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CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
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 income statement 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
Copyright © 2016 Pearson Canada Inc.

205
Instructor’s Resource Manual for Cost Accounting, Seventh Canadian Edition
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.
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 2015 to
February 2016 period becomes a 12-month rolling budget for the April 2015 to March
2016 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.

206
Chapter 6: Master Budget and Responsibility Accounting
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.
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).

207
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.

208
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 gal.) 3,000,0000 skeins 50,000 gal.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Wool: 349,000 skeins $ 715,450
Dye: 5,000 gallons $ 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) gal. × $5 per gal. _________ 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 gal. 2.50
Direct manufacturing
labour 15 56 hrs. 840.00
Dyeing overhead 28.4644 4.5 mach-hrs.
1 128.09
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.

209
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
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
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
Deduct ending finished goods inventory
($1,219.11 × 5,000) 6,095,550

210
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
6-18 (15 min.) Sales budget, service setting.

1.
2015 At 2015 Expected 2016 Expected 2016
McGrath & Sons Volume Selling Prices Change in Volume Volume
Radon Tests 11,000 $250 +5% 11,550
Lead Tests 15,200 $200 -10% 13,680
McGrath & Sons Sales Budget

For the Year Ended December 31, 2016
Selling Price Units Sold Total Revenue
Radon Tests $250 11,550 $2,887,500
Lead Tests $200 13,680 2,736,000
$5,623,500
2.
2015 Planned 2016 Expected 2016 Expected 2016
McGrath & Sons Volume Selling Prices Change in Volume Volume
Radon Tests 11,000 $250 +5% 11,550
Lead Tests 15,200 $190 -5% 14,440
McGrath & Sons Sales Budget

For the Year Ended December 31, 2016

Radon Tests $250 11,550 $2,887,500
Lead Tests $190 14,440 2,743,600
$5,631,100
Expected revenue at the new 2016 prices are $5,631,100, which are greater than the
expected 2015 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 2016.

211
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
6-20 (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

212
6-22 (30 min.) Sales and production budget.

1.
a
l-litre bottles $0.50 6,240,000 $ 3,120,000
b
16-litre units 7.00 2,220,000 15,540,000
$18,660,000
520,000  12 months = 6,240,000
a
185,000  12 months = 2,220,000

b
2. Budgeted unit sales (1-litre bottles) 6,240,000

Total requirements 7,216,000
Deduct beginning finished goods inventory 1,275,000
Units to be produced 5,941,000
3. Beginning Budgeted Target Budgeted

= + –
inventory sales ending inventory production
= 2,220,000 + 265,000 – 2,090,000
= 395,000 16-litre units
6-23 (15-20 min.) Budgeting revenue, cost of sales, and gross margin.
Whimsy Gifts
Budgeted Revenue
For the Quarter Ending December 31
Total
for the
October November December Quarter
Cash sales $14,000 $16,300 $21,100 $51,400
Credit card sales:
$ 9,800  0.96 9,408
$11,200  0.96 10,752
$15,800  0.96 15,168 35,328
Net sales 23,408 27,052 36,268 86,728
Cost of goods sold, at
40% of net sales 9,363 10,821 14,507 34,691
Gross margin $14,045 $16,231 $21,761 $52,037
Some students may think that a 60% gross margin is high. However, this gross margin is
before deducting many operating costs such as rent, advertising, and sales commissions.

213
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.

214
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, 2016
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.

215
6-26 (30 min.) Cash flow analysis.
1. The cash that TabComp Inc. can expect to collect during April 2016 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, 2016, 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, 60%  $3,000 $ 1,800
Projected unit purchases × 104
Total MZB-33 purchases, $1,800  104 $187,200
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.

216
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

217
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.
6-28 (20–30 min.) Kaizen approach to activity-based budgeting
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- 21.00 20.96 20.92
Customer level 0.18 0.18 0.179
support Output-unit-
level
The March 2016 rates can be used to compute the total budgeted cost for each
activity area in March 2016:

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

218
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.

219
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:
 Bu d geted   Target   Bu d geted 

       Beginning 
 p rod u ction 
  end ing 
  sales or _ 
 or p u rchases   inventory   m aterials u sed   inventory 
     
1. Fraser Corporation
Revenue Budget
For 2016
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 2016
Widget Thingamajig
Budgeted sales in units 60,000 40,000
Add target finished goods inventories,
December 31, 2016 27,000 11,000
Total requirements 87,000 51,000
Deduct finished goods inventories,
January 1, 2016 22,000 10,000
Units to be produced 65,000 41,000

220
Direct Materials Purchases Budget (in quantities) for 2016
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, 2016 36,000 32,000 7,000
Total requirements in quantities 501,000 285,000 48,000
Deduct beginning inventories, January 1, 2016 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 2016
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 2016
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

221
Budgeted Finished Goods Inventory
At December 31, 2016
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:
Direct materials costs:
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 overhead costs at $24 per direct
manufacturing labour-hour (3 hours) 72
Budgeted manufacturing costs per unit $225
Finished goods inventory of Thingamajig

$225  11,000 units 2,475,000
Budgeted finished goods inventory, December 31, 2016 $6,471,000

222
6-30 (30 min.) Budgeted income statement.
Easecom Company
Budgeted Operating Income Statement for 2016
(in thousands)
Revenue
Equipment ($6,000 × 1.06 × 1.10) $6,996
Maintenance contracts ($1,800 × 1.06) 1,908
Total revenue $8,904
Cost of goods sold ($4,600 × 1.03 × 1.06) 5,022
Gross margin 3,882
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 $ 843
6-31 Comprehensive review of budgeting. Prepare a master operating budget;

budge schedules for manufacturer.
1. Revenue Budget
Executive Line Director Line Total
Units sold 740 390
Unit selling price $1,224 $1,920
Budgeted revenue $905,760 $748,800 $1,654,560
2. Production Budget in Units

Executive Line Director Line
Budgeted sales 740 390
Add budgeted ending f.g. inventory 30 15
Total requirements 770 405
Deduct beginning f.g. inventory 20 5
Budgeted production 750 400

223
3. Direct Materials Usage Budget (units):
Oak Red Oak Oak Red Oak

Top Top Legs Legs Total
Executive Line:
1. Budgeted input per f.g. unit 1.5 m2 — 4 —
2. Budgeted production 750 — 750 —
3. Budgeted usage 1,125 — 3,000 —
Director Line:
4. Budgeted input per f.g. unit — 2.3 m2 — 4
5. Budgeted production — 400 — 400
6. Budgeted usage — 920 — 1,600
Total direct materials usage (3+6) 1,125 920 3,000 1,600
1. Beginning inventory 29.8 13.9 100 40

2. Unit price (FIFO) $21.60 $27.60 $13.20 $20.40
3. Cost of DM used from
beginning inventory $643.68 $383.64 $1,320 $816 $3,163
4. Materials to be used from
purchases 1,095.20a 906.10b 2,900c 1,560d
5. Cost of DM in March $24 $30 $14.40 $21.60
6. Cost of DM purchased and
used in March $26,285 $27,183 $41,760 $33,696 $128,924
Direct materials used (3+6) $26,928 $27,567 $43,080 $34,512 $132,087
a 1125 m2 – 29.8 = 1,095.2 m2 c 3,000 legs – 100 = 2,900 legs

b 920 m2 – 13.9 = 906.1 m2 d 1,600 legs – 40 = 1,560 legs
Direct Materials Purchases Budget:

Oak Red Oak Oak Red Oak
Top Top Legs Legs Total
Budgeted usage 1,125 920 3,000 1,600
Add ending inventory 17.9 18.6 80 44
Total requirements 1,142.90 938.60 3,080 1,644
Deduct beginning inventory 29.8 13.9 100 40
Total DM purchases 1,113.10 924.70 2,980 1,604
Purchase price (March) $ 24.00 $ 30.00 $ 14.40 $ 21.60
Total purchases $26,714.40 $27,741.00 $42,912.00 $34,646.40 $132,013.80

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4. Direct Manufacturing Labour Budget

Direct
Manu.
Output Labour-
Units Hours per Total Hourly
Produced Output Unit Hours Rate Total
Executive Line 750 3 2,250 $36 $ 81,000
Director Line 400 5 2,000 $36 72,000
4,250 $153,000
5. Manufacturing Overhead Budget

Variable manufacturing overhead costs
(4,250 × $42) $178,500
Fixed manufacturing overhead costs 51,000
Total manufacturing overhead costs $229,500
Total manufacturing overhead cost per hour

$229,500
= = $54 per direct manufacturing labour-hour
4,250
Fixed manufacturing overhead cost per hour

$51,000
= = $12 per direct manufacturing labour-hour
4,250
6. Computation of unit costs of finished goods:

Direct materials
Executive Line Director Line
Direct materials
Oak top ($24 × 1.5; 0) $ 36.00
Red oak top ($30 × 0; 2.3) $ 69.00
Oak legs ($14.40 × 4) 57.60
Red oak legs ($21.60 × 4) 86.40
Direct manufacturing labour ($36 × 3; 5) 108.00 180.00
Manufacturing overhead
Variable ($42 × 3; 5) 126.00 210.00
Fixed ($12 × 3; 5) 36.00 60.00
Total manufacturing cost per unit $363.60 $605.40

225
Ending Inventory Budget
Cost per Unit Units Total

Direct Materials
Oak top $ 24 17.9 $ 429.60
Red oak top 30 18.6 558.00
Oak legs 14.40 80 1,152.00
Red oak legs 21.60 44 950.40
$3,090.00
Finished Goods
Executive 363.60 30 10,908.00
Director 605.40 15 9,081.00
19,989.00
Total $23,079.00
7. Cost of Goods Sold Budget

Actual finished goods inventory,
March 1, 2016
($12,576 + $5,820)a $18,396a
Direct materials used $132,087
Direct manufacturing labour 153,000
Manufacturing overhead 229,500
Cost of goods manufactured 514,587
Cost of goods available for sale 532,983
Deduct ending finished goods inventory,
March 31, 2016 19,989
Cost of goods sold $512,994
a given
Therefore, from #1) Budgeted Revenue = $1,654,560

Less, from #7) Costs of Goods Sold = 512,994
Gross Margin = $1,141,566

226
6-32 Comprehensive review of budgeting. Prepare a master operating

budget; budget schedules for manufacturer.
1.
Revenues Budget
For the Year Ending December 31, 2016
Selling Total
Units Price Revenues
Chairs 172,000 $ 80 $13,760,000
Tables 45,000 $900 $40,500,000
Total $54,260,000
2a. Total budgeted marketing costs

= Budgeted variable marketing costs + Budgeted fixed marketing costs
= $2,011,200 + $4,500,000
= $6,511,200
$6,511,200
Marketing allocation rate = = 0.12 per sales dollar
$54,260,000
2b. Total budgeted distribution costs

= Budgeted variable distribution costs + Budgeted fixed distribution costs
= $54,000 + $380,000
= $434,000
Chairs: 172,000 units ÷ 500 units per delivery 344 deliveries

Tables: 45,000 units ÷ 500 units per delivery 90 deliveries
Total 434 deliveries
$434,000
Delivery allocation rate = = $1,000 per delivery
434 deliveries
3.
Production Budget (in Units)
For the Year Ending December 31, 2016
Product
Chairs Tables
Budgeted unit sales 172,000 45,000
Add target ending finished goods inventory 8,500 2,250
Total required units 180,500 47,250
Deduct beginning finished goods inventory 8,000 2,100
Units of finished goods to be produced 172,500 45,150

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6-33 Comprehensive budget, fill in schedules, prepare a cash budget
1. Schedule A: Budgeted Monthly Cash Receipts
Item September October November December 4th Quarter

Total sales $48,000* $57,600* $72,000* $96,000* $225,600
Credit sales (25%) 12,000* 14,400* 18,000 24,000 56,400
Cash sales (75%) $36,000 $43,200 $54,000 $72,000 169,200
Receipts:
Cash sales $43,200* $54,000 $72,000
Collections on accounts
receivable 12,000* 14,400 18,000
Total $55,200* $68,400 $90,000
*Given
2. Schedule B: Budgeted Monthly Cash Disbursements for Purchases
Item October November December 4th Quarter

Purchases $50,400* $67,200 $30,240 $147,840
Deduct 2% cash discount 1,008* 1,344 605 2,957
Disbursements $49,392* $65,856 $29,635 $144,883
*Given
Note that purchases are 0.7 of next month’s sales, as gross margin averages 30% of
sales (given).
3. Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs

Salaries and wages
(15% of sales) $ 8,640* $10,800 $14,400 $33,840
Rent (5% of sales) 2,880* 3,600 4,800 11,280
Other cash operating costs
(4% of sales) 2,304* 2,880 3,840 9,024
Total $13,824* $17,280 $23,040 $54,144
*Given

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4. Schedule D: Budgeted Total Monthly Cash Disbursements

Purchases $49,392* $65,856 $29,635 $144,883
Cash operating costs 13,824* 17,280 23,040 54,144
Light fixtures 720* 480* — 1,200
Total $63,936* $83,616 $52,675 $200,227
*Given
5. Schedule E: Budgeted Cash Receipts and Disbursements

Receipts $55,200* $68,400 $90,000 $213,600
Disbursements 63,936* 83,616 52,675 200,227
Net cash increase $37,325 $ 13,373
Net cash decrease ($8,736)* ($15,216)
*Given
6. Schedule F: Financing Required

Beginning cash balance $14,400* $ 9,664* $10,448 $14,400
Net cash increase 37,325 13,373
Net cash decrease 8,736* 15,216 _______ _______
Cash position before
borrowing (a) 5,664* (5,552) 47,773 27,773
Minimum cash balance
required 9,600* 9,600 9,600 9,600
Excess (Deficiency) (3,936)* (15,152) 38,173 18,173
Borrowing required (b) 4,000* 16,000 20,000
Interest payments (c) 660 660
Borrowing repaid (d) _______ _______ 20,000 20,000
Ending cash balance
[(a) + (b) − (c) − (d)] $ 9,664* $10,448 $27,113 $27,113
*Given
(c) Interest computation:

$4,000 @ 18% for 3 months = $180
$16,000 @ 18% for 2 months = 480
Total interest expense = $660

229
7. Short-term, self-liquidating financing is best. The schedules clearly demonstrate

the mechanics of a “self-liquidating” loan. The need for such a loan arises because
of the seasonal nature of many businesses. When sales soar, the payroll and
suppliers must be paid in cash. The basic source of cash is proceeds from sales.
However, the credit extended to customers creates a lag between the sale and the
collection of cash. When the cash is collected, it in turn may be used to repay the
loan. The amount of the loan and the timing of the repayment are heavily
dependent on the credit terms that pertain to both the purchasing and selling
functions of the business. Somewhat strangely, in seasonal businesses, the squeeze
on cash is often heaviest in the months of peak sales and is lightest in the months
of low sales.
8. Newport Stationery Store

Budgeted Operating Income Statement
For the Quarter Ending December 31
Revenues—Schedule A $ 225,600
Cost of goods sold (70% of sales) 157,920*
Gross margin 67,680
Operating costs
Salaries and wages—Schedule C $33,840
Rent—Schedule C 11,280
Other cash operating costs—Schedule C 9,024
Amortization ($1,200 × 3 months) 3,600 57,744
Operating income 9,936
Deduct interest expense Schedule F (660)
Add purchase discounts—schedule B 2,957
Net income (before taxes) $ 12,233
*Note: Ending inventory and proof of cost of goods sold:

Inventory, September 30 $ 76,320
Add purchases—schedule B 147,840 $224,160
Deduct inventory, December 31:
Basic inventory 36,000
December purchases—Schedule B 30,240 66,240

230
Newport Stationery Store

Budgeted Balance Sheet
December 31
Assets:
Current assets:
Cash—Schedule F $27,113
Accounts receivable
December credit sales—Schedule A 24,000
Inventory (see Note above) 66,240
Total current assets 117,353
Equipment and fixtures:
Equipment—net ($120,000 – $3,600 amortization) $116,400
Fixtures—Schedule D 1,200 117,600
Total $234,953
Liabilities and Owners’ Equity:

Liabilities None
Owners’ equity $234,953*
Total $234,953
* Owners’ equity, September 30:

$14,400 + $76,320 + $12,000 + $120,000 (Given) $222,720
Net income, quarter ended December 31 12,233
Owners’ equity, December 31 $234,953
9. All of the transactions have been simplified—for example, no bad debts are
considered. Also, many businesses face wide fluctuation of cash flows within a
month. For example, perhaps customer receipts lag and are bunched together near
the end of a month and disbursements are due evenly throughout the month or
are bunched near the beginning of the month. Cash requirements would then need
to be evaluated on a weekly and perhaps daily basis rather than on a monthly
basis. Consider also that borrowing and payment are not necessarily always done
on the first and last day of each month.

231
6-34 Prepare a cash budget.
Basma Wholesale Co.

Statement of Budgeted Cash Receipts and Disbursements
For the Months of December 2015, and January 2016
December 2015 January 2016

Cash balance, beginning $ 12,000 $ 2,580
Add receipts:
Collections of receivables (schedule 1) 283,080 342,960
Total cash available for needs (a) 295,080 345,540
Deduct disbursements:
For merchandise purchases (schedule 2) 220,500 170,100
For variable costs (schedule 3) 60,000 30,000
For fixed costs (schedule 3) 12,000 12,000
Total disbursements (b) 292,500 212,100
Cash balance, end of month [(a) – (b)] $ 2,580 $133,440
Enough cash should be available for repayment of the note on January 31, 2016.
Schedule 1: Collections of Receivables

Collections in October November December Total
December $17,280[a] 60,000[b]
205,800[c] $283,080
January 24,000[d] 72,000[e]
246,960[f] $342,960
[a] 0.08 × $216,000 [b] 0.20 × $300,000 [c] 0.70 × $300,000 × 0.98
[d] 0.08 × $300,000 [e] 0.20 × $360,000 [f] 0.70 × $360,000 × 0.98
Schedule 2: Payments for Merchandise

November December January
Target ending inventory (in units) 1,250[b] 875[a] 800[c]
Add units sold (Sales ÷ $120) 2,500 3,000 1,500
Total requirements 3,750 3,875 2,300
Deduct beginning inventory (in units) 1,125[d] 1,250 875
Purchases (in units) 2,625 2,625 1,425
Purchases in dollars (units × $84) $220,500 $220,500 $119,700

232
December January
Cash disbursements:
For previous month’s purchases at 50% $110,250 $110,250
For current month’s purchases at 50% 110,250 59,850
$220,500 $170,100
[a] 500 units + 0.25($180,000 ÷ $120) [b] $105,000 ÷ $84

[c] 500 units + 0.25($144,000 ÷ $120) [d] 500 units + 0.25($300,000 ÷ $120)
Also:
[b] Ending Inventory Nov. = 500 units + 0.25 (360,000 ÷ 120) = 1,250
Schedule 3: Marketing. Distribution, and Customer Service Costs

Total annual fixed costs, $180,000, minus $36,000 amortization $144,000
Monthly fixed cost requiring cash outlay $ 12,000
$480,000 – $180,000
Variable cost ratio to sales = = 1/6 (= 0.167)
$1,800,000
December variable costs: 1/6 × $360,000 sales = $60,000

January variable costs: 1/6 × $180,000 sales = $30,000
6-35 (30 min.) Activity-based budgeting; Kaizen improvements.
1.
Revenue Budget
For the Quarter Ending March 31
Units 20,000
Selling price  $120
Total revenue $2,400,000
2.
Physical units budget
Direct materials required
(20,000 units  10 g) 200,000 g
Cost budget
(200,000 g  $4/g) $800,000
Direct materials to be used this period $800,000

233
3.
Direct Manufacturing Labour Costs Budget
Output units produced 20,000
Direct manufacturing labour-hours per unit 2
Total direct manufacturing labour-hours 40,000
Hourly wage rate  $15
Total direct manufacturing labour costs $600,000
4.
Manufacturing Overhead Costs Budget
Machine setup overhead
(400 setup-hours  $80 per hour) $32,0001
Operations overhead
(40,000 hours  $1.60 per hour) 64,000
1 (20,000 units/100units) = 200 batches. Each batch requires 2 setup hours, so 200
batches  2 setup-hours per batch = 400 setup-hours
5.
Budgeted Unit Cost
Cost per
Unit of Input per
Input Unit of Output Total
Direct material $ 4 10 g $40.00
Direct manufacturing labour 15 2 DMLH 30.00
Machine setup overhead 80 0.02 setup-hours1 1.60
Operations overhead 1.60 2 DMLH 3.20
Total cost per gizmo $74.80
1Setup-hours per gizmo = 400 setup-hours ÷ 20,000 gizmos = 0.02 setup-hours per
gizmo.

234
Alternatively,
Budgeted Unit Cost
Total Per unit
(1) (2) = (1) ÷ 20,000
Direct material costs
(requirement 2) $ 800,000 $40.00
Direct manufacturing labour costs
(requirement 3) 600,000 30.00
Machine setup overhead costs
(requirement 4) 32,000 1.60
Operations overhead costs
(requirement 4) 64,000 3.20
Total costs $1,496,000 $74.80
6.
Cost of Goods Sold Budget
Total
Beginning finished goods inventory, Jan. 1 $ 72,000
Direct materials used $800,000
Manufacturing overhead 96,000
Cost of goods manufactured 1,496,000
Deduct: Ending finished goods inventory,
Mar. 31a 74,800
aUnder FIFO cost flow assumption, the 1,000 gizmos in ending finished goods
inventory on March 31 will be valued at $74,800 (= 1,000 units × $74.80/unit).
7.
Budgeted Gross Margin
Revenue $2,400,000
Cost of goods sold 1,493,200
Gross margin $ 906,800

235
8.
1st Quarter Proposed 2nd Quarter 3rd Quarter Revised
Quantity Decrease Revised Quantity Quantity
(1) (2) (3) = (1)×(100% ─ (2)) (4) = (3)×(100% ─ (2))
Direct material 10 oz 1% 9.9 g 9.8 g
Direct manufacturing labour 2 DMLH 1% 1.98 DMLH 1.96 DMLH
Machine setup overhead 0.02 setup-hours 3% 0.0194 setup-hours 0.01882 setup-hours
Operations overhead 2 DMLH 1% 1.98 DMLH 1.96 DMLH
Budgeted Unit Cost

For the Quarters Ending June 30 and Sept. 30
2nd Quarter Budgeted 3rd Quarter Budgeted

Cost per Input per Unit Cost Input per Unit Cost
Unit of Input Unit of Output June 30 Unit of Output Sept. 30
Direct material $ 4 9.9 g $39.60 9.8 g $39.20
Direct manufacturing labour 15 1.98 DMLH 29.70 1.96 DMLH 29.40

Machine setup overhead 80 0.0194 setup hrs. 1.55 0.0188 setup-hrs 1.50
Operations overhead 1.60 1.98 DMLH 3.17 1.96 DMLH 3.14
Total $74.02 $73.24

236
Budgeted Gross Margin

For the Quarters Ending
June 30 Sept. 30
Revenue $2,400,000 $2,400,000
Cost of goods sold
($74.02; $73.24 × 20,000) 1,480,400 1,464,800
Gross margin $ 919,600 $ 935,200
9. Reduction in materials can be accomplished by reducing waste and scrap.

Reduction in direct labour and setup time can be accomplished by improving the
efficiency of operations and decreasing down time.
Employees who make the gizmos may have suggestions for ways to do
their jobs more efficiently. For instance, employees may recommend process
changes that reduce idle time, setup time, and scrap. To motivate workers to
improve efficiency, many companies have set up programs that share
productivity gains with the workers. Korna must be careful that productivity
improvements and cost reductions do not in any way compromise product
quality.
6-36 (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

237
2.
Production Budget
Product
Cat-allac Dog-eriffic
Budgeted unit sales 500 300
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
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
(under a FIFO cost-flow assumption)
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

238
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.
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
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

239
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.
Unit Costs of Ending Finished Goods Inventory
April 30
Product
Cat-allac Dog-errific
Cost per Input per Input per
Unit of Unit of Unit of
Input Output Total 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

240
Ending Inventories Budget

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
9.
Revenue $155,000
Cost of goods sold 106,561
Gross margin 48,439
Operating (nonmanufacturing) costs 38,450
Operating income $ 9,989

241
6-37 (25 min.) Cash budget.
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

242
6-38 (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.
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?”

243
6-39 (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.
6-40 Prepare a master operating budget.
1. Schedule 1: Revenue Budget

for the Year Ended December 31, 2016
Units Selling Price Total
Revenues
Snowboards 1,200 $540 $648,000
2. Schedule 2: Production Budget (in Units)

Snowboards
Budgeted unit sales (Schedule 1) 1,200
Add target ending finished goods inventory 200
Deduct beginning finished goods inventory 100

244
3. Schedule 3A: Direct Materials Usage Budget

Wood Fibreglass Total
Physical Budget
To be used in production
(Wood: 1,300 × 5.00 b.f.
Fibreglass: 1,300 × 6.00 yards) 6,500 7,800
6,500 7,800
Cost Budget (uses FIFO)
Available from beginning inventory
(Wood: 2,000 b.f. × $34.00 68,000
Fibreglass: 1,000 yards × 5.80) 5,800
To be used from purchases this period
(Wood: (6,500 – 2,000) × $36.00 $162,000
Fibreglass: (7,800 – 1,000) × $6.00) ________ $40,800
Total cost of direct materials to be used $230,000 $46,600 $276,600
Schedule 3B: Direct Materials Purchases Budget

Wood Fibreglass Total
Physical Budget
Production usage (from Schedule 3A) 6,500 7,800
Add target ending inventory 1,500 2,000
Total requirements 8,000 9,800
Deduct beginning inventory 2,000 1,000
Purchases 6,000 8,800
Cost Budget
(Wood: 6,000 × $36.00 $216,000
Fibreglass: 8,800 × $6.00) ________ $52,800
$216,000 $52,800 $268,800
Note: All units of measurement are standard for this industry.
4. Schedule 4: Direct Manufacturing Labour Budget

Cost
Labour Driver DML Hours per Total Wage
Category Units Driver Unit Hours Rate Total
Manufacturing
Labour 1,300 5.00 6,500 $25.00 $162,500

245
5. Schedule 5: Manufacturing Overhead Budget

At Budgeted Level of 6,500
Direct Manufacturing Labour-Hours
Variable manufacturing overhead costs
($8.40 × 6,500) $ 54,600
Fixed manufacturing overhead costs 78,000
6.
$132,600
Budgeted manufacturing overhead rate: = $20.40 per DML hour
6,500
7.
Budgeted manufacturing overhead cost $132,600
= $102.00 per output unit
per output unit: 1,300
8. Schedule 6A: Computation of Unit Costs of

Finished Goods Inventory at End of 2016
Cost per
Unit of
Inputa Inputsb Total
Direct materials
Wood $36.00 5.00 $180.00
Fibreglass 6.00 6.00 36.00
Direct manufacturing labour 25.00 5.00 125.00
Total manufacturing overhead 102.00
Total cost per unit $443.00
aCost is per board-foot, yard, or hour.
bInputs is the amount of input per board.
9. Schedule 6B: Ending Inventory Budget

December 31, 2016
Cost per
Units Unit Total
Direct materials
Wood 1,500 $36.00 $ 54,000
Fibreglass 2,000 6.00 12,000
Finished goods
Snowboards 200 443.00 88,600
Total Ending Inventory $154,600

246
10. Schedule 7: Cost-of-Goods-Sold Budget

From
Schedule Total
Beginning finished goods inventory
January 1, 2016 Given $ 44,976
Direct materials used 3A $276,600
Direct manufacturing labour 4 162,500
Manufacturing overhead 5 132,600
Deduct ending finished goods
inventory, December 31, 2016 6B 88,600
11. Budgeted Operating Income Statement for Slopes, Inc.

Revenue Schedule 1 $648,000

Costs
Cost of goods sold Schedule 7 528,076
Gross margin 119,924
Operating costs
Marketing costs ($300 × 36) $ 10,800
Other costs* 36,000 46,800
Operating income $ 73,124
*Fixed non-manufacturing costs

247
6-41 Responsibility versus controllability; fixing responsibility.
Note that the lost contribution margin of $1,200 is rarely accounted for in ordinary
accounting systems. If measured at all, it would appear as an underachieved budgeted
contribution margin; that is, actual would be less than budgeted by $1,200. The essence of
this case is to demonstrate the limitations of responsibility accounting and the futility of a
“blame-setting” theme in implementing responsibility accounting.
The responsibility lies with the authority, the city manager. She was not specific in
delegating responsibility. If her authority is required to break a stalemate, then her people
must know to take the stalemate to her. The repair shop manager was negligent in not
doing this.
The theory of responsibility accounting is straightforward—link each cost
ultimately to one person in the organization who has the most day-to-day influence over
its total amount. Repair and maintenance costs provide one of the most difficult
illustrations of implementing the theory. The total cost of the repair job, by itself, is the
responsibility of the repair shop manager. The manager has the most influence over the
total amount incurred at the instant of repair. However, in the eyes of many observers,
the department is only an intermediate cost objective because it services other
departments.
Most students will probably maintain that the utility department should bear the
$3,120 cost because its failure to maintain specified clearances led to this incident. Some
students will feel that the sanitation department should bear the extra costs above the
$2,400 original proposal.
Decisions regarding these disputes are inherently contextual, so students should
be properly uneasy about choosing a course of action for the controller. The controller has
dealt with all parties before and will interact with them again and again, so he must
measure the effects of his present decision against a whole series of decisions about the
running of the control system. The key is to prevent a similar occurrence in this or other
areas.
Given these precautions, the controller might avoid the issue of “fixing blame” by
not charging any department (or by charging the controller’s department). All the
managers seem to have partial responsibility. It would be reasonable to split the $3,120
cost between them evenly to avoid singling one manager out from the others, yet still
penalize each one for making an error. The lost $1,200 revenue need not be split. The
controller should learn from this incident and take action to:
1. Pinpoint responsibility for preventive maintenance of utility lines in the future.

Decide how future costs should be allocated to provide the best set of coordinated
goals and incentives.
2. Have a meeting of all department heads involved to improve mutual
understanding of responsibilities.

248
COLLABORATIVE LEARNING CASES
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

249
Direct Materials Purchases Budget

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

250
1f.
Unit Costs of Ending Finished Goods Inventory
Large Giant
Cost per Input per Input per
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
a0.08 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.
Ending Inventories Budget

June
Quantity Cost per unit Total
Direct Materials
Sugar 240 lbs. $0.50 $120
Sticks 480 sticks 0.30 144 $ 264
Finished goods
Large 300 $2.525 $757
Giant 180 3.155 568 1,325
Total ending inventory $1,589
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) 1,325

251
1h.
Nonmanufacturing Costs Budget
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
Total cash available for needs (x) $15,011
Deduct cash disbursements
Direct material purchases in May $ 696
Direct material purchases in June
( $2,421  70%) 1,695
Manufacturing overhead
( $2,657  60% because 40% is depreciation) 1,594
Nonmanufacturing costs
( $1,620  70% because 30% is depreciation) 1,134
Taxes 500
Total disbursements (y) $14,239
Financing
Interest at 12% ($20,000  12%  1 ÷ 12) (z) $ 200
Ending cash balance, June 30 (x) ─ (y) ─ (z) $ 572

252
3.
Revenue $16,200
Cost of goods sold 13,252
Gross margin 2,948
Operating (nonmanufacturing) costs $1,620
Bad debt expense ($16,200  80%  1%) 130
Interest expense (for June) 200 1,950
Net income $ 998
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 1,325 1,589
Fixed assets $190,000

Less: accumulated depreciation
($55,759 + 2,657  40% + 1,620  30%) 57,308 132,692
Total assets $141,203
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 + $998) 110,277
Total liabilities and equity $141,203

253
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.
• 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.

254
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’.

255
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.

256
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"Not before lunch," said the Great Man. He turned to the
detective. "On the face of it the matter should prove a simple one,
Kenly, but just at present it is beyond our combined intelligence to
fathom it. Late on the fifteenth—a Tuesday, wasn't it, Markham?—a
cypher cablegram containing important information came into this
office. The despatch was de-coded——"
"By myself," interrupted the Permanent Secretary.
"Placed in a despatch case which was sealed in the usual way
and forwarded by King's Messenger to me," continued Sir Gadsby. "I
received the case, broke the seals myself, and retained the despatch
in my own possession."
"Yes," said the detective, as the Great Man paused.
"The despatch related to the recent trouble in the South Pacific,
the German affair," remarked the Permanent Secretary, "and next
morning there was wild excitement on the Stock Exchange, and later
in the day the newspapers published full details of the trouble, much
to our embarrassment."
"H—m," said the detective, "I suppose you want me to find out
who gave the show away?"
"Your perspicacity is wonderful, Kenly," remarked the Great Man
drily and the Permanent Secretary smiled. "At present, Markham, I
know, suspects me of 'giving the show away,' as you put it, and if I
didn't know Markham I should be compelled to suspect him. We are
really the only two possible suspects."
"H—m," said the detective a second time before remarking
deprecatingly, "The despatch passed through the hands of a third
person. I think you mentioned a King's Messenger?"
"I sealed the despatches with my own hands," remarked the
Permanent Secretary. "And the seals were intact when I took the
case from Captain Marven's hands," added the Great Man.
The detective hazarded another suggestion.
"Is it quite impossible that the information might not have
reached the Stock Exchange and the newspapers from an external
source?"
"So far as we can ascertain, quite impossible," replied the
Permanent Secretary. "We have ascertained that no cable was
received in London which could in any way have related to the affair
before the publication of the news."
"It seems to me," said the Great Man briskly, "that even if we
cannot get direct evidence as to the source through which the
information leaked out, we should at least be able to come to some
sort of conclusion if we knew the names of the parties who must
have benefited by the Stock Exchange operations."
"I see," said the detective. "Well, Sir Gadsby, I'll do my best to
find that out for you."
"I know you will, Kenly," said the Great Man. "But not a word to
anyone; and, while I think of it, I'll write a note to the Commissioner
and ask him to allow you to report directly to Markham here, and to
devote your whole time and attention to this business."
"Very good, Sir Gadsby," said the detective, and the interview
ended.
When alone with the Permanent Secretary, Inspector Kenly
asked every question which occurred to his active brain, but he
elucidated nothing more than the very simple facts with which he had
already been made acquainted, and when he left the Foreign Office
it was with no very hopeful feeling of being able to lay his hand on
the culprit. It is true that there had occurred to him the glimmering of
a possibility as to who might have been responsible for the
disclosure. The despatches had been in the possession of a third
party, in the possession of Captain Marven, the King's Messenger,
for seven or eight hours; and Inspector Kenly had no particular
reason for believing that official locks and seals were more inviolable
than any other locks and seals if submitted to the gentle
manipulation of an expert. But he had met Captain Marven in the
course of his official life, and what he had seen of him led him to
credit the reputation for perfect probity and honour which the King's
Messenger held in the eyes of the world.
"I should have liked an easier job," grumbled Inspector Kenly to
himself. "Another failure to find out anything coming on top of my
failure to get the slightest clue to the mystery of the Flurscheim affair
will make the Chief think that I am getting past my work. However,
it's no use worrying because I'm not possessed of the gift of
divination. What is, was to be," with which philosophic reflection he
stepped aboard a 'bus bound Citywards, and, while engaged there in
his investigations, the Great Man, having finished preparing his list of
answers for the day's sitting of Parliament, carried off the Permanent
Secretary to lunch with him. They enjoyed their meal none the less
because they had unloaded the cause of their vexation upon the
broad shoulders of Detective Inspector Kenly.
CHAPTER X
A NEW VIEW OF THE FLURSCHEIM ROBBERY
Time did not touch Mr. Hildebrand Flurscheim's sore with a

healing finger. A month after he had been robbed of his treasures the
wound was still open, though by that time he had been wise enough
to conceal it with a decent bandage from the curious eyes of the
public. But his friends and his enemies knew that it was there and
condoled or rejoiced, according to their several temperaments.
Perhaps there were more who rejoiced than of those who pitied him,
for Flurscheim was not a popular man. Even his friends were
compelled to admit that he was something of a curmudgeon, and
were not quite so sorry as they would have been had the loss fallen
upon anyone else.
After the robbery he became more curmudgeonish than ever,
and his perpetual growlings at everything and everybody made him
so undesirable a companion that even his poor relations began to
find that his company was an infliction that was barely endurable,
even when sweetened by the prospect of figuring in his will. Yet as
people shrank from him he seemed anxious for society. Partly
because he realised that if he were cloistered with his own thoughts
his broodings would terminate in madness, and partly because he
wished to make clear to the world that his loss was a mere triviality
to a man of his wealth, he sought to entertain in a manner which was
entirely foreign to his earlier habit and his real desire. He had a wide
acquaintance, and there were many of the butterflies of fashion and
rank who were attracted to his dinner-table once by curiosity. If, after
the experience, they decided not to go a second time, it was too
early for the connoisseur to have discovered the fact. It was in
pursuance of this campaign of detraction that he had found himself
at the opera when his stares had proved so discomposing to Meriel
Challys and—afterwards—to Guy. The latter, had he known, need
have taken no alarm. Flurscheim's scrutiny was not directed towards
him. Meriel's face alone had engaged his attention. He had first
caught sight of her as she had bent forward to drink in the music,
and he recognised that her features were familiar to him, but where
and when he had met her he could not for the moment remember. It
was not until after he had left the opera house that his memory
supplied the answer he sought. Then he remembered that one of the
stolen miniatures would have served as a portrait of the girl.
Immediately he began to weave a new theory concerning the
burglary. He had woven many theories before; avarice, spite,
disappointed rivalry had all supplied motives for them, but never had
he considered the possibility of a love motive for the robbery.
Supposing that some unfavoured suitor had seen the miniature, and,
coveting it, had broken in to steal it. No! Such a theory was too wild
for even his own belief. Yet the likeness was so extraordinary that he
looked forward to meeting the owner of the strangely attractive face
again.
Fortune favoured him, for within a week he found himself at a
garden party at which Meriel was also a guest. He sought and
obtained an introduction from the hostess, and was quite oblivious to
the chilly character of his reception.
"I particularly wanted to meet you, Miss Challys. Indeed, I may
say that since I saw you at the opera a week ago your face has
really haunted me," said Flurscheim.
Meriel's eyebrows arched. She meditated flight.
"I'm afraid you must have thought me an awful bounder, staring
at you the other night," he continued, "but your face was so familiar
to me, and yet I could not recall where I had met you. It wasn't until
after the opera was over that I remembered that one of my stolen
miniatures was a most striking portrait of you; I hope that you will
realise that my rudeness was unintentional."
"I certainly did not think so at the time," replied Meriel.
"It was quite a relief when I placed my memory," said the
connoisseur. "D'you know that I'm one of those men that are made
supremely uncomfortable by a lapse of memory of that sort. I begin
to think my brain's failing if it doesn't respond at once to any call I
make upon it, and after my recent worry I really began to be
anxious."
"Did the burglary worry you so much as all that?" replied Meriel.
Usually sympathetic to any story of trouble, she felt it difficult to
express any sympathy with the loss the wealthy connoisseur had
sustained.
"Worry me?" asked Flurscheim in an astonished tone. "Worry
me?" he repeated. "Worry isn't the name for what I've gone through.
I can see you don't understand what a collector's treasures mean to
him. My dear young lady"—in his excitement an accent became
audible which made of the words "ma tear young lady,"—"my
pictures are what I've lived for. If I lose them my life is as empty—as
empty"—he looked round for an appropriate simile and found one
handy—"as most of these people's pockets."
Meriel smiled at the racial revelation. Flurscheim thought she
smiled at the simile itself. "Fortunately it was only one of my pictures
that was taken," he continued, "but"—he could not resist the wail—"it
was the best of the lot. I would rather have lost any two of the
others."
Meriel began to be interested in the man. He was manifestly
honest in his confession. She even managed to infuse a little
sympathy into her enquiry as to whether the police had obtained no
clue to the thief. By so asking she struck another chord in the
keyboard of the Flurscheim emotions.
"The police! Fools! Dolts! Idiots!" he exclaimed. "Of what use are
the police but to strut about and direct the traffic? When it comes to
catching thieves they are just about as useful as the pigeons in the
parks. Some of them call themselves detectives," he continued with
virulent scorn. "There's one of them called Kenly, an inspector with a
reputation of being one of the smartest men at Scotland Yard! Got it,
I should think, the same way as an owl gets a reputation for wisdom.
Cocks his ears, opens his eyes wide, and keeps his mouth shut. For
nearly six weeks he has been doing nothing else but investigate my
robbery. And what has he found out? Nothing, absolutely nothing.
Detectives, bah!" He pulled himself up with an effort. "I've promised
myself I wouldn't talk about the matter to anyone, Miss Challys. I
can't do so without losing my temper, and it will give you a very bad
opinion of me if I have to apologise to you twice in one day."
"You seem to lose it pretty easily, Mr. Flurscheim," she
answered.
"Can't help it, Miss Challys. So I'll apologise straight away for
doing so and for staring at you the other night, for I know you were
annoyed. It never struck me that you might be annoyed, you know.
Most girls to-day take it as a compliment when a man looks 'em
over."
Meriel stiffened and, looking away, met Guy's eyes. She had
known that he expected to be present, and at the recognition her
whole face brightened. Guy had already recognised Flurscheim, and
though the fact that he was apparently engaged in earnest
conversation with Meriel gave him a twinge of apprehension, he did
not hesitate to come forward.
Flurscheim looked upon the young man disapprovingly as Meriel
put her hand in his. He saw that his existence was momentarily
obliterated from the girl's mind. But he did not move from her side,
and when, still forgetful, she strolled away with Guy across the lawn
without even turning her head in his direction, he muttered a curse in
which Guy was included amongst things in general, but from which
Meriel herself was just as certainly excluded.
No sooner were they out of hearing than Guy gave expression
to the curiosity which the sight of Flurscheim in conversation with
Meriel had excited in him.
"However did that bounder Flurscheim manage to corner you,
Miss Challys?" he asked.
Meriel glanced round. "Oh! I had quite forgotten him," she said
laughing, "although I was wondering how I should manage to escape
him when I saw you."
"After staring at you the other night in so impertinent a manner I
wonder he had the cheek to face you," continued Guy irritably.
"Oh! he explained all that," replied Meriel. "He sought me out to-
day in order to apologise." She told how the connoisseur had been
puzzled to account for his familiarity with her face and his ultimate
recognition of her as the autotype of one of his missing miniatures.
Guy smiled at the explanation. He realised with an exceptional
degree of pleasure that the miniature was now in his own
possession. He had long ago carefully removed the picture from the
lid of the snuff-box in which it had been set and had reset it himself
in a simple gold frame with a circlet of brilliants. It was his by right of
possession, and he determined that it should remain his. Incidentally
the information Meriel had given him that she had been the object of
Flurscheim's scrutiny came as a relief. It was proof that he himself
was in no way suspected. At the same time it seemed to Guy an
added impertinence on the part of the connoisseur that he should
have sought to make Meriel's acquaintance. It gave him pleasure to
think that he had despoiled the Jew of his treasures. He would have
liked to have confided his thoughts to the girl at his side. He was
almost on the point of doing so when his common sense bade him
pause. She would not understand. She was not tutored in the
doctrine of the rights of the individual to possess everything upon
which he may lay his hand. But he could not resist the opportunity
which seemed to offer to open her eyes to some of his own beliefs. If
he presented them delicately they might not offend. Crudely
expressed, he knew that she would not listen.
"Flurscheim is hardly the sort of person who deserves to
possess beautiful things," he hazarded.
"There seems something incongruous in the idea," she said
smiling her reply. "But there can be no doubt but that he has a very
real love for them."
"Can't believe it," said Guy emphatically. "The capacity to
acquire beautiful things and the capacity to see their beauties rarely
go together."
"I should think that your argument would rather apply to the
burglar who stole Mr. Flurscheim's valuables than to Mr. Flurscheim,"
replied Meriel merrily.
"Not necessarily," answered Guy. "It might be that the person in
whose possession they are now is far more capable of appreciating
the Greuze or of the miniature which he declares is so like yourself,
than he is, and if such should happen to be the case hasn't the
present possessor as much right as Flurscheim to the enjoyment of
them?"
He spoke lightly and Meriel replied in the same tone.
"Isn't that an argument which might apply to anything of the
nature of personal possessions?" she asked.
"Certainly," he responded quickly. "Is the man or woman, who
wants a thing, to go without it when somebody else has more of the
same article than he knows what to do with? Look at that fat old
woman over there"—the disrespectful allusion referred to the
maternal relative of the latest American addition by marriage to the
list of British peeresses—"she's so loaded up with jewels that she
absolutely clanks as she walks. She has enough on her to satisfy the
aspirations of a hundred ordinary women. Why should she have all
those pretty stones and trinkets and lots of other women go
without?"
"She certainly is wearing far too much jewellery for a garden
party," replied Meriel, her eyes twinkling.
"Yet if any other woman were to relieve her of even the smallest
of her extraneous adornments the mere possession of which would
probably give her far more pleasure than it does to the present
possessor, there's not a man or woman here who would not cry 'to
gaol with the thief,'" said Guy.
Despite his intention, Guy had warmed to the argument, and he
awoke a corresponding earnestness in his companion.
"I don't think I should," she said quietly. "I should pity her too
much."
"But why?" he asked. "She would merely have shown herself to
have the courage of her desires."
Meriel shook her head. "I always pity people who cannot control
their desires, particularly when those desires are for things that don't
belong to them."
"But," urged Guy, "everyone is born with the right to enjoy. That
fat old woman has long ago ceased to find enjoyment in many of her
trinkets. Why pity anyone who would at one stroke relieve her of her
burden and at the same time provide themselves with a new
pleasure?"
Meriel knitted her brows. "I'm no good at an ethical argument,
Mr. Hora," she said. "And I am quite sure you only want to get me to
agree with you so that you may laugh at me afterwards."
"No," he answered. "I've no arrière pensée of the sort you
imagine. I know you would think it wrong, the majority think it wrong
for anyone to help themselves to other people's things. I want to
know why."
Meriel looked at him archly. "Suppose I were to slip behind that
comfortable old lady and snip off that little watch all studded with
diamonds from her chatelaine, what would you think of me?"
"I wish to Heaven you would," he answered.
Meriel laughed. "I should never have thought that you could be
so strongly provoked by mere ostentation."
"I was not thinking of the old woman," he answered. "My
admiration would be entirely attributable to your pluck in defying the
conventions."
"But afterwards?" she objected. "You could never have the
slightest respect for me."
"On the contrary——" he began.
She interrupted him. "No," she said. "You would no more
respect me than I could you, if, for instance, you had stolen poor Mr.
Flurscheim's picture."
He was taken aback by the apposite allusion. For a second, and
for a second only, he imagined that there was intention in her
selection of the simile. But a glance into the smiling eyes which met
his so frankly disabused his mind of the idea. Clearly, the girl never
thought that he could possibly have engaged in such an adventure.
She had not the slightest idea that he was guilty—no, that was the
wrong word, the coward's word, no guilt attached to his actions—that
he was capable of such a feat. She saw that he was disturbed and
continued gaily.
"Why, even the supposition of such a thing is repugnant to you,
and yet you ask why?"
"Even suppose that the idea is repugnant," he replied, "I still ask
why it is so. Reason could justify the action."
"For reason say sophistry," she answered quickly. "You know
that the repugnance of the thought is inbred. It's inherited. We can't
help thinking like that because the knowledge of right and wrong is
intuitive."
"A woman's answer," he answered lightly.
"A man's still more," she said with earnestness. "One might
possibly forgive a woman's theft. We are the weaker creatures and
the more easily swayed by our desires. But the man should be
strong enough to resist. No man worthy the name could stoop to
dishonour himself in so petty a manner, nor could he have aught but
contempt for the woman who so gave way to her covetousness. No,
Mr. Hora. You could never persuade me that you could have an atom
of respect for me if I were to so forget my principles as to filch any
one of the over-jewelled dowager's trinkets? Now, would you?"
He sought refuge from the direct answer in a side issue. "But if
your principles were such that you honestly believed that the good
lady had no more right than yourself to her jewels and that only the
fear of punishment restrained you from taking possession of them?"
Meriel laughed gaily. "I cannot even conceive such a possibility,"
she said. "It seems to me you are preaching anarchy, and I'm not the
least little bit of an anarchist."
The approach of a third person interrupted Guy's reply. Looking
away from Meriel he saw Captain Marven standing beside him. The
Captain had heard his niece's concluding words and he corroborated
them.
"I can safely swear that a more tyrannical dictator of law and
order than Meriel never stepped over a man's threshold. You must
accuse her of something else, Hora."
Guy laughed and the subject dropped. But the conversation had
made an impression upon him. It had destroyed, though at the time
he did not recognise the fact, the delight he had felt in being
something apart from other men, the exhilaration of being in conflict
with the world. The obvious scorn which the girl felt for the thief, her
absolute belief that the idea of theft was as repugnant to him as it
was to herself, were deadly blows to the philosophy which Lynton
Hora fondly imagined he had planted so deeply as to be
ineradicable. Guy felt that his belief was crumbling. He knew that if
he were to be true to the man he knew as father he should forswear
the bewitching companionship of the girl who exercised so unsettling
an influence upon him, nevertheless when a little later Captain
Marven asked him to visit them at their country home when the
season was over, he accepted eagerly.
CHAPTER XI
GUY FINDS A NEW HOME
In the days that followed the conversation between Guy and

Meriel, the young man's disquiet strengthened, though he hid his
perturbation successfully enough from the eyes of his daily
companions. He met the Marvens frequently, for he could not resist
the fascination Meriel exercised upon him. He could see that he was
a welcome visitor at the Marvens' house, and yet every time he
accepted their hospitality he felt a twinge of regret that Captain
Marven should have been a victim of his predatory philosophy, even
though the victim had not been personally injured thereby.
Instinctively he loathed himself for the treacherous part he appeared
to be playing, even though he argued that he had but played a man's
part in avenging his father's wrongs.
He would have felt more satisfied if he could have been made
acquainted with the nature of those wrongs. But when he had
ventured a question on the subject Lynton Hora's brow had wrinkled
into a heavy frown, and he had harshly bidden Guy to refer no more
to the subject. Nor could he gain the least enlightenment from Meriel,
though he had discreetly questioned her regarding her uncle's early
life. No suspicion as to his real parentage ever crossed his mind.
Meriel had merely referred to the great grief of her relatives' lives in
terms which had produced in Guy's mind the idea that their only child
had died in infancy. "Poor auntie and uncle lost their only child when
he was three years old," she had said, "and even now no one ever
dares mention his name in their presence, they feel the loss so
acutely. His name was Guy, like yours, and I think that is partly why
they seem to like you so much."
From his acquaintance with Captain Marven, Guy could not
conceive that the kindly hearted man had ever done anyone a
deliberate injury. He began to question the possibility of Hora being
possessed of some delusion on the subject and longed the more to
be acquainted with the facts in order that he might be in a position to
put the misunderstanding right. Since that was hopeless, however,
he was profoundly thankful that Hora had insisted upon his taking a
residence apart. He had found chambers which suited him in the
"Albany," and there he was free to brood over his own mental
problems without the possibility of having to meet Lynton Hora's
enquiring glance. He no longer felt satisfied with his tutor's
philosophy. He was almost afraid to lay bare his new-born doubts to
the scorn which the Commandatore would pour upon his heart-
searchings. He imagined that the Commandatore had no idea that
any conflict was taking place in his mind. He flattered himself that he
had long since obtained complete mastery over the expression of his
thoughts, that his face was no dial of his emotions but a mask for
their concealment. But he did less than justice to his master's
perceptive powers. He was not conscious that it needed an effort to
remain in the company of the Commandatore, but Lynton Hora
perceived it, and realising that Guy was concealing something from
him determined to become acquainted with the details of the matter
concealed. He had not lost confidence in Guy. He did not imagine
that the truth of principles he had so carefully instilled was likely to
be questioned. But Captain Marven was so associated with the black
days, marked indelibly in his life's calendar, that he could not feel
easy in his mind now that he had once more crossed his path.
Besides, for the consummation of the revenge he was planning, it
was imperative that no nook or corner of Guy's life should be veiled
from his sight. That was the real reason why he had suggested
Guy's finding an abode for himself. He desired to be made
acquainted with Guy's movements, the houses he visited and the
companions he affected when away from home. It would have been
difficult to set such a watch on Guy, if he had remained at the flat in
Westminster, without subjecting himself to inconvenience; but
installed in chambers of his own, it would be easy to obtain
information.
Hora's first intention had been to keep watch himself on Guy's
movements, but consideration decided him to employ some tool for
the purpose. His thoughts had lingered for a moment on Myra, but
that suggestion also was speedily put aside; she was too
passionately interested in Guy to prove a trustworthy spy upon his
actions. Hora knew where to look for a reliable tool, for, secretive
though he was, averse to allowing any outsider to co-operate with
him in the execution of any of his enterprises, yet he had kept in
touch with certain of the companions who had worked beside him,
groaned under the same harsh discipline, in the days of his
expiation. None of them knew him by name. But his face was known
to them, and welcomed, for he never appeared amongst them
without bringing largesse for their debauches, and, more welcome
still, suggestions of places where booty awaited the skilful craftsman
with bold heart, and wise words of advice as to the means by which
it might be acquired. These denizens of the lower world guessed that
their unknown benefactor was of themselves, though moving on a
higher plane. The suggestions he made were invariably audacious,
but when put into practice they almost as invariably proved
successful, so that the unknown became known amongst them as
the Master.
Guy had not been settled in his new abode for more than three
days when Hora set out in search of someone who would undertake
the business. He took all his usual precautions in order to avoid
identification, though he relied more upon the assumption of a new
character than upon any physical disguise. He entered a train which
carried him away to London's most beautiful possession, the Royal
Gardens of Kew. He entered the gates a bright, alert personality. He
had an appreciative eye for the beauties of the trees and the flowers,
but he did not linger amongst them, seeking a retired spot amongst
the trees in the wild portion of the demesne. When half an hour later
he retraced his steps nothing but the curious limp in his gait would
have hinted at his identity. The overcoat which he had carried on his
arm was now worn on his back. Its threadbare seams and worn cuffs
were an eloquent testimony of poverty. The sprucely folded umbrella
had become baggy, and instead of carrying it on his arm he leaned
heavily upon it. A pair of steel spectacles were fixed upon his nose.
His hat had been exchanged for another much the worse for wear.
His collar had been replaced by one of clerical cut. A Bible, much
worn, was under his arm. He looked like a mild, inoffensive
clergyman who had fallen upon evil days, or a curate who had never
fallen upon good ones, and anyone who spared him a single glance
would have been ready to stake a good round sum that the contents
of the bag he carried consisted mainly of tracts. Returning to the
railway station he asked in the mildest of voices for a ticket to
Latimer Road, and bungled over counting the change while the
people waiting behind him impatiently snorted at his clumsiness.
"I'm sure I beg your pardon for detaining you," he said when the
coppers were safely put away in a shabby old purse. He was always
authentic in his impersonations.
No one took the slightest heed of him when he reached the
station to which he had booked, and, alighting, set his face in the
direction of Notting Dale. He walked steadily on, turning now to the
left now to the right again. Each street he entered seemed to worsen
in some indefinable manner. The main road into which he had
passed from the station had been merely one of London's
characterless thoroughfares, with rows of struggling shops, each
flaunting the banner of cheapness in the face of passers-by. A sign
of a poor neighbourhood this, and off the main road the signs were
more pronounced. The open doors, the women sitting at open
windows, the babies on the stairs and the pavements, the voice of
the coal hawker, were all unmistakable signs. Presently the dress of
the women became more blowsy, the children dirtier, men were to be
seen lolling from the windows and gathered in groups outside the
doors of the public houses; when policemen were to be seen at all,
they were in couples. Hora's face wore an air of positive
benevolence. A boy of five or six years ran beside him with
outstretched hand.
"Spare us a copper, guvnor?" he asked.
Hora paused. "I have no coppers to spare, my child," he
remarked.
"I ain't had no breakfus," said the child.
Hora's eyes twinkled.
"I'm afraid you are not speaking the truth, my boy," he remarked
blandly. "Still"—he opened his bag carefully and extracted therefrom
a packet of sticky sweets and a bundle of tracts. "I don't expect you
get many sweeties. Hold out your hand."
The youngster did as he was bidden. Hora counted four sugary
lumps into the eager palm. "Never tell a lie, my boy," he said
solemnly.
The child seemed unimpressed. "I say, is that all, guvnor?" he
asked as Hora replaced the paper of sweets in his bag.
The incident had not passed unobserved. From a doorway close
at hand a bullet-headed man, whose cranial outline was the more
strongly marked because of the closely cropped hair, was looking on
with a grin on his countenance, while across the road a couple of
policemen were also watching. The bullet-headed person spoke
suddenly.
"You run away and stop worriting the good gen'l'man," he said.
The boy looked up, caught sight of the policemen, and whirling
on his heels disappeared like a rabbit into its burrow.
"The very kids in this street learn to tell the tale afore they can
walk," remarked the round-head pleasantly.
"I'm afraid it's a very wicked street," said Hora with a sigh. "The
devil has many disciples in Fancy Lane."
"Guess you're right there, guvnor," replied the man. "There's two
on 'em comin' across the road to talk to you now." There was a
shadow of a wink in his eye.
"Let me hope you will have nothing to do with them," said Hora
earnestly, "any more than I should myself. You must know where
companionship of that sort leads."
"I know that right enough," said the man passing his hand over
his closely cropped hair. "I don't have no more truck with that sort
than I can help."
Hora reopened his bag and took from it a tract.
"You may find some helpful words here," he said. "This little
story is called 'The Downward Path.' Take it and it may prove a
blessing to you."
He turned away, and, for the first time, appeared to become
aware of the presence of the two policemen.
"I am afraid that I did not rightly apprehend that good man's
meaning," he said aloud as if talking to himself.
One of the policemen looked down upon the bent figure.
"Beg pardon, sir," he said, "I just wanted to make sure it was
you, because this street, as you know, isn't too safe for strangers."
"Thank you, my friend," replied Hora. "But you know that I am as
safe here as at my own home." The policemen passed on.
"There won't come no harm to him," said the elder to his
companion. "They knows he's a harmless old crank, an' they chy-
ikes him a bit for comin' to convert 'em with a packet of tracts for the
men and a packet of sweets for the kids, but he's safe enough, for
he never has anything about him to make it worth while anyone
knocking him on the head."
"He comes pretty reg'lar, I suppose then?" asked the second
constable. "I've not seen him before."
"Three or four times a year, may be. There's plenty knows him in
the street."
They passed out of sight and Hora went on his way, stopping
now and then to speak to a man or a woman or to bestow a sweet
on some urchin in the gutter. So, progressing slowly, he reached an
archway which had once formed an entrance to a builder's yard. He
passed beneath it and crossed the open space to a shed which
stood at the far end. The ground was littered with rubbish of all sorts,
dirty wisps of straw, dirty pieces of newspaper, rotting cabbage stalks
and decomposing remains of fish. Reaching the shed he gave no
knock but pushed the door open and entered. Outside, the July sun
was shining brightly and within the darkness was so dense that he
stood still until his eyes grew accustomed to it. The shed was
provided with one small window, but three of its four panes were
glazed with brown paper and the remaining pane of glass was so
begrimed that only a feeble light forced entrance through it.
While he stood in the doorway striving to penetrate the gloom a
human voice, though it was so far unlike the ordinary human voice
that it might have belonged to any creature but one made in God's
image, began to mutter and gurgle in the darkest corner.
"Ma Norton?" asked Hora.
The answer came like a wheeze of a dropsical spider.
"Get out of this. I don't want no ant'em cacklers round my
place."
By this time Hora's vision had grown accustomed to the semi-
darkness. He took off his hat and laid it on the table. He saw that but
for one old woman seated in a corner there was no one else present.
"Your eyesight's failing, Ma," he remarked composedly. The old
woman struggled to her feet. "Blimy! If it ain't the Master hisself," she
wheezed. "What's brought you down here again so soon?"
"What else should but the desire to see you a reformed
character, the desire to read the Bible to you, pray with you with the
object of ending your days in the workhouse like a decent Christian
woman. Ha—ha—ha!" He laughed at his own ribaldry.
"He! He! He!" the old woman cackled in response. Her pallid,
pendulous, flabby cheeks flapped as she shook with merriment. Her
enormous frame, held loosely together about the waist and
shoulders with untidy tapes, threatened to collapse like a half-cooled
jelly shaken too soon from the mould. The tears started from her
eyes and ran down her cheeks. She gasped and choked until
reaching for a bottle standing handily on a shelf she poured
something from it into a tumbler standing by and tossed off the
draught.
"That's better," she remarked. "You shouldn't make me laugh,
Master. Laughing shakes me so that I'm afraid it'll be the death of me
some day."
"No fear," answered Hora. "You will finish yourself off with the
gin bottle first."
"Lord! What a man it is for making game of an old woman's little
weakness," she replied composedly. "But what's brought you here
to-day out of your time? Nothin's happened to my gal, has there?"
"Getting anxious to have her home again?" remarked Hora
sardonically. "I'm not sure that she would appreciate the home you
could give her."
He looked round him and smiled at the thought of Myra
transported into such surroundings. The bare walls of the shed with
the plaster broken and crumbling away; the filthy floor with a grimy
sack thrown before the fenderless fireplace to do service as rug; the
two stained deal tables littered with old articles of crockery, remnants
of food, articles of attire, all mixed up together; the broken chairs; the
grubby bed and bedding in the corner, would make a strange setting
for the exotic beauty who at that very moment would probably be
stepping from her perfumed bath to don a dainty dressing gown
before submitting to the ministrations of her maid.
The old woman watched his glance distrustfully. "You ain't
thinking of turning her out, Master?" she whined. "I know very well
she's well off where she is, an' you know this ain't no place for the
likes of her."
"I might bring her here to see you one day. I'm sure she would
be glad to see her mother," he remarked.
The woman rose again from the chair. She spoke with ill-
concealed agitation.
"Don't you go for to do it, Master. Don't you do it. I'm quite
satisfied so long as I knows she's all right. There ain't no call for her
to set eyes on the likes of me. Why, it might happen that she would
sick at the sight." Her voice died away and she repeated dully, "Don't
you go for to do it!"
"I don't think she would be exactly pleased," remarked Hora.
"But make you mind easy, Ma. It's nothing to do with Myra that I want
to see you about. You hear a lot of things in this part of the world,
and I wondered whether by any chance you have heard lately of
Corny Jessel. I have a job for him."
The old woman reseated herself and helped herself thoughtfully
to another allowance of gin. "When did I last hear tell of him?" she
murmured. "Not so long ago, for certain. The shadder-man, you
mean, ain't it, Master? Corny Jessel, the shadder-man?"
"Yes," said Hora. "The shadow-man."
"My memory ain't what it was," said the old woman
disconsolately, "but I'm sure I heard about him only the other day."
Hora lit a cigarette and smoked calmly while the woman racked
her memory. At last he was rewarded for his patience.
"It was Bully Hagan telled me he'd seen him only the other day."
"The round-headed man who's just come out of prison?" asked
Hora.
"Lives at 27 in the Street, first floor front," said the woman.
"I met him on my way here," said Hora. "I'll go and find him." He
rose to go.
"You haven't told me how my gal's lookin'," said the woman.
Hora laughed, but he good naturedly complied with the request,
and for five minutes poured into the greedy ears of the woman a
description of the dresses and the jewels her daughter wore at the
theatres and dinners and dances to which she had recently been.
Then he took his departure, leaving behind him a couple of gold
pieces in the old woman's palm. In the street he resumed his
missionary demeanour and passing along from house to house
found Bully Hagan at the same spot where he had parted from him,
and in exchange for another piece of gold was soon put in
possession of the address he sought. He wrote it down on a piece of
paper.
Cornelius Jessel, Woodbine Cottage, Melpomene Road,
Wimbledon.
And, resuming his progress, came at last to the more
respectable streets and finally to the railway station again.
CHAPTER XII
INSPECTOR KENLY'S LODGER
One day at the beginning of July Detective Inspector Kenly's

face as he left the railway station and stepped out briskly homewards
wore a particularly injured air. It was not entirely owing to the sultry
state of the atmosphere, though that may have had something to do
with his frame of mind. He considered himself to be a greatly
aggrieved man. In the first place his investigations into the
Flurscheim burglary had been an abject and total failure. He had
spent day and night following up illusory clues without the slightest
result. On top of this he had been entrusted with the investigation of
the stolen despatch affair, and after three days' laborious enquiry
found himself no nearer any accurate result than he had been when
he commenced, save that certain names on the list of members of
the Stock Exchange had been ticked off as unable to afford any
information. These failures he might have borne with equanimity had
they been his sole grievance. But he had another, and being a purely
personal, private, domestic grievance, it rankled far more than any of
the others.
Detective Inspector Kenly was a married man, and when Mrs.
Detective Inspector determined to have her own way, Mr. Detective
Inspector, however clever he was at circumventing the wiliest of
criminals, invariably succumbed to the wiles of the smiling lady who
ruled over his household. Happily any difference between them was
rare, but there was one subject upon which they never could agree.
The Inspector liked to keep his home to himself. He thought that his
good lady had quite enough to do to look after himself and the two
little Kenlys. But that was not Mrs. Kenly's opinion at all. She thought
that no home was complete without a lodger. To her such a thing as
a spare bedroom in her house was an abomination. She looked
upon it as so much capital lying idle, instead of being put out at
interest with some eligible young man or young woman. When he
had taken Woodbine Cottage, Melpomene Road, Wimbledon, Kenly
had thought that he should have circumvented Mrs. Kenly's little
idiosyncrasy. But there were two attics in the cottage which had not
entered into his calculations. It did not occur to him that they could
be utilised for any other purpose than as box-rooms. But Mrs. Kenly
thought differently. In her eyes they would make quite adequate, if
small, bedrooms, so before he had been settled in the house for a
month, all the Inspector's arrangements were recast, the youthful
Kenlys were relegated to the attics, while the largest bedroom on the
first floor was furnished as a bed sitting-room and a card placed in
the window announced to all and sundry that "furnished apartments"
were to be secured at Woodbine Cottage.
The card did not remain there very long. Woodbine Cottage
looked so spick and span; the bright windows, the white curtains, the
spotless doorstep, and shining brass knocker were such attractive
testimonials to the quality of the accommodation to be found within,
that the eligible lodger was speedily secured. For six years Inspector
Kenly entertained a single lady of mature years and a small income.
He did not repine overmuch, for she had few friends, gave little
trouble, and was more or less of a companion to Mrs. Kenly when
his business, as it often did, took him away from home.
But, when she left, Inspector Kenly made another effort to
persuade his wife to do without "the lodger." In vain he argued that
his income was ample for the wants of the household. Mrs. Kenly
would not listen. Once again the card appeared in the window, and in
due course Cornelius Jessel, passing by, saw it there, and, being at
the time in want of a quiet retreat in a really respectable
neighbourhood, thought that the apartments, if not too expensive,
would suit him. He saw the bed sitting-room. He liked its appearance
so well that he paid a week's rent there and then in advance, and
thus, when Inspector Kenly returned home one evening, he found
that he was once more possessed of a lodger.
Possibly, if Cornelius Jessel had been acquainted with the
position and occupation of the head of the household into which he
had entered, he might not have been so ready to take possession of
the comfortable bed sitting-room. But Inspector Kenly did not think it
desirable to blazon abroad his connection with Scotland Yard. He
had particularly insisted upon any lodger who entered his house
remaining unacquainted with his profession. So Cornelius Jessel had
not the slightest idea that he was living under the roof of one of the
men whom he had long ago learned to look upon as an enemy.
Indeed, he had real reasons to fear the emissaries of law and order.
Not that he was by any means a person of importance in the criminal
world. He was merely one of those backboneless creatures who
have the will but lack the courage to do any daring deed which would
make them famous in the annals of crime; one of those poor
shrinking, cringing creatures who are content to play the part of
jackal to more venturesome spirits, a petty thief sometimes, an
astute writer of begging letters at others, a deviser of petty frauds for
robbing poor people of a few stamps on every convenient occasion.
As she bent over him a

sudden mad impulse to
clasp her in his arms
seized him.
When he had timidly asked to be shown the vacant apartments

in Woodbine Cottage, Mrs. Kenly had decided at once that he would
prove amenable to any rules and regulations she might like to
impose upon him. He agreed with such a deprecating air to every
suggestion she made as to the points which seemed desirable in a
well-conducted lodger that her heart quite warmed to him. He
thought sixpence a scuttle for coals "most reasonable." He agreed
that the room was certainly worth more than the seven and sixpence
weekly paid in advance, which Mrs. Kenly demanded for rent and
attendance. He exhibited the liveliest satisfaction when Mrs. Kenly
informed him that beyond a shilling a week for "gas" she charged "no
extras," and came to a most satisfactory arrangement regarding the
meals he proposed to take at home, and the price he was to pay for
them. Mrs. Kenly thought in her own mind that a bachelor was much
more profitable than a maiden of mature years, and congratulated
herself on her luck. When she further learned from Cornelius Jessel
that he was engaged in "literary pursuits," and would not be
disturbed by many callers, though his work might sometimes keep
him in the house all day, she thought she was indeed in luck's way,
and was fully prepared to defend her action when called upon.
She found it necessary to do so from the first. Inspector Kenly
objected most strenuously to the presence of a male lodger in the
house. He objected still more when he had made the acquaintance
of his new tenant. He disliked Jessel's appearance. The pale hair,
pale complexion, pale watery eyes roused his antipathy. He disliked
Jessel's manner still more. The lodger did not walk as an ordinary
man, he glided from place to place. He glided down the stairs and
out of the front door, and he glided in again and up the stairs so that
no one ever knew whether he was in or out of the house. His
apologetic manner, his dislike of going abroad by day, his
abstemiousness, his apparent lack of acquaintances, the very
decorum of his habits were to Inspector Kenly reasons for suspicion.
The Inspector was no mean judge of men, and he dubbed Jessel
thief at sight. "Some day we shall find him and the spoons missing,"
he said to his wife. She laughed at the idea.
"Well, if that should happen, I shall depend upon you to recover
them for me," she replied.
She did not believe that there was any harm in the man. But the
Inspector was so certain in his own mind that he spent some hours
searching the records at Scotland Yard, after having secured some
of his tenant's finger prints by a trick. The search was quite useless.
There was no record against him. Hitherto he had always managed
to evade the law.
It was the fact that he had been unable to secure the proof he
desired that constituted Inspector Kenly's third and greatest
grievance. Everything seemed to be going wrong with him. He had
been so certain that he would be able to provide good and sufficient
reasons to his wife for getting rid of the detested lodger that, when
he found that he was unable to do so, he began to doubt whether his
instincts were playing him false.
Thus brooding he turned into Melpomene Road. Several yards
before him was an elderly man wearing a clerical collar with an
overcoat threadbare at the seams, a little black bag in his hand, and
a Bible under his arm, and slightly dragging one foot after him as he
walked.
"Non-conformist parson," commented the Inspector to himself.
The stranger was looking each side of him as he passed up the
street, but, on reaching Woodbine Cottage he paused, lifted the latch
of the gate and, entering, made his way to the front door.
"A visitor for the lodger," commented the Inspector, and he
passed by his own door to the end of the road. When he returned,
the non-conformist parson had disappeared. The Inspector let
himself quietly into the house with his latchkey. An opportunity was
afforded him of learning something concerning the lodger which he
determined not to neglect. He said nothing to Mrs. Kenly as to his
intention, for his suspicion that the tenant of the first floor front was,
to use his own expressive phrase, "on the crook," might not prove
capable of demonstration. He merely said that he had business that
evening, and could only remain in the house a few minutes. So Mrs.
Kenly popped the tea in the teapot forthwith, dished up the haddock,
which had been simmering over the pan on the kitchen fire, and
directed all her attention to supplying her husband's requirements.
While thus engaged the lodger's bell rang, but she paid no heed to
the summons until she had seen that the Inspector's needs were all
provided for.
"I expect Mr. Jessel wants a cup of tea for his visitor," she
remarked, when the bell tinkled a second time.
"So he has begun to have callers at last, has he?" remarked the
Inspector.
"It's the first time since he come to live with us, a month ago last
Tuesday," replied Mrs. Kenly, "and a nice-spoken old clergyman, too.
I always thought as he was a most respectable young man, and now
I'm sure of it." She bustled off to answer the bell, in the absence of
the youthful maid of all work, who had been sent out with the two
young Kenlys to picnic on the Common.
Inspector Kenly said nothing. When Mrs. Kenly returned and
prepared a tray with two cups on it, he chatted about indifferent
things. He finished his tea leisurely. "I'll just have a rinse before I go
out again," he remarked to his wife. He closed the door of the little
sitting-room behind him, and mounted the stairs. When occasion
required, Inspector Kenly, in spite of his six feet of muscular
manhood, could be as light-footed as any cat, and not a stair
creaked as he mounted them to his own bedroom, the door of which
was opposite that of the room in which the lodger was entertaining
his guest. In his own doorway he paused and listened. He could hear
a murmur of voices, that was all. Stay! His trained ear caught the
sound of a name twice repeated, "Guy Hora." It meant nothing to
him, but he noted it instinctively. The voices dropped to a murmur
again, and the Inspector returned downstairs, and, after lighting his
pipe and telling his wife that he did not expect to be very late home,
he slipped out of the back door and made his way leisurely to the
end of the street.
His meal had put him in a much more contented frame of mind,
and, as he puffed away at his pipe, he smiled at the thought that he
should be engaged in keeping observation on his own house. It
reminded him of his early days in the detective force, and he
remembered how often he had waited hours without anything
rewarding his patience. This time his patience was not severely tried.
He had not finished his first pipeful of tobacco when his lodger's
visitor made his appearance, and passing along the street took a
turning which led to the nearest railway station.
Inspector Kenly walked briskly in the same direction, but by
another route. It was slightly longer than the one Lynton Hora had
taken, but Kenly was there first. He was on the platform before Hora,
and was in the guard's brake almost as soon as the train came into
the platform. He observed that his lodger's visitor carefully scanned
the carriages as they passed him and entered an empty first-class
compartment. "Hard up parsons don't usually travel first-class,"
commented Inspector Kenly to himself.
He kept his eyes fixed on the door of that compartment all the
way to the terminus, but it remained unopened until Waterloo was
reached. There, watching more keenly than ever, he chuckled at his
own acumen when his observation was rewarded by the sight of a
very differently attired person to the shabbily clad old clergyman,
who had entered the compartment, stepping from the train. The
clerical hat and collar and the spectacles had disappeared. The
shabby overcoat carried on Hora's arm revealed only a new silk
lining which was not out of keeping with the smartly cut lounge suit
Hora was wearing beneath. His stoop abandoned, he seemed three
or four inches taller, but he still carried his bag, and Kenly could not
have mistaken the limp.
The detective walked briskly along the platform to the exit of the
station, giving one glance at Hora's face as he passed him. Hora
was signalling a cab and paid no attention. At the exit the detective
paused. The cab which contained the man he was following drove
through the gate, and he heard the address which the cabman
shouted to the clerk in the cab registry office. He gained the street,
and, hailing an empty cab passing at the moment, gave the driver an
address two doors distant from that which had reached his ears. A
block in the traffic at a street corner enabled him to catch up with the
cab he pursued. Nor did he again lose sight of it until Hora, alighting,
paid the man, and entered his own residence.
The detective looked at his watch. Seven o'clock! There was
plenty of time before him. He also dismissed his cabman, and
strolled along to the building which Hora had entered. Unless his
memory was at fault he guessed that he would have very little
difficulty in obtaining all the information he desired. He knew the
block of mansions, and he knew that a year or two previously an old
comrade of his was employed there in the capacity of hall porter. His
memory had not deceived him. As he reached the door his old
comrade opened it to allow a lady to pass. Recognition was mutual.
Inspector Kenly entered. When he left he was acquainted with all
that the servants in Westminster Mansions knew of Lynton Hora's
household, but the information he had gleaned afforded him no sort
of a hint as to the nature of the connection which existed between
him and Cornelius Jessel, the detective's literary lodger.

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6-1 The budgeting cycle includes the following elements:

6-2 A master budget is a single comprehensive income statement that combines

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in increased sales as demand by customers is less likely to exceed supply. Better

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

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

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

6-15 (10 min.) Terminology.

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

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3. (a) Manager, shipping department

5. (a) Production supervisor

6. (a) Maintenance department

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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

McGrath & Sons Sales Budget

Selling Price Units Sold Total Revenue

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

Budgeted sales in units 135,000

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.

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

185,000  12 months = 2,220,000

2. Budgeted unit sales (1-litre bottles) 6,240,000

3. Beginning Budgeted Target Budgeted

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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

Note the relatively small inventory of wheels. In Japan, suppliers tend to be

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Copyright © 2016 Pearson Canada Inc.

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

2. a. The projected number of the MZB-33 computer hardware units that

a 0.30  90 unit sales in April

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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%

3. An ABB approach recognizes how different products require different mixes of