of each maintenance contract is expected to remain unchanged from 2020.
   2. 2. Bike sales in units are expected to increase by 10%, with a corresponding 10% growth in units of maintenance contracts.
   3. 3. Cost of each unit sold is expected to increase by 8% to pay for the necessary technology and quality improvements for the new model.
   4. 4. Marketing costs are expected to increase by $200,000.
   5. 5. Distribution costs vary in proportion to the number of bikes sold.
   6. 6. One additional maintenance technician is to be hired at a total cost of $60,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time.
   7. 7. There are no anticipated changes to administration costs.
   8. 8. There is no beginning or ending inventory of equipment.
   9. Required
   10. 1. Prepare a budgeted income statement for the year ending December 31, 2021.
   11. 2. How well does the budget align with Spin Cycle’s strategy?
   12. 3. How does preparing the budget help Spin Cycle’s management team better manage the company?
2. 6-39. RESPONSIBILITY IN A RESTAURANT. Janet Jefferson operates a group of 10 Fresh Stop food trucks that serve lunch to busy workers in the business center of a large Midwest city. One of the most popular items on the menu is a quinoa salad made with organic vegetables. The ingredients of the salad, as well as other menu items, are prepped in a central kitchen each morning, under the supervision of the company’s chef, Marie Beck, and loaded onto the trucks. The food truck operators assemble the salads as the orders are placed to ensure maximum freshness. Janet employs a purchasing agent, Bruce Atkins, who orders produce directly from local farmers. Bruce places produce orders at the beginning of each week, based on projected demand, and the farmers make deliveries every 2 days. In September 2020, an unexpected early freeze destroys the local farmer’s arugula that is a key ingredient of the quinoa salad. Bruce decides to replace the arugula order with baby spinach. Unhappy that Bruce made the change without her approval, Chef Marie sends a kitchen helper out to a retail organic grocer to purchase imported arugula at a significantly higher price. Her argument is that the spinach is not an acceptable substitution, and that the change will be noticed by the company’s many regular customers. By the following week, Bruce is able to purchase arugula from a southern grower that serves the company in the off-season. Janet is displeased with Bruce for not securing replacement wholesale arugula in time to avoid the substitution, and with Marie for making the unauthorized purchase at the much higher price.
3. Required
4. Who is responsible for the cost of the arugula? At what level is the cost controllable? Do you agree that Janet should be angry with the purchasing agent Bruce? With Marie? Why or why not?
5. 6-40. COMPREHENSIVE PROBLEM WITH ABC COSTING. Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for the month of April is given in the following tables:

1. Animal Gear accounts for direct materials using a FIFO cost-flow assumption.

1. Animal Gear uses a FIFO cost-flow assumption for finished-goods inventory.
2. Animal Gear uses an activity-based costing system and classifies overhead into three activity pools: Setup, Processing, and Inspection. Activity rates for these activities are $105 per setup-hour, $10 per machine-hour, and $15 per inspection-hour, respectively. Other information follows:

1. If necessary, round up to calculate number of batches.
2. Operating (nonmanufacturing) fixed costs for March equal $32,000, half of which are salaries. Salaries are expected to increase 5% in April. Other operating fixed costs will remain the same. The only variable operating cost is sales commission, equal to 1% of sales revenue.
3. Required
4. Prepare the following for April:
   1. 1. Revenues budget
   2. 2. Production budget in units
   3. 3. Direct material usage budget and direct material purchases budget
   4. 4. Direct manufacturing labor cost budget
   5. 5. Manufacturing overhead cost budgets for each of the three activities
   6. 6. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
   7. 7. Cost of goods sold budget
   8. 8. Operating (nonmanufacturing) costs budget
   9. 9. Budgeted income statement (ignore income taxes)
   10. 10. How does preparing the budget help Animal Gear’s management team better manage the company?
5. 6-41. CASH BUDGET (CONTINUATION OF 6-40). Refer to the information in Problem 6-40.
6. Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only to the public and accepts cash and credit cards; 90% of its sales are to customers using credit cards, for which AG gets the cash right away, less a 2% transaction fee.
7. Purchases of materials are on account. AG pays for half the purchases in the period of the purchase and the other half in the following period. At the end of March, AG owes suppliers $8,000.
8. AG plans to replace a machine in April at a net cash cost of $13,000.
9. Labor, other manufacturing costs, and operating (nonmanufacturing) costs are paid in cash in the month incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the manufacturing cost and $10,000 of the operating (nonmanufacturing) cost for April.
10. AG currently has a $2,000 loan at an annual interest rate of 12%. The interest is paid at the end of each month. If AG has more than $7,000 cash at the end of April, it will pay back the loan. AG owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on hand at the end of March.
    1. Required
    2. 1. Prepare a cash budget for April for Animal Gear.
    3. 2. Why do Animal Gear’s managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?
11. 6-42. COMPREHENSIVE OPERATING BUDGET. Skulas, Inc., manufactures and sells snowboards. Skulas manufactures a single model, the Pipex. In late 2020, Skulas’s management accountant gathered the following data to prepare budgets for January 2021:

1. Skulas’s CEO expects to sell 2,900 snowboards during January 2021 at an estimated retail price of $650 per board. Further, the CEO expects a 2021 beginning inventory of 500 snowboards and would like to end January 2021 with 200 snowboards in stock.

1. Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also $81,000 in fixed manufacturing overhead costs budgeted for January 2021. Skulas combines both variable and fixed manufacturing overhead into a single rate based on direct manufacturing labor-hours. Variable marketing costs are allocated at the rate of $250 per sales visit. The marketing plan calls for 38 sales visits during January 2021. Finally, there are $35,000 in fixed operating (nonmanufacturing) costs budgeted for January 2021.
2. Other data include the following:

1. The inventoriable unit cost for ending finished-goods inventory on December 31, 2020, is $374.80. Assume Skulas uses a FIFO inventory method for both direct materials and finished goods. Ignore work in process in your calculations.
   1. Required
   2. 1. Prepare the January 2021 revenues budget (in dollars).
   3. 2. Prepare the January 2021 production budget (in units).
   4. 3. Prepare the direct material usage and purchases budgets for January 2021.
   5. 4. Prepare a direct manufacturing labor costs budget for January 2021.
   6. 5. Prepare a manufacturing overhead costs budget for January 2021.
   7. 6. What is the budgeted manufacturing overhead rate for January 2021?
   8. 7. What is the budgeted manufacturing overhead cost per output unit in January 2021?
   9. 8. Calculate the cost of a snowboard manufactured in January 2021.
   10. 9. Prepare an ending inventory budget for both direct materials and finished goods for January 2021.
   11. 10. Prepare a cost of goods sold budget for January 2021.
   12. 11. Prepare the budgeted operating income statement for Skulas, Inc., for January 2021.
   13. 12. What questions might the CEO ask the management team when reviewing the budget? Should the CEO set stretch targets? Explain briefly.
   14. 13. How does preparing the budget help Skulas’s management team better manage the company?
2. 6-43. CASH BUDGETING, BUDGETED BALANCE SHEET (CONTINUATION OF 6-42) (APPENDIX).
3. Refer to the information in Problem 6-42.
4. Budgeted balances at January 31, 2021, are as follows:

1. Selected budget information for December 2020 follows:

1. Customer invoices are payable within 30 days. From past experience, Skulas’s accountant projects 40% of invoices will be collected in the month invoiced, and 60% will be collected in the following month.
2. Accounts payable relates only to the purchase of direct materials. Direct materials are purchased on credit with 50% of direct materials purchases paid during the month of the purchase, and 50% paid in the month following purchase.
3. Fixed manufacturing overhead costs include $64,000 of depreciation costs and fixed operating (nonmanufacturing) overhead costs include $10,000 of depreciation costs. Direct manufacturing labor and the remaining manufacturing and operating (nonmanufacturing) overhead costs are paid monthly.
4. All property, plant, and equipment acquired during January 2021 were purchased on credit and did not entail any outflow of cash.
5. There were no borrowings or repayments with respect to long-term liabilities in January 2021.
6. On December 15, 2020, Skulas’s board of directors voted to pay a $160,000 dividend to stockholders on January 31, 2021.
   1. Required
   2. 1. Prepare a cash budget for January 2021. Show supporting schedules for the calculation of collection of receivables and payments of accounts payable, and for disbursements for fixed manufacturing and operating (nonmanufacturing) overhead.
   3. 2. Skulas is interested in maintaining a minimum cash balance of $120,000 at the end of each month. Will Skulas be in a position to pay the $160,000 dividend on January 31?
   4. 3. Why do Skulas’s managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?
   5. 4. Prepare a budgeted balance sheet for January 31, 2021, by calculating the January 31, 2021, balances in (a) cash, (b) accounts receivable, (c) inventory, (d) accounts payable, and (e) plugging in the balance for stockholders’ equity.
7. 6-44. COMPREHENSIVE PROBLEM; ABC MANUFACTURING, TWO PRODUCTS. Butler, Inc., operates at capacity and makes wooden playground equipment. Although Butler’s swing sets and play forts are a matching set, they are sold individually and so the sales mix is not 1:1. Butler’s management is planning its annual budget for fiscal year 2021. Here is information for 2021:

1. Butler accounts for direct materials using a FIFO cost flow assumption.

1. Butler uses a FIFO cost-flow assumption for finished-goods inventory.
2. Swing sets are manufactured in batches of 20, and play forts are manufactured in batches of 10. It takes 2 hours to set up for a batch of swing sets and 1 hour to set up for a batch of play forts.
3. Butler uses activity-based costing and has classified all overhead costs as shown in the following table. Budgeted fixed overhead costs vary with capacity. Butler operates at capacity so budgeted fixed overhead cost per unit equals the budgeted fixed overhead costs divided by the budgeted quantities of the cost allocation base.

1. Delivery trucks transport either 10 swing sets or 5 play forts in each delivery.
2. Required 
3. Do the following for the year 2021:
   1. 1. Prepare the revenues budget.
   2. 2. Use the revenues budget to do the following:
      1. a. Find the budgeted allocation rate for marketing costs.
      2. b. Find the budgeted number of deliveries and allocation rate for distribution costs.
   3. 3. Prepare the production budget in units.
   4. 4. Use the production budget to find the following:
      1. a. The budgeted number of setups and setup-hours and the allocation rate for setup costs.
      2. b. The budgeted total machine-hours and the allocation rate for processing costs.
      3. c. The budgeted total units produced and the allocation rate for inspection costs.
   5. 5. Prepare the direct material usage budget and the direct material purchases budget in both units and dollars; round to whole dollars.
   6. 6. Use the direct material usage budget to find the budgeted allocation rate for materials-handling costs.
   7. 7. Prepare the direct manufacturing labor cost budget.
   8. 8. Prepare the manufacturing overhead cost budget for materials handling, setup, processing, and inspection costs.
   9. 9. Prepare the budgeted unit cost of ending finished-goods inventory and ending inventories budget.
   10. 10. Prepare the cost of goods sold budget.
   11. 11. Prepare the operating (nonmanufacturing) overhead costs budget for marketing and distribution.
   12. 12. Prepare a budgeted operating income statement (ignore income taxes).
   13. 13. How does preparing the budget help Butler’s management team better manage the company?
4. 6-45. CASH BUDGET (CONTINUATION OF 6-44) (APPENDIX). Refer to the information in Problem 6-44.
5. All purchases made in a given month are paid for in the following month, and direct material purchases make up all of the accounts payable balance and are reflected in the accounts payable balances at the beginning and the end of the year.
6. Sales are made to customers with terms net 45 days. Fifty percent of a month’s sales are collected in the month of the sale, 25% are collected in the month following the sale, and 25% are collected 2 months after the sale and are reflected in the accounts receivables balances at the beginning and the end of the year.
7. Direct manufacturing labor, variable manufacturing overhead, and variable marketing costs are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, 60% of fixed marketing costs, and 100% of fixed distribution costs are depreciation expenses. The remaining fixed manufacturing overhead and marketing costs are paid as they are incurred.
8. Selected balances for December 31, 2020, follow:

1. Selected budget information for December 2021 follows:

1. Butler has budgeted to purchase equipment costing $610,000 for cash during 2021. Butler desires a minimum cash balance of $25,000. The company has a line of credit from which it may borrow in increments of $1,000 at an interest rate of 10% per year. By special arrangement, with the bank, Butler pays interest when repaying the principal, which only needs to be repaid in 2022.
   1. Required
   2. 1. Prepare a cash budget for 2021. If Butler must borrow cash to meet its desired ending cash balance, show the amount that must be borrowed.
   3. 2. Does the cash budget for 2021 give Butler’s managers all of the information necessary to manage cash in 2021? How might that be improved?
   4. 3. What insight does the cash budget give to Butler’s managers that the budgeted operating income statement does not?
2. 6-46. BUDGETING AND ETHICS. Jayzee Company manufactures a variety of products in a variety of departments and evaluates departments and departmental managers by comparing actual cost and output relative to the budget. Departmental managers help create the budgets and usually provide information about input quantities for materials, labor, and overhead costs.
3. Kurt Jackson is the manager of the department that produces product Z. Kurt has estimated these inputs for product Z:

1. The department produces about 100 units of product Z each day. Kurt’s department always gets excellent evaluations, sometimes exceeding budgeted production quantities. For each 100 units of product Z produced, the company uses, on average, about 48 hours of direct manufacturing labor (eight people working 6 hours each), 790 pounds of material, and 39.5 machine-hours.
2. Top management of Jayzee Company has decided to implement budget standards that will challenge the workers in each department, and it has asked Kurt to design more challenging input standards for product Z. Kurt provides top management with the following input quantities:

1. Required
2. Discuss the following:
   1. 1. Are these budget standards challenging for the department that produces product Z?
   2. 2. Why do you suppose Kurt picked these particular standards?
   3. 3. What steps can Jayzee Company’s top management take to make sure Kurt’s standards really meet the goals of the firm?
3. 6-47. KAIZEN BUDGETING FOR CARBON EMISSIONS. Angler Chemical Company currently operates three manufacturing plants in Colorado, Utah, and Arizona. Annual carbon emissions for these plants in the first quarter of 2021 are140,000 metric tons per quarter (or 560,000 metric tons in 2021). Angler management is investigating improved manufacturing techniques that will reduce annual carbon emissions to below 505,000 metric tons so that the company can meet Environmental Protection Agency guidelines in 2022. Costs and benefits are as follows:

1. Angler Management has chosen to use Kaizen budgeting to achieve its goal for carbon emissions.
   1. Required
   2. 1. If Angler reduces emissions by 2% each quarter, beginning with the second quarter of 2021, will the company reach its goal of 505,000 metric tons in 2022?
   3. 2. What would be the net financial cost or benefit of their plan? Ignore the time value of money.
   4. 3. What factors other than cost might weigh into Angler’s decision to carry out this plan? What do you recommend Angler to do?
2. 6-48. COMPREHENSIVE BUDGETING PROBLEM; ACTIVITY-BASED COSTING, OPERATING AND FINANCIAL BUDGETS. Tyva makes a very popular undyed cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth-covered wooden soles. Tyva is preparing its budget for June 2021 and has estimated sales based on past experience. Other information for the month of June follows:

1. Tyva accounts for direct materials using a FIFO cost-flow assumption.

1. Tyva uses a FIFO cost-flow assumption for finished-goods inventory.
2. All the sandals are made in batches of 50 pairs of sandals. Tyva incurs manufacturing overhead costs, marketing and general administration, and shipping costs. Besides materials and labor, manufacturing costs include setup, processing, and inspection costs. Tyva ships 40 pairs of sandals per shipment. Tyva uses activity-based costing and has classified all overhead costs for the month of June as shown in the following chart:

1. Required
2. 1. Prepare each of the following for June:
   1. a. Revenues budget
   2. b. Production budget in units
   3. c. Direct material usage budget and direct material purchases budget in both units and dollars; round to dollars
   4. d. Direct manufacturing labor cost budget
   5. e. Manufacturing overhead cost budgets for setup, processing, and inspection activities
   6. f. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
   7. g. Cost of goods sold budget
   8. h. Marketing and general administration and shipping costs budget
3. 2. Tyva’s balance sheet for May 31 follows.

1. Use the balance sheet and the following information to prepare a cash budget for Tyva for June. Round to dollars.
   1. • All sales are on account; 60% are collected in the month of the sale, 38% are collected the following month, and 2% are never collected and written off as bad debts.
   2. • All purchases of materials are on account. Tyva pays for 80% of purchases in the month of purchase and 20% in the following month.
   3. • All other costs are paid in the month incurred, including the declaration and payment of a $15,000 cash dividend in June.
   4. • Tyva is making monthly interest payments of 0.5% (6% per year) on a $150,000 long-term loan.
   5. • Tyva plans to pay the $10,800 of taxes owed as of May 31 in the month of June. Income tax expense for June is $25,107, which will be paid in July.
   6. • 30% of processing, setup, and inspection costs and 10% of marketing and general administration and shipping costs are depreciation.
2. 3. Prepare a budgeted income statement for June and a budgeted balance sheet for Tyva as of June 30, 2021.