Chapter 6 Solutions Horngren Cost Accounting

CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
The Short-Answer Questions, Exercises, and Problems marked with can be found on MyLab:
Accounting. Students can practise them as often as they want, and most feature step-by-step guided
instructions to help find the right answer. Items marked with have Excel templates available on
MyLab for students to use.
SHORT-ANSWER QUESTIONS
6-1 The budgeting cycle includes the following elements:
a. Planning the performance of the organization as a whole and of its subunits. The entire
management team agrees as to what is expected.
b. Providing a frame of reference, a set of specific expectations against which the actual results
can be compared.
c. Investigating variations from the plans. If necessary, corrective action follows investigation.
d. Planning again, considering feedback and changed conditions.
6-2 A master budget is a single comprehensive document that combines information from
many individual budgeted statements. The term “master” refers to its being a comprehensive
organization-wide set of budgets that coordinates all financial projections for a set period of time.
6-3 Plans can and sometimes should be changed if the feedback indicates an assumption
used in the budget was wrong. If the feedback indicates the plan was reasonable, then it is
necessary to understand the issues preventing the achievement of the planned results and
implement an appropriate remedy.
6-4 Strategy, plans, and budgets are interrelated and affect one another. Strategy is a broad
term that usually means selection of overall objectives. Strategic analysis underlies both long-run
and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide
feedback to managers about the likely effects of their strategic plans. Managers use this feedback
to revise their strategic plans.
6-5 Yes, budgeted performance is better than past performance for judging managers.
Why? Mainly because inefficiencies included in past results can be detected and eliminated in
budgeting. Also, new opportunities in the future, which did not exist in the past, may otherwise be
ignored if past performance is used.
6-6 A company that shares its own internal budget information with other companies can
gain multiple benefits. One benefit is better coordination with suppliers, which can reduce the
likelihood of supply shortages. Better coordination with customers can result in increased sales as
demand by customers is less likely to exceed supply. Better coordination across the whole supply
chain can also help a company reduce inventories and thus reduce the costs of holding inventories.
Suppliers and customers become “partners in profit.” Here satisfied customers sell the final product
to new customers.
Copyright © 2019 Pearson Canada Inc.

6-1
Instructor’s Solutions Manual for Cost Accounting, Eighth Canadian Edition
6-7 A rolling budget is a budget or plan that is always available for a specified future
period by adding a month, quarter, or year in the future as the month, quarter, or year just ended is
dropped. For example, a 12-month rolling budget for the March 2018 to February 2019 period
becomes a 12-month rolling budget for the April 2018 to March 2019 period the next month, and
so on.
6-8 The steps in preparing an operating budget are:

1. Prepare the revenue budget
2. Prepare the production budget (in units)
3. Prepare the direct materials usage budget and direct materials purchases budget
4. Prepare the direct manufacturing labour budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonproduction costs budget
9. Prepare the budgeted operating income statement
6-9 The revenue budget is typically the cornerstone for budgeting because production (and
hence costs) and inventory levels generally depend on the forecasted level of demand and revenue.
6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to

examine how budgeted amounts change with changes in the underlying assumptions. This helps
managers to monitor those assumptions that are most critical to a company attaining its budget and
to make timely adjustments to plans when appropriate.
6-11 Padding is when budget figures are either inflated (in the case of expenses) or deflated
(in the case of revenues) in order to make it easier to achieve them during the actual operations of
the firm. This makes it easier for managers to meet their budget targets and earn performance
bonuses. Senior managers should look at outside (external) data to see if the internal budgets are
reasonable. Senior managers should also be familiar with the operations of the firms—this will
make it easier for them to spot unreasonable budget estimates.
6-12 Non-output-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. Non-output-based cost drivers, such as the number of part
numbers, number of batches, and number of new products, can be used with ABB.
6-13 The choice of a responsibility centre type guides the variables to be included in the
budgeting exercise. For example, if a revenue centre is chosen, the focus will be on variables that
assist in forecasting revenue. Factors related to, say, costs of the investment base will be
considered only if they assist in forecasting revenue.
6-14 Equal or across-the-board reductions is a strategy that penalizes honest business

functions and rewards those that pad the budgets. The strategy produces a perverse incentive,
rewarding the overstatement of budgeted costs and the understatement of budgeted revenue.

6-2
Chapter 6: Master Budget and Responsibility Accounting
EXERCISES
6-15 (10 min.) Terminology.
A cash cycle, also known as an operating cycle, is the movement of cash arising from business
functions to inventories, to receivables, and back to cash when outputs are sold. It is a self-
liquidating cycle where all costs of a corporation are recovered when output is sold. Budgetary
slack is the practice of underestimating revenue and overestimating costs to make budget
constraints less challenging. Once the corporate budget is produced, all managers make a
commitment to reach budget targets. They are responsible for controllable cost that must be at or
below the budget constraint during each reporting time period. Some companies produce a rolling
budget that adds a reporting time period as one is completed. An investment budget affects the flow
in and out of cash either to make the investment or to pay to finance it.
6-16 (15 min.) Responsibility and controllability.

1. (a) Salesperson
(b) VP of sales
Permit the salesperson to offer a reasonable discount to customers, but require that he/she
clear bigger discounts with the VP. Also, base his/her bonus/performance evaluation not just
on revenue generated, but also on margins (or, ability to meet budget).
2. (a) VP of sales
(b) VP of sales
VP of sales should compare budgeted sales with actuals, and ask for an analysis of all the sales
during the quarter. Discuss with salespeople why so many discounts are being offered—and if
they are really needed to close each sale. Are our prices too high (i.e., uncompetitive)?
3. (a) Manager, shipping department
(b) Manager or director of operations (including shipping)
The shipping department manager must report delays more regularly and request additional
capacity in a timely manner. Operations manager should ask for a review of shipping
capacity utilization, and consider expanding the department.
4. (a) HR department
(b) Production supervisor
The production supervisor should devise his or her own educational standards that all new
plant employees are held to before they are allowed to work on the plant floor. Offer
remedial in-plant training to those workers who show promise. Be very specific about the
types of skills required when using the HR department to hire plant workers. Test the
workers periodically for required skills.
5. (a) Production supervisor
Get feedback from the workers, analyze it, and act on it. Get extra coaching and training
from experienced mentors.
6. (a) Maintenance department
First, get the requisite maintenance done on the machines. Make sure that the maintenance
department head clearly understands the repercussions of poor maintenance. Discuss and
establish maintenance standards that must be met (frequency of maintenance and tolerance
limits, for example). Test and keep a log of the maintenance work.

6-3
6-17 (30 min.) Budgeting: direct material usage, manufacturing cost, and gross
margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Blue Rugs (100,000 rugs × 30 skeins and 0.5 L.) 3,000,0000 skeins 50,000 L.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Wool: 349,000 skeins $ 715,450
Dye: 5,000 litres $ 24,850
To be purchased this period
Wool: (3,000,000 - 349,000) skeins × $2 per skein 5,302,000
Dye: (50,000 – 5,000) L. × $5 per L. _________ 225,000
Direct materials to be used this period: (a) + (b) $6,017,450 $ 249,850 $6,267,300
2.
Weaving budgeted = $18,852,000
= $3.3664 per DMLH
overhead rate 5,600,000 DMLH
Dyeing budgeted = $12,809,000 = $28.4644 per MH

overhead rate 450,000 MH
3. Budgeted unit cost of blue rug

Input per
Cost per Unit of
Unit of Input Output Total
Wool $2 30 skeins $ 60.00
Dye 5 0.5 L. 2.50
Direct manufacturing
labour 15 56 hrs. 840.00
1
Dyeing overhead 28.4644 4.5 mach-hrs. 128.09
Weaving overhead 3.3664 56 DMLH 188.52
Total $1219.11
1
0.15 machine hour per skein  30 skeins per rug = 4.5 machine-hrs. per rug.
4. Revenue budget
Selling
Units Price Total Revenue
Blue Rugs 100,000 $2,000 $200,000,000
Blue Rugs 95,000 $2,000 $190,000,000

6-4
5a. Cost of goods sold budget

Sales = 100,000 rugs
From Schedule Total
Beginning finished goods inventory $ 0
Direct materials used $ 6,267,300
Direct manufacturing labour
($840 × 100,000) 84,000,000
Dyeing overhead ($128.09 × 100,000) 12,809,000
Weaving overhead ($188.52 × 100,000) 18,852,000 121,928,300
Cost of goods available for sale 121,928,300
Deduct ending finished goods inventory 0
Cost of goods sold $121,928,300
5b. Cost of Goods Sold Budget

Sales = 95,000 rugs
From Schedule Total
Direct manufacturing labour
($840 × 100,000) 84,000,000
Dyeing overhead
($128.09 × 100,000) 12,809,000
Weaving overhead
($188.52 × 100,000) 18,852,000 121,928,300
Deduct ending finished goods inventory
($1,219.11 × 5,000) 6,095,550
6.
100,000 rugs sold 95,000 rugs sold
Revenue $200,000,000 $190,000,000
Less: Cost of goods sold 121,928,300 115,832,750
Gross margin $ 78,071,700 $ 74,167,250

6-5
6-18 (15 min.) Sales budget, service setting.

1.
2018 At 2018 Expected 2019 Expected 2019
McGrath & Sons Volume Selling Prices Change in Volume Volume
Radon Tests 11,000 $250 +10% 12,100
Lead Tests 15,200 $200 -10% 13,680
McGrath & Sons Sales Budget
For the Year Ended December 31, 2019
Selling Price Units Sold Total Revenue
Radon Tests $250 12,100 $3,025,000
Lead Tests $200 13,680 2,736,000
$5,761,000
2.
2018 Planned 2019 Expected 2019 Expected 2019
McGrath & Sons Volume Selling Prices Change in Volume Volume
Radon Tests 11,000 $250 +10% 12,100
Lead Tests 15,200 $190 -5% 14,440
McGrath & Sons Sales Budget

For the Year Ended December 31, 2019
Selling Price Units Sold Total Revenue

Radon Tests $250 12,100 $3,025,000
Lead Tests $190 14,440 2,743,600
$5,768,600
Expected revenue at the new 2019 prices are greater than the expected 2018 revenue of
$5,623,500 if the prices are unchanged. So, if the goal is to maximize sales revenue and if
Jim McGrath’s forecasts are reliable, the company should lower its price for a lead test in
2019.
6-19 (5 min.) Sales and production budget.
Budgeted sales in units 135,000

Add target ending finished goods inventory 16,300
Total requirements 151,300
Deduct beginning finished goods inventory 9,700
Units to be produced 141,600

6-6
6-20 (5 min.) Direct materials budget.
Direct materials to be used in production (bottles) 2,100,000

Add target ending direct materials inventory (bottles) 55,000
Total requirements (bottles) 2,155,000
Deduct beginning direct materials inventory (bottles) 23,700
Direct materials to be purchased (bottles) 2,131,300
6-21 (10 min.) Budgeting material purchases.

Finished Goods
(units)
Budgeted sales 52,250
Direct Materials
(in litres)
Direct materials needed for production (54,350  3) 163,050
Add target ending direct materials inventory 110,000
Deduct beginning direct materials inventory 117,350
Direct materials to be purchased 155,700
6-22 (30 min.) Revenues and production budget.

1.
Selling Units Total
Price Sold Revenues
12-ounce bottles $0.30 6,000,000a $1,800,000
1-gallon units 1.60 1,560,000b 2,496,000
$4,296,000
a
500,000 × 12 months = 6,000,000
b
130,000 × 12 months = 1,560,000
2. Budgeted unit sales (12-ounce bottles) 6,000,000

Total requirements 6,660,000
Units to be produced 5,680,000

6-7
3. Beginning = Budgeted + Target  Budgeted

inventory sales ending inventory production
= 1,560,000 + 300,000  1,200,000
= 660,000 1-gallon units
6-23 (30 min.) Budgeting; direct material usage, manufacturing cost, and gross
margin.
1.
Material
Wool Dye Total
Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.) 7,200,000 skeins 160,000 gal.
Cost Budget
Available from beginning direct materials inventory:
(a)
Wool: 458,000 skeins $ 961,800
Dye: 4,000 gallons $ 23,680
To be purchased this period: (b)
Wool: (7,200,000 – 458,000) skeins × $2 per skein 13,484,000
Dye: (160,000 – 4,000) gal. × $6 per gal. 936,000
Direct materials to be used this period: (a) + (b) $14,445,800 $ 959,680 $15,405,480
2. Weaving budgeted = $31, 620, 000

= $2.55 per DMLH
overhead rate 12, 400, 000 DMLH
Dyeing budgeted = $17, 280, 000 = $12 per MH

overhead rate 1, 440, 000 MH

6-8
3.
Budgeted Unit Cost of Blue Rug
Input per
Cost per Unit of
Unit of Input Output Total
Wool $ 2 36 skeins $ 72.00
Dye 6 0.8 gal. 4.80
Direct manufacturing labour 13 62 hrs. 806.00
Dyeing overhead 12 7.21 mach-hrs. 86.40
Weaving overhead 2.55 62 DMLH 158.10
Total $1,127.30
1
0.2 machine hour per skein  36 skeins per rug = 7.2 machine-hrs. per rug.
4.
Revenue Budget
Selling
Units Price Total Revenues
Blue Rugs 200,000 $2,000 $400,000,000
Blue Rugs 185,000 $2,000 $370,000,000
5a.
Cost of Goods Sold Budget
From Schedule Total

Direct manufacturing labour ($806 × 200,000) 161,200,000
Dyeing overhead ($86.40 × 200,000) 17,280,000

6-9
5b.
Production = 200,000 rugs
From Schedule Total

Direct manufacturing labour ($806 ×
200,000) 161,200,000
Dyeing overhead ($86.40 × 200,000) 17,280,000
Deduct ending finished goods inventory
($1,127.30 × 15,000) 16,909,500
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar
expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of
goods sold budget will be as follows. The Cost of Goods Sold budget is higher because the fixed
overhead costs in the dyeing and weaving cost pools do not get “inventoried” in the closing
inventory of rugs but are instead expensed in the current period.

Cost of Goods Sold Budget for Producing 185,000 rugs
From Schedule Total

Direct materials useda $ 14,253,480
Direct manufacturing labour ($806 × 185,000) 149,110,000
Variable dyeing overhead ($70.55b × 185,000) 13,051,750
Fixed dyeing overheadc 3,170,000
Variable weaving overhead ($119.15d × 185,000) 22,042750
Fixed weaving overheade 7,790,000 209,417,980
a
[$961,800 + (185,000 rugs×36 skeins−458,000)×$2] + [$23,680 + (185,000 rugs×0.8 gallons−4,000)×$6]
b
Variable dyeing overhead cost per rug = ($6,560,000 + $7,550,000) ÷ 200,000 rugs = $70.55 per rug
c
Fixed dyeing overhead costs = $347,000 + $2,100,000 + $723,000 = $3,170,000
d
Variable weaving overhead cost per rug = ($15,400,000 + $5,540,000 + $2,890,000) ÷ 200,000 rugs = $119.15 per rug
e
Fixed weaving overhead costs = $1,700,000 + $274,000 + $5,816,000 = $7,790,000

6-10
6.
185,000 rugs sold 185,000 rugs sold
200,000 rugs sold 200,000 rugs produced 185,000 rugs produced
Revenue $400,000,000 $370,000,000 $370,000,000
Less: Cost of goods sold 225,505,480 208,595,980 209,417,980
Gross margin $174,494,520 $161,404,020 $160,582,020
7. If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce
less to reduce variable costs and inventory costs.
8. Top management can look for ways to increase (stretch) sales and improve quality,
efficiency, and input prices to reduce costs in each cost category such as direct materials, direct
manufacturing labour, and overhead costs. Top management can also use the budget to
coordinate and communicate across different parts of the organization, create a framework for
judging performance and facilitating learning, and motivate managers and employees to achieve
“stretch” targets of higher revenues and lower costs.
6-24 (15-20 min.) Revenue, production, and purchases budget.
1. 985,000 motorcycles  505,000 yen = 497,425,000,000 yen
2. Budgeted sales (units) 985,000

3. Direct materials to be used in production, 948,000  2 1,896,000

Add target ending direct materials inventory 28,000
Deduct beginning direct materials inventory 19,000
Direct materials to be purchased 1,905,000
Cost per wheel in yen 21,300
Direct materials purchase cost in yen 40,576,500,000
Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very
close to the major manufacturer. Inventories are controlled by just-in-time (JIT) and similar
systems. Indeed, some direct materials inventories are almost nonexistent.

6-11
6-25 (15-25 min.) Budgets for production and direct manufacturing labour.
All Frame Company
Budget for Production and Direct Manufacturing Labour
For the Quarter Ended March 31, 2019
January February March Quarter
Budgeted sales (units) 10,000 12,000 8,000 30,000
Add target ending finished goods inventory* (units) 16,000 12,500 13,500 13,500
Total requirements (units) 26,000 24,500 21,500 43,500
Deduct beginning finished goods inventory (units) 16,000 16,000 12,500 16,000
Units to be produced 10,000 8,500 9,000 27,500
Direct manufacturing labour-hours (DMLH) per unit  2.0  2.0  1.5
Total hours of direct manufacturing labour time needed 20,000 17,000 13,500 50,500
Direct manufacturing labour costs:
Wages ($10.00 per DMLH) $200,000 $170,000 $135,000 $505,000
Pension contributions ($0.50 per DMLH) 10,000 8,500 6,750 25,250
Workers’ compensation insurance ($0.15 per DMLH) 3,000 2,550 2,025 7,575
Employee medical insurance ($0.40 per DMLH) 8,000 6,800 5,400 20,200
Employment insurance (employer’s share)
($10.00  0.075 = $0.75 per DMLH) 15,000 12,750 10,125 37,875
Total direct manufacturing labour costs $236,000 $200,600 $159,300 $595,900
*100% of the first following month’s sales plus 50% of the second following month’s sales.
Note that the employee employment insurance levy of 7.5% is irrelevant. Such taxes are withheld from employees’ wages and paid to the
government by the employer on behalf of the employees; therefore, the employee 7.5% amounts are not additional costs to the employer.

6-12
6-26 (30 min.) Cash flow analysis.

1. The cash that TabComp Inc. can expect to collect during April 2019 is calculated below:
April cash receipts:
April cash sales ($400,000  .25) $100,000
April credit card sales ($400,000  .30  .96) 115,200
Collections on account:
March ($480,000  .45  .70) 151,200
February ($500,000  .45  .28) 63,000
January (uncollectable–not relevant) 0
Total collections $429,400
2. a. The projected number of the MZB-33 computer hardware units that TabComp Inc.
will order on January 25, 2019, is calculated as follows.
MZB-33
Units
March sales 110
Plus: Ending inventorya 27
Total needed 137
Less: Beginning inventoryb 33
Projected purchases in units 104
a
0.30  90 unit sales in April
b
0.30  110 unit sales in March
b.
Selling price = $2,025,000  675 units, or for March, $330,000 110 units
= $3,000 per unit
Purchase price per unit, 70%  $3,000 $ 2,100
Projected unit purchases × 104
Total MZB-33 purchases, $1,800  104 $218,400
3. Monthly cash budgets are prepared by companies such as TabComp Inc. in order to plan
for their cash needs. This means identifying when both excess cash and cash shortages may
occur. A company needs to know when cash shortages will occur so that prior
arrangements can be made with lending institutions in order to have cash available for
borrowing when the company needs it. At the same time, a company should be aware of
when there will be excess cash available for investment or for repaying loans.

6-13
6-27 (20-30 min.) Activity-based budgeting.
1.
Cost Soft Fresh Packaged
Activity Hierarchy Drinks Produce Food Total
Ordering
$90  14; 24; 14 Batch-level $1,260 $ 2,160 $1,260 $ 4,680
Delivery
$82  12; 62; 19 Batch-level 984 5,084 1,558 7,626
Shelf-stocking
$21  16; 172; 94 Output-unit-level 336 3,612 1,974 5,922
Customer support
$0.18  4,600; 34,200; 10,750 Output-unit-level 828 6,156 1,935 8,919
Total budgeted indirect costs $3,408 $17,012 $6,727 $27,147
Percentage of total indirect costs 13% 63% 25%

(subject to rounding)
2. Refer to the last row of the table in requirement 1. Fresh produce, which probably
represents the smallest portion of COGS, is the product category that consumes the
largest share (63%) of the indirect resources. Fresh produce demands the highest level of
ordering, delivery, shelf-stocking, and customer support resources of all three product
categories—it has to be ordered, delivered, and stocked in small, perishable batches, and
supermarket customers often ask for a lot of guidance on fresh produce items.
3. An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each
activity area is:

Ordering Batch-level 27% 46% 27% 100%
Delivery Batch-level 13 67 20 100
Shelf-stocking Output-unit-level 6 61 33 100
Customer support Output-unit-level 9 69 22 100
By recognizing these differences, YM managers are better able to budget for different
unit sales levels and different mixes of individual product-line items sold. Using a single
cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support
activities) across product lines which does not occur at YM. Other benefits cited by
managers include: (1) better identification of resource needs, (2) clearer linking of costs
with staff responsibilities, and (3) identification of budgetary slack.

6-14
6-28 (20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-27).

1.
Budgeted Cost-Driver Rates
Activity Cost Hierarchy January February March
Ordering Batch-level $90.00 $89.82 $89.64
Delivery Batch-level 82.00 81.84 81.67
Shelf-stocking Output-unit-level 21.00 20.96 20.92
Customer support Output-unit-level 0.18 0.18 0.179
The March 2019 rates can be used to compute the total budgeted cost for each activity
area in March 2019:

Ordering Batch-level
$89.64  14; 24; 14
Delivery Batch-level $1,255 $2,151 $1,255 $4,661
$81.67  12; 62; 19
Shelf-stocking Output-unit- 980 5,064 1,552 7,596
$20.92  16; 172; level
94 Output-unit- 335 3,598 1,966 5,899
Customer support level
$0.179  4,600;
34,200; 10,750 823 6,122 1,924 8,869
Total $3,393 $16,935 $6,697 $27,025
2. A kaizen budgeting approach signals management’s commitment to systematic cost

reduction. Compare the budgeted costs from Exercises 6-27 and 6-28.
Shelf- Customer
Ordering Delivery Stocking Support
Exercise 6-27 $4,680 $7,626 $5,922 $8,919
Exercise 6-28 (Kaizen) 4,661 7,596 5,899 8,869
The kaizen budget number will show unfavourable variances for managers whose
activities do not meet the required monthly cost reductions. This likely will put more
pressure on managers to creatively seek out cost reductions by working “smarter” within
YM or by having “better” interactions with suppliers or customers.
One limitation of kaizen budgeting, as illustrated in this question, is that it
assumes small incremental improvements each month. It is possible that some cost
improvements arise from large discontinuous changes in operating processes, supplier
networks, or customer interactions. Companies need to highlight the importance of
seeking these large discontinuous improvements as well as the small incremental
improvements.

6-15
PROBLEMS
6-29 (30–40 min.) Revenue and production budgets.
This is a routine budgeting problem. The key to its solution is to compute the correct quantities of
finished goods and direct materials. Use the following general formula:
 Budgeted   Target   Budgeted 

       Beginning 
 production 
  ending 
  sales or  _  inventory 
 or purchases   inventory   materials used   
     
1. Fraser Corporation
Revenue Budget
For 2019
Units Price Total

Widget 60,000 $198 $ 11,880,000
Thingamajig 40,000 300 12,000,000
Projected sales $23,880,000
Production Budget (in units)
For 2019
Widget Thingamajig
Budgeted sales in units 60,000 40,000
Add target finished goods inventories,
December 31, 2019 27,000 11,000
Total requirements 87,000 51,000
Deduct finished goods inventories,
January 1, 2019 22,000 10,000
Units to be produced 65,000 41,000

6-16
Direct Materials Purchases Budget (in quantities) for 2019
Direct Materials
A B C
Direct materials to be used in production
• Widget (budgeted production of 65,000
units times 4 kg of A, 2 kg of B) 260,000 130,000 —
• Thingamajig (budgeted production of 41,000
units times 5 kg of A, 3 kg of B, 1 unit of C) 205,000 123,000 41,000
Total 465,000 253,000 41,000
Add target ending inventories, December 31, 2019 36,000 32,000 7,000
Total requirements in quantities 501,000 285,000 48,000
Deduct beginning inventories, January 1, 2019 32,000 29,000 6,000
Direct materials to be purchased (quantities) 469,000 256,000 42,000
Direct Materials Purchases Budget (in dollars) for 2019
Budgeted Expected
Purchases Purchase
(Quantities) Price per Unit Total
Direct material A 469,000 $14 $6,566,000
Direct material B 256,000 7 1,792,000
Direct material C 42,000 5 210,000
Budgeted purchases $8,568,000
Direct Manufacturing Labour Budget for 2019
Direct
Budgeted Manufacturing Rate
Production Labour-Hours Total per
(Units) per Unit Hours Hour Total
Widget 65,000 2 130,000 $15 $1,950,000
Thingamajig 41,000 3 123,000 19 2,337,000
Total $4,287,000

6-17
Budgeted Finished Goods Inventory
At December 31, 2019
Widget:
Direct materials costs:
A, 4 kilograms at $14 $56
B, 2 kilograms at $7 14 $70
Direct manufacturing labour costs, 2 hours at $15 30
Manufacturing overhead costs at $24 per direct
manufacturing labour-hour (2 hours) 48
Budgeted manufacturing costs per unit $148
Finished goods inventory of Widget

$148  27,000 units $3,996,000
Thingamajig:
A, 5 kilograms at $14 $70
B, 3 kilograms at $7 21
C, 1 each at $5 5 $96
Direct manufacturing labour costs, 3 hours at $19 57
manufacturing labour-hour (3 hours) 72
Finished goods inventory of Thingamajig

$225  11,000 units 2,475,000
Budgeted finished goods inventory, December 31, 2019 $6,471,000

6-18
6-30 (30 min.) Budgeted income statement.
Easecom Company
Budgeted Operating Income Statement for 2019
(in thousands)
Revenue
Equipment ($6,000 × 1.06 × 1.15) $7,314
Maintenance contracts ($1,800 × 1.06) 1,908
Total revenue $9,222
Cost of goods sold ($4,600 × 1.03 × 1.06) 5,022
Gross margin 4,200
Operating costs:
Marketing costs ($600 + $250) 850
Distribution costs ($150 × 1.06) 159
Customer maintenance costs ($1,000 + $130) 1,130
Administrative costs 900
Total operating costs 3,039
Operating income $ 1,161
6-31 (40 min.) Budget schedules for a manufacturer.

1a. Revenues Budget
Broncos Rams
Blankets Blankets Total
Units sold 140 195
Selling price $305 $378
Budgeted revenues $42,700 $73,710 $116,410
b. Production Budget in Units

Broncos Rams
Blankets Blankets
Budgeted unit sales 140 195
Add budgeted ending fin. goods inventory 24 29
Total requirements 164 224
Deduct beginning fin. goods inventory 14 19
Budgeted production 150 205

6-19
c. Direct Materials Usage Budget (units)

Red Black Broncos logo Rams logo
wool wool patches patches Total
Broncos blankets:
1. Budgeted input per f.g. unit 5 – 1 –
2. Budgeted production 150 – 150 –
3. Budgeted usage (1 × 2) 750 – 150 –
Rams blankets:
4. Budgeted input per f.g. unit – 6 – 1
5. Budgeted production – 205 – 205
6. Budgeted usage (4 × 5) – 1,230 – 205
7. Total direct materials
usage (3 + 6) 750 1,230 150 205
Direct Materials Cost Budget

8. Beginning inventory 40 20 50 65
9. Unit price (FIFO) $ 10 $ 14 $ 8 $ 7
10. Cost of DM used from
beginning inventory (8 × 9) $ 400 $ 280 $ 400 $ 455 $ 1,535
11. Materials to be used from
purchases (7 – 8) 710 1,210 100 140
12. Cost of DM in March $ 11 $ 13 $ 8 $ 9
13. Cost of DM purchased and
used in March (11 × 12) $7,810 $15,730 $ 800 $1,260 $26,600
14. Direct materials to be used
(10 + 13) $8,210 $16,010 $1,200 $1,715 $27,135
Direct Materials Purchases Budget

Black Bronco Rams
Red wool wool s logos logos Total
Budgeted usage
(from line 7) 750 1,230 150 205
Add target ending
inventory 30 20 30 30
Total requirements 780 1,260 180 235
Deduct beginning inventory 40 20 50 65
Total DM purchases 740 1,240 130 170
Purchase price (March) $ 11 $ 13 $ 8 $ 9
Total purchases $8,140 $16,120 $1,040 $1,530 $26,830
d. Direct Manufacturing Labour Budget

Direct
Budgeted Manuf. Labour-
Units Hours per Total Hourly
Produced Output Unit Hours Rate Total
Broncos blankets 150 4 600 $28 $16,800
Rams blankets 205 5 1,025 $28 28,700
1,625 $45,500

6-20
e. Manufacturing Overhead Budget
Variable manufacturing overhead costs (1,625 × $17) $27,625

Fixed manufacturing overhead costs 14,625
Total manufacturing overhead costs $42,250
Total manuf. overhead cost per hour = $42,250 ÷ 1,625 = $26 per direct manufacturing
labour-hour
Fixed manuf. overhead cost per hour = $ 14,625 ÷ 1,625 = $9 per direct manufacturing
labour-hour
f. Computation of unit costs of ending inventory of finished goods

Broncos Rams
Blankets Blankets
Direct materials
Red wool ($11 × 5, 0) $ 55 $ 0
Black wool ($13 × 0, 6) 0 78
Broncos logos ($8 × 1, 0) 8 0
Rams logos ($9 × 0, 1) 0 9
Direct manufacturing labour ($28 × 4, 5) 112 140
Manufacturing overhead
Variable ($17 × 4, 5) 68 85
Fixed ($9 × 4, 5) 36 45
Total manufacturing cost $279 $357
Ending Inventories Budget
Cost per Unit Units Total
Direct Materials
Red wool $ 11 30 $ 330
Black wool 13 20 260
Broncos logo patches 8 30 240
Rams logo patches 9 30 270
1,100
Finished Goods
Broncos blankets 279 24 6,696
Rams blankets 357 29 10,353
17,049
Total $18,149
g. Cost of goods sold budget

Beginning fin. goods inventory, March 1, 2017 ($1,960 + $2,945) $ 4,905
Direct materials used (from Dir. materials cost budget) $27,135
Direct manufacturing labour (Dir. manuf. labour budget) 45,500
Manufacturing overhead (Manuf. overhead budget) 42,250
Cost of goods manufactured 114,885
Cost of goods available for sale 119,790
Deduct ending fin. goods inventory, March 31, 2014 (Inventories budget) 17,049
Cost of goods sold $102,741

6-21
2. Areas where continuous improvement might be incorporated into the budgeting process:
(a) Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts for the fabric could be related to the maximum
improvement (current usage – minimum possible usage) of yards of fabric for either
blanket. It may also be feasible to decrease the price paid, particularly with quantity
discounts on things like the logo patches.
(b) Direct manufacturing labour. The budgeted usage of 4 hours/5 hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labour cost per
hour of $28 could be continuously revised down. The former appears more feasible
than the latter.
(c) Variable manufacturing overhead. By budgeting more efficient use of the allocation
base, a signal is given for continuous improvement. A second approach is to budget
continuous improvement in the budgeted variable overhead cost per unit of the
allocation base.
(d) Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as
fixed, then they are more difficult to adjust down on a monthly basis.
6-32 (30–40 min.) Revenue and production budgets.
This is a routine budgeting problem. The key to its solution is to compute the correct quantities
of finished goods and direct materials. Use the following general formula:
 Budgeted   inventory   materials used   inventory 

production = Target ending + Budgeted sales or – Beginning
or purchases
1. Chen Corporation
Revenues Budget for 2017
Units Price Total

Thingone 69,000 $160 $11,040,000
Thingtwo 44,000 258 11,352,000
Budgeted revenues $22,392,000
2. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?

6-22
3. Chen Corporation
Production Budget (in units) for 2017
Thingone Thingtwo
Budgeted sales in units 69,000 44,000
Add target finished goods inventories,
December 31, 2017 29,000 8,000
Deduct finished goods inventories,
January 1, 2017 24,000 7,000
Units to be produced 74,000 45,000
4. Chen Corporation
Direct Materials Purchases Budget (in quantities) for 2017
Direct Materials
A B C
Direct materials to be used in production
• Thingone (budgeted production of 74,000
units times 6 lbs. of A, 4 lbs. of B) 444,000 296,000 --
• Thingtwo (budgeted production of 45,000
units times 7 lbs. of A, 5 lbs. of B, 3 lb. of C) 315,000 225,000 135,000
Total 759,000 521,000 135,000
Add target ending inventories, December 31, 2017 38,000 34,000 12,000
Total requirements in units 797,000 555,000 147,000
Deduct beginning inventories, January 1, 2017 36,000 31,000 9,000
Direct materials to be purchased (units) 761,000 524,000 138,000
5. Chen Corporation
Direct Materials Purchases Budget (in dollars) for 2017
Budgeted Expected
Purchases Purchase
(Units) Price per unit Total
Direct material A 761,000 $13 $ 9,893,000
Direct material B 524,000 8 4,192,000
Direct material C 138,000 7 966,000
Budgeted purchases $15,051,000
6. Chen Corporation
Direct Manufacturing Labour Budget (in dollars) for 2017
Direct
Budgeted Manufacturing Rate
Production Labour-Hours Total per
(Units) per Unit Hours Hour Total
Thingone 74,000 4 296,000 $13 $3,848,000
Thingtwo 45,000 5 225,000 18 4,050,000
Total $7,898,000

6-23
7. Chen Corporation
Budgeted Finished Goods Inventory
at December 31, 2017
Thingone:
A, 6 pounds × $13 $78
B, 4 pounds × $8 32 $110
Direct manufacturing labour costs,
4 hours × $13 52
manufacturing labour-hour (4 hours × $24) 96
Finished goods inventory of Thingone
$258 × 29,000 units $ 7,482,000
Thingtwo:
A, 7 pounds × $13 $91
B, 5 pounds × $8 40
C, 3 each × $7 21 $152
Direct manufacturing labour costs,
5 hours × $18 90
manufacturing labour-hour (5 hours × $24) 120
Finished goods inventory of Thingtwo
$362 × 8,000 units 2,896,000
Budgeted finished goods inventory, December 31, 2017 $10,378,000
8. The CEO would want to ask the production manager why the target ending inventories
have increased. Could production be more closely tailored to demand? Could the efficiency and
productivity of direct materials and direct manufacturing labour be increased? Could direct
materials inventory be reduced?
9. Preparing a budget helps Chen Corporation manage costs based on revenues and
production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
areas where costs are high, coordinate and communicate across different parts of the
organization, create a framework for judging performance and facilitating learning, and motivate
managers and employees to achieve “stretch” targets of higher revenues and lower costs.

6-24
6-33 (60 min.) Comprehensive operating budget.

1. Schedule 1: Revenues Budget for January 2018
Units Selling Price Total Revenues
Snowboards 2,900 $650 $1,885,000
2. Schedule 2: Production Budget (in Units) for January 2018

Snowboards
Budgeted unit sales (Schedule 1) 2,900
Add target ending finished goods inventory 200
Deduct beginning finished goods inventory 500
3. Schedule 3A: Direct Materials Usage Budget for January 2018

Wood Fiberglass Total
Wood: 2,600 × 9 b.f. 23,400
Fiberglass: 2,600 × 10 yards _______ 26,000
To be used in production 23,400 26,000
Cost Budget
Available from beginning inventory
Wood: 2,040 b.f. × $32.00 $ 65,280
Fiberglass: 1,040 b.f. × $8.00 $ 8,320
To be used from purchases this period
Wood: (23,400 – 2,040) × $34.00 726,240
Fiberglass: (26,000 – 1,040) × $9.00 _______ 224,640
Total cost of direct materials to be used $791,520 $232,960 $1,024,480
Schedule 3B: Direct Materials Purchases Budget for January 2018

Wood Fiberglass Total
Production usage (from Schedule 3A) 23,400 26,000
Add target ending inventory 1,540 2,040
Deduct beginning inventory 2,040 1,040
Purchases 22,900 27,000
Cost Budget
Wood: 22,900 × $34.00 $778,600
Fiberglass: 27,000 × $9.00 ________ $243,000
Purchases $778,600 $243,000 $1,021,600

6-25
4. Schedule 4: Direct Manufacturing Labour Budget for January 2018
Cost Driver DML Hours per Total Wage

Labour Category Units Driver Unit Hours Rate Total
Manufacturing labour 2,600 5.00 13,000 $29.00 $377,000
5. Schedule 5: Manufacturing Overhead Budget for January 2018

At Budgeted Level of 13,000
Direct Manufacturing Labour-Hours
Variable manufacturing overhead costs
($7.00 × 13,000) $ 91,000
Fixed manufacturing overhead costs 81,000
Total manufacturing overhead costs $172,000
$172,000
6. Budgeted manufacturing overhead rate: = $13.23 per hour
13,000
$172,000
7. Budgeted manufacturing overhead cost per output unit: = $66 per output unit
2,600
(rounded)
8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in January 2018
Cost per
Unit of
Inputa Inputsb Total
Direct materials
Wood $34.00 9.00 $306.00
Fiberglass 9.00 10.00 90.00
Direct manufacturing labour 29.00 5.00 145.00
Total manufacturing overhead 66.00
$607.00
a
Cost is per board foot, yard, or per hour
b
Inputs is the amount of each input per board
9. Schedule 6B: Ending Inventories Budget, January 31, 2018
Cost per
Units Unit Total
Direct materials
Wood 1,540 $ 34.00 $ 52,360
Fiberglass 2,040 9.00 18,360
Finished goods
Snowboards 200 607.00 121,400
Total Ending Inventory $192,120

6-26
10. Schedule 7: Cost of Goods Sold Budget for January 2018

From
Schedule Total
Beginning finished goods inventory
January 1, 2018, $374.80 × 500 Given $ 187,400
Direct materials used 3A $1,024,480
Direct manufacturing labour 4 377,000
Manufacturing overhead 5 172,000
Cost of goods manufactured 1,573,480
Deduct ending finished goods
inventory, January 31, 2018 6B 121,400
11. Budgeted Income Statement for Skulas for January 2018

Revenues Schedule 1 $1,885,000
Cost of goods sold Schedule 7 1,639,480
Gross margin 245,520
Operating costs
Variable marketing costs ($250 × 38) $ 9,500
Fixed nonmanufacturing costs 35,000 44,500
12. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
The CEO would want to ask the production manager if production could be more closely
tailored to demand? Could the efficiency and productivity of direct materials and direct
manufacturing labour be increased? Could direct materials inventory be reduced?
The CEO should set stretch targets that are challenging but achievable because creating
some performance anxiety motivates employees to exert extra effort and attain better
performance. A major rationale for stretch targets is the psychological motivation that comes
from loss aversion—people feel the pain of loss more than the joy of success. Setting challenging
targets motivates employees to reach these targets because failing to achieve a target is seen as
failing. At no point should the pressure for performance push employees to engage in illegal or
unethical practices. So, while setting stretch targets, the CEO must place great emphasis on
adhering to codes of conduct and following appropriate norms and values. The CEO should also
not set targets that are very difficult or impossible to achieve. Such targets demotivate employees
because they give up on trying to achieve them.
13. Preparing a budget helps Skulas manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.

6-27
6-34 (30 min.) Cash budgeting, budgeted balance sheet. (Appendix)

1.
Cash Collections from Receivables

From sales in:
December (60%  $1,650,000) $ 990,000
January (40%  $1,885,000) 754,000
Total $1,744,000
Cash Disbursements for Material Purchases
For purchases in:

December (50% × $820,000) $410,000
January (50% × $1,021,600a) 510,800
Total $920,800
a
6-34, Schedule 3B
Cash Disbursements for Fixed Overhead Costs

Fixed manufacturing overhead ($81,000b – $64,000) $17,000
Fixed nonmanufacturing overhead ($35,000c – $10,000) 25,000
Total $42,000
b
6-34, Schedule 5
c
6-34, Budgeted Income Statement
Cash Budget for January 2018
Beginning cash balance $ 124,000
Add receipts: Collection of receivables 1,744,000

Total cash available $1,868,000
Deduct disbursements:
Material purchases $ 920,800
Direct manufacturing labour 377,000
Variable manufacturing overhead 91,000
Fixed manufacturing overhead 17,000
Variable marketing costs 9,500
Fixed nonmanufacturing costs 25,000
Cash dividends 160,000
Total disbursements 1,600,300
Ending cash balance $ 267,700

6-28
2. Yes. Skulas has a budgeted cash balance of $267,700 on January 31, 2018, after paying the
dividend of $160,000 at the end of January.
3. Skulas’ managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Skulas could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Skulas’ managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Skulas’ managers need
to prepare a cash budget in addition to an operating income budget.
4. Budgeted Balance Sheet for Skulas as of January 31, 2018

Cash $ 267,700
Accounts receivable (60% × $1,885,000) 1,131,000
Inventory 6-34 Schedule 6B 192,120
Property, plant, and equipment (net) 1,175,600
Total assets $2,766,420
Accounts Payable $ 510,800

Long-term liabilities 182,000
Stockholders’ equity 2,073,620
Total liabilities and stockholders’ equity $2,766,420
6-35 (60 min.) Comprehensive problem with ABC costing.

1.
Revenue Budget
For the Month of April
Units Selling Price Total Revenue

Cat-allac 500 $160 $ 80,000
Dog-eriffic 300 250 75,000
Total $155,000
2.
Production Budget
Product
Cat-allac Dog-eriffic
Add target ending finished goods inventory 35 15
Total required units 535 315
Deduct beginning finished goods inventory 15 30
Units of finished goods to be produced 520 285

6-29
3a.

Material
Plastic Metal Total
Cat-allac (520 units × 4 kg and 0.5 kg) 2,080 kg 260 kg
Dog-errific (285 units × 6 kg and 1 kg) 1,710 kg 285 kg
Total quantity of direct materials to be used 3,790 kg 545 kg
Cost Budget
Plastic: 250 kg × $3.80/kg $ 950
Metal: 60 kg × $3/kg $ 180
Plastic: (3,790 – 250) kg  $4/kg 14,160
Metal: (545 – 60) kg  $3/kg __ ____ 1,455
Direct materials to be used this period $15,110 $ 1,635 $16,745
3b.
Direct Material Purchases Budget
Material
Plastic Metal Total
To be used in production (requirement 3) 3,790 kg 545 kg
Add target ending inventory 380 kg 55 kg
Total requirements 4,170 kg 600 kg
Deduct beginning inventory 250 kg 60 kg
Purchases to be made 3,920 kg 540 kg
Cost Budget
Plastic: 3,920 kg  $4 $15,680
Metal: 540 kg  $3 ______ $ 1,620
Purchases $15,680 $ 1,620 $ 17,300
4.
Direct Manufacturing Labour Costs Budget
Output Units
Produced DMLH Total Hourly Wage
(requirement 2) per Unit Hours Rate Total
Cat-allac 520 3 1,560 $10 $15,600
Dog-errific 285 5 1,425 10 14,250
Total $29,850

6-30
5. Machine Setup Overhead

Cat-allac Dog-errific Total
Units to be produced 520 285
Units per batch ÷ 20 ÷15
Number of batches 26 19
Setup time per batch  1.5 hrs.  1.75 hrs.
Total setup time 39 hrs. 33.25 hrs. 72.25 hrs.
Budgeted machine setup costs = $100 per setup hour  72.25 hours
= $7,225
Processing Overhead
Budgeted machine-hours (MH)
= (10 MH per unit × 520 units) + (18 MH per unit × 285 units)
= 5,200 MH + 5,130 MH = 10,330 MH
Budgeted processing costs
= $5 per MH × 10,330 MH
= $51,650
Inspection Overhead
Budgeted inspection hours
= (0.5  26 batches) + (0.6  19 batches)
= 13 + 11.4 = 24.4 inspection hrs.
Budgeted inspection costs
= $16 per inspection hr.  24.4 inspection hours
= $390.40
Manufacturing Overhead Budget
Machine setup costs $ 7,225
Processing costs 51,650
Inspection costs 390
Total costs $59,265

6-31
6.
Unit Costs of Ending Finished Goods Inventory
April 30
Product
Cat-allac Dog-errific
Cost per Input per Input per
Unit of Unit of
Input Output Total Unit of Output Total
Plastic $ 4 4 kg $ 16.00 6 kg $ 24.00
Metal 3 0.5 kg 1.50 1 kg 3.00
Direct manufacturing labour 10 3 hrs. 30.00 5 hrs. 50.00
Machine setup 100 0.075 hrs. 1 7.50 0.1167 hr1 11.67
Processing 5 10 MH 50.00 18 MH 90.00
Inspection 16 0.025 hr2 0.40 0.04 hr.2 0.64
Total $105.40 $179.31
1
39 setup hours ÷ 520 units = 0.075 hours per unit; 33.25 setup hours ÷ 285 units = 0.1167 hours per unit
2
13 inspection hours ÷ 520 units = 0.025 hours per unit; 11.4 inspection hours ÷ 285 units = 0.04 hours per
unit

April 30
Quantity Cost per Unit Total

Direct Materials
Plastic 380 $4 $1,520
Metals 55 3 165 $1,685
Finished goods
Cat-allac 35 $105.40 $3,689
Dog-errific 15 179.31 2,690 6,379
Total ending inventory $8,064
7.
Beginning finished goods inventory, April, 1 ($1,500 + $5,580) $ 7,080
Direct materials used (requirement 3) $16,745
Direct manufacturing labour (requirement 4) 29,850
Manufacturing overhead (requirement 5) 59,265
Deduct: Ending finished goods inventory, April 30 (reqmt. 6) 6,379
8.
Nonmanufacturing Costs Budget
Salaries ($36,000 ÷ 2  1.05) $18,900
Other fixed costs ($36,000 ÷ 2) 18,000
Sales commissions ($155,000  1%) 1,550
Total nonmanufacturing costs $38,450

6-32
9.
Budgeted Operating Income Statement
Revenue $155,000
Cost of goods sold 106,561
Gross margin 48,439
Operating (nonmanufacturing) costs 38,450
6-36 (25 min.) Cash budget (continuation of 6-35).

Cash Budget
April 30
Cash balance, April 1 $ 5,360
Add receipts
Cash sales ($155,000 × 10%) 15,500
Credit card sales ($155,000 × 90% × 97%) 135,315
Total cash available for needs (x) $156,175
Deduct cash disbursements
Direct materials ($8,500 + ($17,300 × 50%)) $ 17,150
Manufacturing overhead ($59,265 – $20,000 depreciation) 39,265
Nonmanufacturing salaries 18,900
Sales commissions 1,550
Other nonmanufacturing fixed costs ($18,000 – $10,000 deprn) 8,000
Machinery purchase 13,700
Income taxes 5,000
Total disbursements (y) $133,415
Financing
Repayment of loan $ 2,000
1 20
Interest at 12% ($2,000  12%  )
12
Total effects of financing (z) $ 2,020
Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 20,740
6-37 (15 min.) Responsibility and controllability.

The time lost in the plant should be charged to the purchasing department. Certainly, the
plant manager could not be asked to underwrite a loss which is due to failure of delivery
over which he had no supervision. Although the purchasing agent may feel that he has done
everything he possibly could, he must realize that, in the whole organization, he is the one
who is in the best position to evaluate the situation. He receives an assignment. He may
accept it or reject it. But if he accepts, he must perform. If he fails, the damage is evaluated.
Everybody makes mistakes. The important point is to avoid making too many mistakes and
also to understand fully that the extensive control reflected in “responsibility accounting” is
the necessary balance to the great freedom of action that individual executives are given.

6-33
Discussions of this problem have again and again revealed a tendency among
students (and among accountants and managers) to “fix the blame”—as if the variances
arising from a responsibility accounting system should pinpoint misbehaviour and provide
answers. The point is that no accounting system or variances can provide answers.
However, variances can lead to questions. In this case, in deciding where the penalty
should be assigned, the student might inquire who should be asked—not who should be
blamed.
Classroom discussions have also raised the following diverse points:
(a) Is the railway company liable? Yes, and they have liability insurance.
(b) Costs of idle time are usually routinely charged to the production department.
Should the information system be fine-tuned to reallocate such costs to the
purchasing department? Both purchasing and the plant manager answer to either a
business manager or an operations manager. The buck stops here. Some companies
have the purchasing department answer directly to the plant manager, which would
be a probable result of the above mistake. Give accountability to the plant manager
as his/her authority warrants it.
(c) How will the purchasing managers behave in the future regarding willingness to
take risks?
The text emphasizes the following: Beware of overemphasis on controllability. For
example, a time-honoured theme of management is that responsibility should not be given
without accompanying authority. Such a guide is a useful first step, but responsibility
accounting is more far-reaching. The basic focus should be on information or knowledge,
not on control. The key question is: “Who is the best informed?” Put another way, “Who is
the person who can tell us the most about the specific item, regardless of ability to exert
personal control?”
6-38 (15 min.) Budgeting and governance.

1. The standards proposed by Maki are not challenging. In fact, she set the target at the level
her department currently achieves.
DM 2.95 kg  100 units = 295 kg

DL 19.2 min.  100 units = 1,920 min ÷ 60 = 32 hrs.
MT 9.9 min.  100 units = 990 min. ÷ 60 = 16.5 hrs.
2. Maki probably chose these standards so that her department would be able to make the
goal and receive any resulting reward. With a little effort, her department can likely beat
these goals.
3. As discussed in the chapter, benchmarking might be used to highlight the easy targets set
by Maki. Perhaps the organization has multiple plant locations that could be used as
comparisons. Alternatively, management could use industry averages. Also, management
should work with Maki to better understand her department and encourage her to set
more realistic targets. Finally, the reward structure should be designed to encourage
increasing productivity, not beating the budget.

6-34
6-39 (60 min.) Comprehensive problem with ABC costing

1.
Revenue Budget

Cat-allac 530 $205 $108,650
Dog-eriffic 225 310 69,750
Total $178,400
2.
Production Budget
Product
Add target ending finished goods inventory 30 10
Total required units 560 235
Deduct beginning finished goods inventory 10 19
Units of finished goods to be produced 550 216
3.
Material
Plastic Metal Total
Cat-allac (550 units × 4 lbs. and 0.5 lb.) 2,200 lbs. 275 lbs.
Dog-eriffic (216 units × 6 lbs. and 1 lb.) 1,296 lbs. 216 lbs.
Total quantity of direct material to be used 3,496 lbs. 491 lbs.
Cost Budget
Plastic: 290 lbs. × $3.80 per lb. $ 1,102
Metal: 70 lbs. × $3.10 per lb. $ 217
Plastic: (3,496 – 290) lbs.  $5 per lb. 16,030
Metal: (485 – 70) lbs.  $4 per lb. _ 1,684
Direct materials to be used this period $17,132 $1,901 $19,033

6-35
Direct Material Purchases Budget

Material
Plastic Metal Total
To be used in production (requirement 3) 3,496 lbs. 491 lbs.
Add target ending inventory 410 lbs. 65 lbs.
Total requirements 3,906 lbs. 556 lbs.
Deduct beginning inventory 290 lbs. 70 lbs.
Purchases to be made 3,616 lbs. 486 lbs.
Cost Budget
Plastic: 3,616 lbs.  $5 $18,080
Metal: 486 lbs.  $4 _______ $1,944
Purchases $18,080 $1,944 $20,024
4.
Output Units
Produced DMLH Total Hourly Wage
(requirement 2) per Unit Hours Rate Total
Cat-allac 550 3 1,650 $10 $16,500
Dog-eriffic 216 5 1,080 10 10,800
Total $27,300
5. Machine Setup Overhead

Cat-allac Dog-eriffic Total
Units to be produced 550 216
Units per batch ÷ 25 ÷9
Number of batches (rounded up) 22 24
Setup time per batch ×1.50 hrs. ×1.75 hrs.
Total setup time 33 hrs. 42 hrs. 75 hrs.
Budgeted machine setup costs = $105 per setup hour  75 hours

= $7,875
Processing Overhead
Budgeted machine-hours (MH) = (11 MH per unit × 550 units) + (19 MH per unit × 216 units)
= 6,050 MH + 4,104 MH = 10,154 MH
Budgeted processing costs = $10 per MH × 10,154 MH
= $101,540
Inspection Overhead
Budgeted inspection-hours = (0.5  22 batches) + (0.7  24 batches)
= 11 + 16.8 = 27.8 inspection hrs.
Budgeted inspection costs = $15 per inspection hr.  27.8 inspection hours
= $417

6-36
Manufacturing Overhead Budget

Machine setup costs $ 7,875
Processing costs 101,540
Inspection costs 417
Total costs $109,832
6.
April 30
Product
Unit of Unit of Unit of
Input Output Total Output Total
Plastic $ 5 4 lbs. $ 20.00 6 lbs. $ 30.00
Metal 4 0.5 lbs. 2.00 1 lb. 4.00
Direct manufacturing labour 10 3 hrs. 30.00 5 hrs. 50.00
Machine setup 105 0.06 hrs.a 6.30 0.2 hra 21.00
Processing 10 11 MH 110.00 19 MH 190.00
Inspection 15 0.02 hrb 0.30 0.08 hr.b 1.20
Total $168.60 $296.20
a
33 setup-hours ÷ 550 units = 0.06 hours per unit; 42 setup-hours ÷ 210 units = 0.2 hours per unit
b
11 inspection hours ÷ 550 units = 0.02 hours per unit; 16.8 inspection hours ÷ 210 units = 0.08 hours per unit

April 30
Quantity Cost per unit Total

Direct Materials
Plastic 410 $ 5 $2,050
Metals 65 4 260 $ 2,310
Finished goods
Cat-allac 30 $168.60 $5,058
Dog-eriffic 10 296.20 2,962 8,020

6-37
7.
Beginning finished goods inventory, April, 1 ($1,000 + $4,650) $ 5,650
Direct materials used (requirement 3) $ 19,033
Direct manufacturing labour (requirement 4) 27,300
Manufacturing overhead (requirement 5) 109,832
Deduct: Ending finished goods inventory, April 30 (requirement 6) 8,020
8.
Salaries ($32,000 ÷ 2  1.05) $16,800
Other fixed costs ($32,000 ÷ 2) 16,000
Sales commissions ($178,400  1%) 1,784
Total nonmanufacturing costs $34,584
9.
Budgeted Income Statement
Revenues $178,400
Gross margin 24,605
Operating (nonmanufacturing)
costs 34,584
Operating income $ (9,979)
10. Animal Gear is making a loss and will need to increase revenues and manage costs to
turn around the business. Preparing a budget helps Animal Gear manage costs based on revenues
and production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
areas where costs are high, coordinate and communicate across different parts of the
organization, create a framework for judging performance and facilitating learning, and motivate
management and employees to achieve “stretch” targets of higher revenues and lower costs.

6-38
6-40 (25 min.) Cash budget (continuation of 6-39).

1.
Cash Budget
April 30
Cash balance, April 1 $ 5,900
Add receipts
Cash sales ($178,400 × 10%) 17,840
Credit card sales ($178,400 × 90% × 98%) 157,349
Direct materials ($8,000 + $20,024 × 50%) $ 18,012
Manufacturing overhead ($109,832 ─ $25,000 depreciation) 84,832
Nonmanufacturing salaries 16,800
Sales commissions 1,784
Other nonmanufacturing fixed costs ($16,000 ─ $10,000 depreciation) 6,000
Machinery purchase 13,000
Income taxes 5,000
Financing
Repayment of loan $ 2,000
1 20
Interest at 12% ($2,000  12%  )
12
Total effects of financing (z) $ 2,020
Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 6,341
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April after the loan is paid is anticipated to be $6,341, which is less than
$7,000 and so Animal Gear would not repay the loan. Under this assumption, the $2,000
repayment would not be shown. Our assumption is that Animal Gear has $8,361 ($181,089
−$172,728) at the end of April before the loan is paid which is more than $7,000 and so the loan
will be repaid.
2. Animal Gear’s managers prepare a cash budget in addition to the operating income
budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet
payroll, and pay operating expenses as these payments come due. Animal Gear could be very
profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be
delayed and result in insufficient cash being available to make scheduled payments for its
expenses. Animal Gear’s managers may then need to initiate a plan to borrow money to finance
any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so Animal Gear’s managers need to prepare a cash budget in addition to an operating
income budget.

6-39
6-41 (60 min.) Comprehensive budgeting problem; activity-based costing, operating

and financial budgets.
1a.
Revenues Budget
For the Month of June, 2018

Regular 2,000 $120 $240,000
Deluxe 3,000 195 585,000
Total $825,000
b.
Production Budget
Product
Regular Deluxe
Budgeted unit sales 2,000 3,000
Add: target ending finished goods inventory 400 600
Total required units 2,400 3,600
Deduct: beginning finished goods inventory 250 650
Units of finished goods to be produced 2,150 2,950
c.
Material
Cloth Wood Total
Regular (2,150 units × 1.3 yd.; 0 b.f.) 2,795 yds. 0 b.f.
Deluxe (2,950 units × 1.5 yds.; 2 b.f.) 4,425 yds. 5,900 b.f.
Total quantity of direct materials to be used 7,220 yds. 5,900 b.f.
Cost Budget
(under a FIFO cost-flow assumption) $ 3,219 $ 6,060

Cloth: (7,220 yd. – 610 yd.) × $5.25 per yd. 34,703
Wood: (5,900 – 800) × $7.50 per b. f. 38,250
Direct materials to be used this period $37,922 $44,310 $82,232

6-40

Material
Cloth Wood Total
To be used in production 7,220 yds. 5,900 ft
Add: Target ending direct material inventory 386 yds. 295 ft
Total requirements 7,606 yds. 6,195 ft
Deduct: beginning direct material inventory 610 yds. 800 ft
Purchases to be made 6,996 yds. 5,395 ft
Cost Budget
Cloth: (6,996 yds. × $5.25 per yd.) $36,729
Wood: (5,395 ft × $7.50 per b.f.) ______ $40,463
Total $36,729 $40,463 $77,192
d.
Output Units Direct Manufacturing Total Hourly Wage Total

Produced Labour-Hours per Unit Hours Rate
Regular 2,150 5 10,750 $15 $161,250
Deluxe 2,950 7 20,650 15 309,750
Total 31,400 $471,000
e.
Manufacturing Overhead Costs Budget
For the Month of June 2018
Total
Machine setup
(Regular, 43 batchesa × 2 hrs./batch + Deluxe, 59 batchesb × 3 hrs./batch)  $18/hour $ 4,734
Processing (31,400 DMLH  $1.80) 56,520
Inspection [(2,150 + 2,950) pairs  $1.35 per pair] 6,885
Total $68,139
a
Regular: 2,150 pairs ÷ 50 pairs per batch = 43; bDeluxe: 2,950 pairs ÷ 50 pairs per batch = 59

6-41
f.
Regular Deluxe
Unit of Input Unit of Output Total Unit of Output Total
Cloth $ 5.25 1.3 yd $ 6.83 1.5 yd $ 7.88
Wood 7.50 0 b.f. 0.00 2 b.f. 15.00
Direct manufacturing labour 15.00 5 hr. 75.00 7 hrs. 105.00
Machine setup 18.00 0.04 hra 0.72 0.06 hrb 1.08
Processing 1.80 5 hrs 9.00 7 hrs 12.60
Inspection 1.35 1 pair 1.35 1 pair 1.35
Total $92.90 $142.91
a
2 hours per setup ÷ 50 pairs per batch = 0.04 hr. per unit
b
3 hours per setup ÷ 50 pairs per batch = 0.06 hr. per unit

June, 2018

Direct Materials
Cloth 386 yards $5.25 $2,026.50
Wood 295 b.f. 7.50 2,212.50 $ 4,239
Finished goods
Regular 400 $ 92.90 $37,160
Deluxe 600 142.91 85,746 122,906
g.
Beginning finished goods inventory, June 1 ($23,250 + $92,625) $115,875
Direct materials used (requirement c) $ 82,232
Direct manufacturing labour (requirement d) 471,000
Manufacturing overhead (requirement e) 68,139
Deduct ending finished goods inventory, June 30 (requirement f) 122,906

6-42
h.
Total
Marketing and general administration
8% × $825,000 $66,000
Shipping
(5,000 pairs ÷ 40 pairs per shipment) × $15 1,875
Total $67,875
2.
Cash Budget
June 30, 2018
Cash balance, June 1 (from Balance Sheet) $ 9,435
Add receipts
Collections from May accounts receivable 307,800
Collections from June accounts receivable
($825,000  60%) 495,000
Total collection from customers 802,800

Direct material purchases in May $ 15,600
Direct material purchases in June
($77,192  80%) 61,754
($68,139  70% because 30% is depreciation) 47,697
Nonmanufacturing costs
($67,875  90% because 10% is depreciation) 61,088
Taxes 10,800
Dividends 15,000
Financing
Interest at 6% ($150,000  6%  1 ÷ 12) (z) $ 750
Ending cash balance, June 30 (x) – (y) – (z) $128,546

6-43
3.
Budgeted Income Statement
Revenues $825,000
Bad debt expense ($825,000  2%) 16,500
Net revenues $808,500
Gross margin 194,160
Operating (nonmanufacturing) costs $67,875
Interest expense (for June) 750 68,625
Net income $125,535
Budgeted Balance Sheet

June 30, 2018
Assets
Cash $ 128,546
Accounts receivable ($825,000 × 40%) $330,000
Less: allowance for doubtful accounts 16,500 313,500
Inventories
Direct materials $ 4,239
Finished goods 122,906 127,145
Fixed assets $870,000

Less: accumulated depreciation
($136,335 + $68,139  30% + $67,875 × 10%)) 163,564 706,436
Total assets $1,275,627
Liabilities and Equity

Accounts payable ($77,192 × 20%) $ 15,438
Interest payable 750
Long-term debt 150,000
Common stock 300,000
Retained earnings ($698,904 + $125,535 – $15,000)) 809,439
Total liabilities and equity $1,275,627

6-44
MINI-CASE
6-42 (60 min.) Comprehensive budgeting problem; activity-based costing, operating

and financial budgets.
1a.
Revenue Budget
For the Month of June
Units Selling Price Total Revenue

Large 3,000 $3 $ 9,000
Giant 1,800 4 7,200
Total $16,200
1b.
Production Budget
Product
Large Giant
Budgeted unit sales 3,000 1,800
Add: target ending finished goods inventory 300 180
Total required units 3,300 1,980
Deduct: beginning finished goods inventory 200 150
Units of finished goods to be produced 3,100 1,830
1c.
Material
Sugar Sticks Total
Large (3,100 units × 0.25 lb.; 1 stick) 775 lbs. 3,100
Giant (1,830 units × 0.50 lb.; 1 stick) 915 lbs. 1,830
Total quantity of direct materials to be used 1,690 lbs. 4,930
Cost Budget
(under a FIFO cost-flow assumption) $ 64 $ 105
Sugar: (1,690 lbs. – 125 lbs.) × $0.50 per lb. 783
Sticks: (4,930 – 350) × $0.30 per stick ____ 1,374
Direct materials to be used this period $847 $1,479 $2,326

6-45

Material
Sugar Sticks Total
To be used in production 1,690 lbs. 4,930
Add: Target ending direct material inventory 240 lbs. 480
Total requirements 1,930 lbs. 5,410
Deduct: beginning direct material inventory 125 lbs. 350
Purchases to be made 1,805 lbs. 5,060
Cost Budget
Sugar: (1,805 lbs. × $0.50 per lb.) $903
Sticks: (5,060 × $0.30 per stick) ____ $1,518
Total $903 $1,518 $2,421
1d.
Output Units Direct Manufacturing Total Hourly Wage Total
Produced Labour-Hours per Unit Hours Rate
Large 3,100 0.20 620 $8 $4,960
Giant 1,830 0.25 457.5 8 3,660
Total 1,077.5 $8,620
1e.
Manufacturing Overhead Costs Budget
Total
Machine setup
(Large 310 batchesa  0.08 hrs./batch + Giant 183 batchesb  0.09
hrs./batch)  $20/hour $ 825
Processing (1,077.5 DMLH  $1.70) 1,832
Total $2,657
a
Large: 3,100 units ÷ 10 units per batch = 310
b
Giant: 1,830 units ÷ 10 units per batch = 183

6-46
1f.
Large Giant
Unit of Input Unit of Output Total Unit of Output Total
Sugar $ 0.50 0.25 lb $0.125 0.50 lb. $ 0.25
Sticks 0.30 1 0.30 1 0.30
Direct manufacturing
labour 8.00 0.2 hr. 1.60 0.25 hr. 2.00
Machine setup 20.00 0.008 hr.a 0.16 0.009 hra 0.18
Processing 1.70 0.2 hr 0.34 0.25 hr 0.425
Total $2.525 $3.155
a
0.08 hour per setup ÷ 10 units per batch = 0.008 hr. per unit;
0.09 hour per setup ÷ 10 units per batch = 0.009 hr. per unit.

June
Direct Materials
Sugar 240 lbs. $0.50 $120
Sticks 480 sticks 0.30 144 $ 264
Finished goods
Large 300 $2.525 $758
Giant 180 3.155 568 1,326
1g.
Beginning finished goods inventory, June 1 ($500 + $474) $ 974
Direct materials used (requirement c) $2,326
Direct manufacturing labour (requirement d) 8,620
Manufacturing overhead (requirement e) 2,657
Deduct ending finished goods inventory, June 30 (requirement f) 1,326

6-47
1h.
Total
Marketing and general administration
10%  16,200 $1,620
2.
Cash Budget
June 30
Cash balance, June 30 $ 587
Add receipts
Collections from May accounts receivable 4,704
Collections from June accounts receivable
($16,200  80%  50%) 6,480
Collections from June cash sales
($16,200  20%) 3,240
Total collection from customers 14,424
Direct material purchases in May $ 696
Direct material purchases in June
( $2,421  70%) 1,695
( $2,657  60% because 40% is depreciation) 1,594
Nonmanufacturing costs
( $1,620  70% because 30% is depreciation) 1,134
Taxes 500
Financing
Interest at 12% ($20,000  12%  1 ÷ 12) (z) $ 200
Ending cash balance, June 30 (x) ─ (y) ─ (z) $ 572
3.
Budgeted Operating Income Statement
Revenue $16,200
Gross margin 2,949
Operating (nonmanufacturing) costs $1,620
Bad debt expense ($16,200  80%  1%) 130
Interest expense (for June) 200 1,950
Net income $ 999

6-48
Budgeted Balance Sheet

June 30
Assets
Cash $ 572
Accounts receivable ($16,200  80%  50%)) $ 6,480
Less: allowance for doubtful accounts 130 6,350
Inventories
Direct materials $ 264
Finished goods 1,326 1,590
Fixed assets $190,000

Less: accumulated depreciation
($55,759 + 2,657  40% + 1,620  30%) 57,308 132,692
Total assets $141,204
Liabilities and Equity

Accounts payable ($2,421  30%) $ 726
Interest payable 200
Long-term debt 20,000
Common stock 10,000
Retained earnings ($109,279 + $999) 110,278
Total liabilities and equity $141,204
6-43 (60 min.) University department, budget revision options.
This exercise illustrates the difficulty of budgeting issues in universities. There are multiple
stakeholders—student-athletes, student non-athletes, coaches, sports administrators, university
faculty, university administrators, and alumni. Actions that benefit one type of stakeholder can
“gore the ox” of other stakeholders.
The general options that groups could examine are outlined below.
Increasing Revenue
There are at least two approaches to “increase” revenue:
(a) Increase revenue from outside sources. For example, sell more tickets to football, basketball,
etc. This is heavily driven by success. Medley’s concerns about academic standards likely
will constrain Tax’s flexibility to recruit any athlete he believes to be a major star.
Some universities have been innovative in terms of increasing cable television revenue
from coverage of university sporting games.
Tax could propose direct fundraising for the athletics department. This could run into
problems with Medley, as she may require all fundraising to be coordinated at the university
level.
(b) Increase the “revenue” attributed to the athletics department. Tax could argue that a
successful athletics program has many positive externalities for Maritime University, many of
which increase MU revenue.
• Alumni are more likely to give money and other contributions when they are stimulated
by being on campus to watch a nationally ranked team or viewing a successful MU team
on television. Many universities use tickets to athletic events and invitations to related
social functions as a thank-you to major donors.

6-49
• Athletics officials (especially nationally prominent coaches) are expected to assist Medley
and her senior officers in promoting MU to potential donors, parents of future students,
etc. For example, the coach of a number-one-ranked football team may attend over 50
dinners/functions a year on behalf of the university. Some of these dinners are “one-on-
one” with potential large donors.
• Merchandising revenue sold to alumni and other supporters is likely to increase when
MU’s athletics teams achieve national success. These include sweaters, towels, and rings.
The current budgeting process gives zero recognition to these externalities, which may well exceed
the projected $3.612 million deficit.
Decreasing Costs
Tax can always cut costs to meet any level Medley may impose. However, the ways to achieve any
substantial reduction will be relatively painful.
(a) Reduce scholarships (either number or amount) to students. This can take time to achieve
bottom-line reductions as existing students may have three more years of scholarship
remaining. Unless Tax cuts existing scholarships, he is restricted to cutting back on
scholarships to new students. This option will be very painful. One consequence will be
lower-quality levels of student athletes which will have implications for the sporting
competitiveness of MU. The option of cutting back on already committed existing
scholarships would be traumatic (but it has occurred).
Tax could undertake across-the-board cuts or target the reductions to some sports. For
example, sports that do not draw sizable crowds may be candidates for reduction. One
difficulty here is that Tax is faced with both reducing total costs and increasing the relative
percentage of scholarships to women. The scholarship breakdown is:
Men’s Women’s
Program Program Total
Football 37 — 37
Basketball 21 11 32
Swimming 6 4 10
Other 4 2 6
Total 68 17 85
The largest percentage of scholarships are for the two highly successful programs—men’s
football (37/85 = 44%) and men’s basketball (21/85 = 25%). There is little room for cutbacks
in the second tier sports at MU.
(b) Reduce sports sponsored by the athletics department. Cut out support for all but a few
targeted sporting programs. This will cause morale problems for students in these sporting
programs (such as rugby, soccer, and volleyball).
(c) Reduce salaries and other costs of the athletics department. The salary for Bill Madden is an
obvious target for Tax’s cost reduction. However, Madden may have a multi-year contract
that leaves MU little room for cost reduction. Moreover, if cost reduction is attempted,
Madden may leave, which could have negative general effects on morale and university
finances. Tax could approach alumni or sponsors to cover Madden’s salary and other costs.
This would address Medley’s budget balance concerns but not her concern as to the level of
Madden’s salary relative to leading academics’.

6-50
Cost reductions could be achieved by reducing the number of assistant coaches and the number of
support officials. The effect of these reductions on student morale and MU athletic achievements is
difficult to measure.
Gender Issues
Based on dollar expenditures and scholarships, Medley has evidence to support her concerns. The
men’s programs get the “lion’s share” of the expenditures and student scholarships.
Men’s Women’s
Program Program
Costs $13.248 million $3.36 million
Full student scholarships 68 17
Tax could respond by noting that the men’s programs have a lower deficit based on revenue minus
assigned costs (in millions):
Men’s Women’s
Program Program
Revenue $12.420 $ 0.936
Assigned costs 13.248 3.360
Contribution $(0.828) $(2.424)
This lower deficit reflects, in part, the large revenue-drawing capacity of their successful men’s
football and athletics departments.
Medley’s demands for a balanced budget, more gender equality, and higher academic
standards leaves Tax in an unenviable position.

6-51

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CHAPTER 6

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Copyright © 2019 Pearson Canada Inc.

6-8 The steps in preparing an operating budget are:

6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to

6-14 Equal or across-the-board reductions is a strategy that penalizes honest business

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6-16 (15 min.) Responsibility and controllability.

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Dyeing budgeted = $12,809,000 = $28.4644 per MH

3. Budgeted unit cost of blue rug

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5a. Cost of goods sold budget

5b. Cost of Goods Sold Budget

Cost of goods sold $115,832,750

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6-18 (15 min.) Sales budget, service setting.

McGrath & Sons Sales Budget

Selling Price Units Sold Total Revenue

6-19 (5 min.) Sales and production budget.

Budgeted sales in units 135,000

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6-20 (5 min.) Direct materials budget.

Direct materials to be used in production (bottles) 2,100,000

6-21 (10 min.) Budgeting material purchases.

6-22 (30 min.) Revenues and production budget.

2. Budgeted unit sales (12-ounce bottles) 6,000,000

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3. Beginning = Budgeted + Target  Budgeted

2. Weaving budgeted = $31, 620, 000

Dyeing budgeted = $17, 280, 000 = $12 per MH

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From Schedule Total

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From Schedule Total

Sales = 185,000 rugs

From Schedule Total

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6-24 (15-20 min.) Revenue, production, and purchases budget.

1. 985,000 motorcycles  505,000 yen = 497,425,000,000 yen

2. Budgeted sales (units) 985,000

3. Direct materials to be used in production, 948,000  2 1,896,000

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6-26 (30 min.) Cash flow analysis.

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6-27 (20-30 min.) Activity-based budgeting.

Total budgeted indirect costs $3,408 $17,012 $6,727 $27,147

Percentage of total indirect costs 13% 63% 25%

Cost Soft Fresh Packaged

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6-28 (20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-27).

Cost Soft Fresh Packaged

2. A kaizen budgeting approach signals management’s commitment to systematic cost

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6-29 (30–40 min.) Revenue and production budgets.

 Budgeted   Target   Budgeted 

Units Price Total

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Finished goods inventory of Widget

Finished goods inventory of Thingamajig

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