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CHAPTER 10: STRATEGY AND THE MASTER BUDGET
QUESTIONS
10-1 Compel strategic planning and facilitate implementation of strategic plans. An
organization’s strategy, strategic plans, and budgets are interrelated. Preparing
budgets compels reviews of an organization’s strategy and its strategic plans and
can facilitate multiple implementations of the strategic plan. Feedback from
budgets often results in improvements to an organization’s strategy and strategic
plan.
Serve as a basis for performance evaluation. Budgets serve as the benchmark
against which actual performance can be compared. Budgets are a better basis for
judging performance than past performance for two reasons. First, budgeted
amounts take into account expected changes and improvements in the
environment. Second, past performance is a result of past events and operations
and may not be suitable to serve as a benchmark. To the extent past performance
was not effective/efficient it does not make sense to use this as the standard
against which actual performance is compared.
Motivate managers and employees. Budgets, if internalized, serve as goals for
managers and employees and, if properly implemented, can motivate them toward
achievements of the goals.
Promote coordination and communication within the organization. Budgets compel
managers to think of interdependencies and interrelationships among subunits of
the organization. A budget is also a communication device that helps all
employees and managers understand and accept the organization’s objectives and
expected roles and contributions over the coming period.
Authorization to act. The approved budget, particularly in a not-for-profit setting,
gives the manager authorization to act (make decisions, etc.).
Other benefits can include serving as a basis for resource allocation, aiding cash-
flow management, and providing authorization documentation.
10-2 A master budget is a comprehensive plan of action for a future period; as such, the
master budget includes both operating and financial budgets. An operating budget
consists of plans regarding revenues and resource acquisition/use across all major
operating areas of the organization (e.g., sales, production, purchasing, marketing,
research and development, and general administrative activities). The set of
operating budgets culminates in a budgeted income statement. Financial budgets
relate to sources and uses of funds for an upcoming period. The set of financial
budgets culminates in a budgeted statement of cash flows and budgeted balance
sheet.
10-3 Many organizations are “run by the numbers.” In these organizations managers are
held accountable for financial results and therefore need to be “data literate” as
regards the factors that combine to determine financial results. Much of this
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
information needed by managers comes from the annual planning process known
as master budgeting. Therefore, their interest tends to focus on projections of
financial results and they judge the desirability of a set of operating strategies
based on the financial results projected for those strategies.
10-4 Some would argue that the primary purpose of budgets is for planning and that
problems are created when budgets are used for control and incentive-
compensation purposes. The latter use of budgets is thought to engender both
unethical practices (e.g., Enron, WorldCom) or, more prevalently, gaming behavior.
For example, people whose performance will be compared to the budget targets
may understate their potential in order to have achievable targets set. Therefore,
tying plans to after-the-fact control compromises the integrity of the information-
gathering process. Some people have argued that information used for planning
should not be used in after-the-fact control. (Standards for after-the-fact control
could, instead, be based on independent benchmark information or improvements
on previous performance.) Some organizations have designed incentive schemes
that reward people jointly on their ability to improve performance and to meet
budget projections. This approach partially mitigates the problem of gaming
behavior on the part of employees.
10-5 The sales budget is often regarded as the cornerstone in the master budget
because all operating activities in a business emanate from efforts to attain the
level of sales specified in the sales budget. A firm can complete the plan for other
activities of a period once it knows the expected sales levels for the current and the
immediate future periods. A manufacturing firm, for example, can ascertain the
number of units to be produced in coming periods based on levels of forecasted
sales and the desired ending inventory each period. The units to be produced, in
turn, affect many other activities of the firm including amount and kinds of materials
to be purchased, number of employees to be hired, levels of factory overhead, etc.
10-6 Additional factors include:
▪ Beginning and desired ending inventories of work-in-process (WIP) and
finished goods
▪ The required material inputs (in lbs., liters, etc.) for each product
▪ Beginning and desired ending inventories of direct materials
▪ The cost of materials (per lb., liter, etc.)
10-7 A cash budget that is prepared according to the statement of cash flows required
for external reporting purposes generally includes five components:
▪ Beginning-of-period cash balance
▪ Net cash flow from operations
▪ Cash flow from investing activities
▪ Cash flow from financing activities (e.g.,new financing andrepayment of
principal)
▪ End-of-period cash balance
10-8 Zero-base budgeting (ZBB) is a budgeting process that requires managers to

Education.
prepare budgets each period from a zero base for all operations.
A typical budgeting process is “incremental” in nature. That is, budgets for the
upcoming period start from the approved budgets for the current period, with
amounts added to reflect planned changes for the upcoming period. Thus,
traditional budgets assume that most, if not all, of the current activities and
functions will continue into the coming budget period. In contrast, a zero-base
budgeting process allows no activities or functions to be included in the budget
unless managers can justify their need. Pure forms of ZBB are expensive and
time-consuming. For this reason, some companies have partial ZBB systems.
A number of companies (e.g., Xerox, Texas Instruments) and government
organizations (e.g., State of Georgia) have at one time or another used ZBB. And
ZBB has been gaining in popularity in recent years.
10-9 Budgetary slack, or "padding" the budget, is the practice of knowingly including a
higher amount of expenditure in the budget (or lower amount of revenue) than
managers believe should be the case. One reason that it is common to find slack
in budgets is the desire of managers to use such slack as a cushion for
unpredictable/uncontrollable future events (e.g., worker attrition, machine
breakdowns/malfunctions). Another reason is the increased recognition or reward
that might accrue to those who “beat” their budget target. Finally, managers may
believe that the budgets they submit will be “cut” in the budget negotiation
process. Therefore, such managers must “pad” their budgets in order to secure
the amount of resources they feel they actually need.
10-10 A time-driven activity-based costing (TDABC) system, as explained in Chapter 5,
is a refinement and simplification of a traditional ABC system. Rather than
identifying activities and associated activity costs, a TDABC system calculates a
cost rate for each major activity, process, or department using only the following
pieces of information: (1) the resource cost associated with the process or
department, and (2) the resource consumption (measure in time) of each activity
(handling a production run, shipping a product, packaging a product, etc.). More
complex situations can be captured by time equations used in a TDABC system.
Advocates of TDABC believe that this system both reduces the cost of
implementing an ABC system and improves the accuracy of the resulting activity-
cost data. Resulting activity-cost data from a TDABC system can be used, as is
the case with ABB, to budget resource requirements once a sales and production
plan has been determined for an upcoming period. As with ABB, we work
backwards from this plan to determine resource requirements. This planning
process is facilitated by simplifications introduced by a TDABC system.
Finally, both ABB and TDABB facilitate the budgeting process because both
systems tend to reduce the amount of “negotiations” that occur. That is, there is
less room to negotiate because once the production and sales plan for the
upcoming period has been determined, the resources requirements (and therefore
resource budgets) are all but automatically determined.
Education.
10-11 A fixed-performance contract refers to the performance associated with the results
reflected in the master (static) budget that is prepared at the beginning of the
year. This amount is “fixed” in the sense that the amount is negotiated prior to the
beginning of the budget period and not adjusted afterwards. For incentive-
compensation purposes, actual performance (e.g., operating income generated)
can be compared to this fixed budgeted amount, hence the term “fixed-
performance contract.”
From a planning perspective, the use of fixed-performance targets lead to a
narrow (i.e., artificially short) horizon. From a control standpoint, such fixed-
performance contracts have been criticized because they encourage both gaming
behavior and other ethically questionable behavior. In short, under such contracts
managers are motivated to “do whatever it takes, but no more” to achieve the
(fixed) budgeted target.
10-12 What-if analysis, within the context of budgeting, refers to the process of varying
one or more budget inputs for the purpose of examining the resulting effect on a
variable of interest (e.g., budgeted sales, operating income, or operating cash
flows). Scenario analysis can be viewed as the result of simultaneously changing
two or more inputs and examining the resulting effect on a variable of interest.
The basic version of Excel can perform three kinds of what-if analyses: scenarios,
data tables, and Goal Seek. Scenarios and data tables take sets of input values
and determine possible results. A data table works only with one or two variables,
but it can accept many different values for those variables. A scenario can have
multiple variables, but it can accommodate only up to 32 values. Goal Seek works
differently from scenarios and data tables in that it takes a result and determines
possible input values that produce that result. In addition to these three methods,
an Excel add-in, Solver, can be used to perform “what-if” analyses. The Solver
add-in is similar to Goal Seek, but it can accommodate more variables.
See the following tutorials for additional information about performing what-if
analyses using Excel 2016, Excel 2013, and Excel 2010:
1. Introduction to What-If Analysis:

https://support.office.com/en-US/article/Introduction-to-what-if-analysis-22BFFA5F-E891-4ACC-
BF7A-E4645C446FB4
2. Using Excel to Perform Scenario Analysis:

http://office.microsoft.com/en-us/excel-help/switch-between-various-sets-of-values-by-using-
scenarios-HP010072669.aspx
3. Using Excel to Create Data Tables:

http://office.microsoft.com/en-us/excel-help/calculate-multiple-results-by-using-a-data-table-
HP010342214.aspx
Education.
4. Using Goal Seek in Excel:
http://office.microsoft.com/en-us/excel-help/use-goal-seek-to-find-the-result-you-want-by-
adjusting-an-input-value-HP010342990.aspx
5. Using Solver to Perform What-If Analysis:

http://office.microsoft.com/en-us/excel-help/define-and-solve-a-problem-by-using-solver-
HP010342416.aspx
https://support.office.com/en-US/article/Define-and-solve-a-problem-by-using-Solver-9ed03c9f-7caf-
4d99-bb6d-078f96d1652c
10-13 The term “relative-performance contract” means that the basis against which
actual managerial performance is compared is either an internal or an external
benchmark, rather than budgeted performance embodied in the annual master
budget. It means, benchmarking actual performance against peer performance for
purposes of determining incentive compensation and managerial rewards.
The term “rolling financial forecast” refers to a process of continually updating

budgets as each budget period (e.g., month) passes. In this way, the organization
has a constant (e.g., 12-month) planning horizon.
The use of both “relative-performance contracts” and “rolling financial forecasts”

are key recommendations set forth by the Beyond Budgeting Roundtable
(www.bbrt.org). Also, see Jeremy Hope and Robin Fraser, Beyond Budgeting:
How Managers Can Break Free from the Annual Performance Trap. Boston, MA:
Harvard Business School Press, 2003; and, Jeremy Hope and Robin Fraser,
“Who Needs Budgets?” HBR OnPoint Product Number 306X. Boston, MA:
Harvard Business School Publishing Corporation, 2003.
Education.
BRIEF EXERCISES
10-14
Q2 Q3
Sales—2019 16,000 15,000
Plus projected 25% increase for 2020 4,000 3,750
Estimated sales volume—2020 20,000 18,750
× Estimated unit selling price—2020 $4.00 $4.00
Estimated sales dollars—2020 $80,000 $75,000
10-15 Payment history:

% paid in month of purchase: 25%
% paid in month following month of purchase: 75%
Expected cash disbursements:

February: ($5,500 × 0.75) + ($6,500 × 0.25) = $5,750
March: ($6,500 × 0.75) + ($8,000 × 0.25) = $6,875
10-16 Number of units produced in Qtr. 1:

Ending inventory of direct materials (DM) = 50,000 lbs.
Desired ending inventory = 25% of following month’s production
requirements
Therefore, DM used for production in Qtr. 1 = 50,000 ÷ 0.25 = 200,000 lbs.
Units produced in Qtr. 1 = lbs. of DM used/lbs. of DM per unit of

output = 200,000 ÷ 8 = 25,000 units
DM requirements (in lbs.), Qtr. 2 = Planned production, Qtr. 2 × DM lbs./unit

= (25,000 units × 1.10) × 8 lbs./unit
= 27,500 units × 8 lbs./unit = 220,000 lbs.
10-17 Scheduled Production, Quarter 2:

Units required to meet estimated sales, Qtr. 2 = 12,000 units
Units required to meet targeted ending inventory:
15,000 units × 10% = 1,500 units
Total units needed 13,500 units
Less: Beginning inventory, Qtr.2 (12,000 units × 10%) = 1,200 units
Scheduled production, Quarter 2 = 12,300 units
10-18 Current level of monthly operating costs = $10,000:

Estimated operating costs, January = $10,000 × 0.991 = $9,900
Estimated operating costs, June = $10,000 × 0.996 = $9,415
Estimated operating costs, December = $10,000 × 0.9912 = $8,864
Education.
10-19 Collection of Credit Sales—November:
30% of credit sales made in October = 0.30 × $30,000 = $9,000
70% of credit sales made in November = 0.70 × $24,000 = $16,800
Total estimated collections--November = $25,800
Collection of credit sales—December:

30% of credit sales made in November = 0.30 × $24,000 = $7,200
70% of credit sales made in December = 0.70 × $20,000 = $14,000
Total estimated collections--December = $21,200
10-20 Collection of Credit Sales—December:

From credit sales made in November = 0.20 × $90,000 = $18,000
From credit sales made in December:
= (0.75 × $100,000) × 0.98 = $73,500
Total estimated collections—December = $91,500
10-21 Estimated interest expense—April = borrowing in April × (annual rate ÷ 12)

= [($30,000 − $18,000) + $1,000] × (0.12 ÷ 12)
= $13,000 × 0.01 = $130.00
Note that, strictly speaking, to maintain a minimum cash balance of $30,000, the
company would have to borrow an extra $1,000 to be able to cover the interest
payment (eom) and still have at least $30,000 of cash.
Estimated financing transactions—May:

Interest expense (paid eom): $13,000 × 0.01 = $130.00
Principal repayment:
Beginning-of-month cash balance
= $18,000 + ($13,000 − $130) = $30,870
Plus: net cash flow in May, prior to financing = $22,000
Cash balance prior to financing transactions = $52,870
Less: interest expense (eom) for May (see above) = ($130)
Less: minimum cash balance requirement = ($30,000)
Cash available for principal repayment = $22,740
Repayment of April borrowing = $13,000
Total financing transactions—May (Int. exp. + repay.) = $13,130
10-22 Direct Material (DM) Purchases, December = (DM issued to production +

ending DM inventory) – beginning DM inventory
= ($150,000 + $39,500) – $37,000 = $152,500
Education.
10-23 Total budgeted marketing expenses, 4th quarter:
Sales volume (units):

3rd Quarter (actual) = 4,000
Estimated 4th-Qtr. Increase = 10%
Variable marketing expenses, per unit sold = $0.05
Fixed marketing expenses, per MONTH:
Salaries (cash) = $10,000
Depreciation--delivery trucks = $5,000
Insurance (paid monthly) = $2,000
Total budgeted marketing expense and cash payments, 4th quarter:

Variable costs ($0.05 × [4,000 units × 1.10]) = $220
Fixed costs:
Salaries = (3 × $10,000) = $30,000
Depreciation = (3 × $5,000) = $15,000
Insurance = (3 × $2,000) = $6,000 $51,000
th
Total budgeted marketing expenses, 4 quarter = $51,220
Less: Non-cash charges:
Depreciation expense = $15,000
Estimated cash payments for marketing expenses = $36,220
Education.
EXERCISES
10-24 Purchase Discounts (25 minutes)
The financial cost of not taking advantage of the early-payment discount for
purchases made on credit can be approximated by the following formula (we use
the term “approximate” here to denote the fact that the estimate below does not
assume compounding of interest and as such provides a conservative estimate):
Opportunity cost (%) = [discount % ÷ (1 − discount %)] × [365 ÷ no. of

extra days allowed if discount is not taken]
1. In the case of 2/10, n/30, the approximate economic cost of not taking
advantage of the early-payment discount is:
= [0.02 ÷ (1 − 0.02)] × [365 ÷ 20] = 0.020408 × 18.25 = 37.24%
Basically, if you choose not to take the early-payment discount, you are giving
up a 2% discount (on the net amount) in return for an extra 20 days in which
to pay. There are 18.25 (365 ÷ 20) 20-day periods in a year. Note that in the
first term of this formula we divide the 2% discount rate by 98% (100% − 2%)
because, in effect, you are paying 2% to delay for 20 days paying 98% of the
total bill. So, the percentage rate you are paying in this case is really 2.0408%
of the net bill (the bill without financing cost).
2. In the case of 1/10, n/30, the opportunity cost of not taking advantage of the
early-payment cash discount is:
= [0.01 ÷ (1 − 0.01)] × [365 ÷ 20] = 0.010101 × 18.25 = 18.43%
3. Given the significant opportunity cost of not taking advantage of early-

payment cash discounts, the appropriate accounting practice (to motivate
mangers to avoid or at least minimize such opportunity costs) would be to
record purchases at their net-of-discount amount and then to record as
“interest expense” or “purchase discounts lost” any cash discounts not taken
advantage of.
Education.
10-25 Production and Materials Purchases Budgets (20-25 minutes)
Production Budget:
2nd Quarter 3rd Quarter
Budgeted sales 76,000 68,000
Desired ending inventory (5% of next quarter’s sales) + 3,400 + 4,800
Total units needed 79,400 72,800
Beginning inventory (5% of this quarter’s sales) – 3,800 – 3,400
Total units to produce 75,600 69,400
Budgeted Purchases of Direct Materials (in lbs.) for the 2nd quarter:
2nd Quarter 3rd Quarter

Budgeted production 75,600 69,400
Direct materials (lbs.) per unit produced × 3 × 3
Direct materials needed in production 226,800 208,200
Desired ending inventory of direct materials (lbs.)
(20% of 208,200 lbs.) + 41,640
Total direct materials needed 268,440
Beginning inventory of DM (20% of 226,800) – 45,360
Budgeted purchases of direct materials (lbs.) 223,080
Education.
10-26 Budgeted Cash Receipts and Cash Disbursements (30 minutes)
1. Budgeted Cash Receipts:
November:
Cash sales = $120,000
Collection of accounts receivable:
From Oct sales:
($100,000 × 0.95) × 0.40 × 0.75 × 0.985 = $28,073
($100,000 × 0.95) × 0.40 × 0.25 = $9,500
From Nov sales:
($150,000 × 0.95) × 0.60 × 0.75 × 0.985 = $63,163
($150,000 × 0.95) × 0.60 × 0.25 = $21,375 $242,111
December:
Cash sales = $80,000
From Nov sales:
($150,000 × 0.95) × 0.40 × 0.75 × 0.985 = $42,109
($150,000 × 0.95) × 0.40 × 0.25 = $14,250
From Dec sales:
($ 90,000× 0.95) × 0.60 × 0.75 × 0.985 = $37,898
($ 90,000× 0.95) × 0.60 × 0.25 = $12,825 $187,082
2. Budgeted Cash Disbursements:
November:
From Nov purchases:
($170,000 × 0.70) × 0.25 = $29,750
From Oct purchases:
($270,000 × 0.70) × 0.75 = $141,750 $171,500
December:
From Dec purchases:
($200,000 × 0.70) × 0.25 = $35,000
From Nov purchases:
($170,000 × 0.70) × 0.75 = $89,250 $124,250
Education.
10-27 Cash Disbursements Budget (30-35 minutes)
1. Budgeted cash payments for merchandise purchases:
a. February:
20% (January) × $150,000 = $30,000
80% (February) × $120,000 = $96,000 $126,000
b. March:
20% (February) × $120,000 = $24,000
80% (March) × $90,000 = $72,000 $96,000
2. Budgeted cash payments for merchandise purchases:
a. February:
20% (January) × $150,000 × 0.98 = $29,400
80% (February) × $120,000 × 0.98 =$94,080 $123,480
b. March:
20% (February) × $120,000 × 0.98 =$23,520
80% (March) × $90,000 × 0.98 = $70,560 $94,080
3. The financial cost of not taking advantage of the early-payment discount can be
approximated by the following formula:
Opportunity cost (%) = [discount % ÷ (1 – discount %)] × [365 ÷ no. of extra

days allowed if discount is not taken]
= [0.02 ÷ (1 − 0.02)] × [365 ÷ 15] = 0.020408 × 24.33 = 49.66%
Basically, if the company chooses not to take the early-payment discount, it is

giving up a 2% discount (on the net amount) in return for an extra 15 days in
which to pay. There are 24.33 (365 ÷ 15) 15-day periods in a year. Note that in
the first term of this formula we divide the 2% discount rate by 98% (100% − 2%)
because, in effect, the company would be paying 2% to delay for 15 days paying
98% of the total bill. So, the percentage rate the company is paying in this case is
really 2.0408% of the net bill (the bill without financing cost). Regardless of the
technicalities here, students should understand that the opportunity cost of not
taking advantage of the early-payment (cash) discount can be very significant, as
is the case here. For this reason, firms should consider recording purchases at
net cost and any discounts lost as interest expense.
Education.
10-28 Cash Budget—Financing Effects (30 minutes)
Hartz & Co.

Cash Budget
For November and December
November December
Cash balance, beginning $75,000 $99,000

Plus: Cash receipts $525,000 $450,000
Total cash available (A) $600,000 $549,000
Cash disbursements, prior to financing (B) $450,500 $550,000

Plus: Minimum cash balance (given) $50,000 $50,000
Total cash needed (C) $500,500 $600,000
Excess (deficiency of) cash, before

financing effects (D) = (A) − (C) $99,500 ($51,000)
Financing:
Short-term borrowing, beginning of month -0- $52,000
Repayments (long-term loan principal),
end of month ($50,000) -0-
Cash Interest (@12%/year), end of month ($500) ($520)
Total Effects of Financing = (E) ($50,500) $51,480
Ending cash balance = (A) − (B) + (E) $99,000 $50,480
Note: Financing of $52,000 at the beginning of December is needed to cover both the
$51,000 projected deficiency of cash (before financing effects) plus the interest charge
that would have to be made in December ($520) based on this new financing. Also
note that the cash budget is not the same as the statement of cash flows prepared for
external users, so we include interest expense as part of the financing activities.
Education.
10-29 Cash Budget (20 minutes)
Marsha Inc.
Cash Budget for Coming Year
Beginning cash balance $15,000

Net cash flow from operations:
Cash inflows:
Cash collections from customers $145,000
Cash outflows:
Direct materials purchases (25,000)
Operating expenses $50,000
Less: Depreciation 20,000 (30,000)
Payroll (75,000)
Income taxes (6,000) 9,000
Investing activities:
Purchase of machinery (30,000)
Financing activities:
Cash excess (shortage) before financing ($6,000)
Minimum cash balance required 25,000
New financing required 31,000
Budgeted end-of-period cash balance $25,000
Education.
10-30 Budgeted Cash Receipts: Cash Discounts Allowed on Receivables (45
Minutes)
1. Breakdown of Cash/
Sales Data Amount Bank Credit-Card Sales
June $60,000 Cash sales 40%
July $80,000 Credit cards 60%
August $90,000
September $96,000 Bank charges 3%
October $88,000
Credit sales: Collection of Credit Sales
Current month 20%
Sales Breakdown and Terms 1st month 50%
Cash and bank credit card sales 25% 2nd month 15%
Credit sales 75% 3rd month 12%
Terms 1/eom, n/45 Late charge/month 2%
Discount (if paid by eom) 1%
Schedule of Cash Receipts: September & October
Education.
10-30 (Continued)
2. Appropriate accounting treatment for:
a) Bank service (collection) fees: These can be considered an offset to gross sales
and thus can be reflected as a deduction in determining “net sales” (see text
Exhibit 10.13). Alternatively, these amounts can be considered “selling
expenses” and, as such, be treated as an “operating expense,” (i.e., an element
of “Selling and Administrative Expenses” on the Income Statement).
b) Cash discounts allowed on collection of receivables: These are offered as an

incentive to speed up the collection process. They are recorded as an offset
(decrease) to revenue.
Education.
10-31 Cash Receipts and Payments (30-40 minutes)
1. Budgeted cash collections in December 2018 from November 2018 credit

sales:
Total credit sales in November $240,000
Percentage collectible × 95%
Total amount collectible from credit sales in November $228,000
Percentage collected in the month following month of sales × 40%
Budgeted collections in December from November credit sales $ 91,200
2. Budgeted total cash receipts in January 2019:

Cash sales in January $ 60,000
Collections from credit sales in January:
Total collectible from credit sales
$180,000 × 95% = $171,000
Percentage to be collected in January × 60% $102,600
Collections from credit sales in December:
Total collectible from credit sales
$360,000 × 95% = $342,000
Percentage to be collected in January × 40% 136,800
Budgeted total cash receipts in January $299,400
3. Budgeted total cash payments in December 2018 for inventory purchases:

Total inventory purchases in November:
For November sales: $320,000 × 0.3 × 0.6 = $ 57,600
For December sales: $460,000 × 0.7 × 0.6 = 193,200 $250,800
Percentage of Nov. purchases to be paid in December × 75%
Payment in December for purchases in November $188,100
Budgeted purchases in December:
For December sales: $460,000 × 0.3 × 0.6 = $ 82,800
For January sales: $240,000 × 0.7 × 0.6 = 100,800 $183,600
Percentage of December purchases to be paid in December × 25%
Payment in December for purchases in December $45,900
Budgeted cash payment in December for inventory purchases $234,000
Education.
10-32 Retailer Budget (50 minutes)
1. Budgeted merchandise purchases: May and June
D. Tomlinson Retail
Budgeted Merchandise Purchases
May and June
May June July

Sales (in units) 11,900 11,400 12,000
Cost per unit × $20 × $20 × $20
Cost of Goods Sold (CGS) $238,000 $228,000 $240,000
Ending inventory (130% of
next month’s CGS) + 296,400 + 312,000
Total needed $534,400 $540,000
Beginning inventory (130% of
this month’s CGS) – 309,400 – 296,400
Budgeted Merchandise Purchases $225,000 $243,600
2. Budgeted cash disbursements: June
Budgeted Selling, General, and Administrative (SG&A) expenses:
May June
Sales revenue $357,000 $342,000
SG&A expense ratio × 0.15 × 0.15
Total SG&A expense $ 53,550 $ 51,300
Non-depreciation SG&A expense $ 51,550 $ 49,300
D. Tomlinson Retail
Budgeted Cash Disbursements, June
May June
Merchandise purchases $ 225,000 $ 243,600
Non-depreciation SG&A expenses + 51,550 + 49,300
Total payables $276,550 $292,900
Payment for the current month’s payables (54%) $158,166
Owed from last month (46%) + 127,213
Budgeted cash disbursements $285,379
Education.
10-32 (Continued)
3. Budgeted cash collections: May

D. Tomlinson Retail
Cash Collections
May
From last month's (April) sales:
Within the discount period ($363,000) × 60% × 97% = $211,266

After the discount period $363,000 × 25% = 90,750
From credit sales two months ago (i.e., March):
Collection of credit sales made in March $354,000 × 9% = 31,860

Total cash collections $333,876
4. Gross and net balance of Accounts Receivable (AR) as of May 31
March April May Total

Sales $354,000 $363,000 $357,000
Remaining AR % 6% 15% 100%
AR Balance (Gross) $21,240 $54,450 $357,000 $432,690
Bad-debt allowance* $21,240 $21,780 $21,420 64,440
AR Balance (Net) $368,250
* @ 6% of gross sales dollars
Education.
10-33 Accounts Receivable Collections and Sensitivity Analysis (50 minutes)
Original Assumptions/Data:
Actual credit sales for March $130,000
Actual credit sales for April $160,000
Estimated credit sales for May $210,000
Estimated collections in month of sale 25%
Estimated collections in first month following month of sale 60%
Estimated collections in the second month after month of sale 10%
Estimated provision for bad debts in month of sale 5%
1. Estimated cash receipts in May from collection of accounts receivable:

Collection from sales in March (0.10 × $130,000) $13,000
Collection from sales in April (0.60 × $160,000) $96,000
Collection from sales in May (0.25 × $210,000) $52,500
Total estimated cash collections in May $161,500
2. Gross accounts receivable, May 31st (after appropriate write-off uncollectible

accounts):
From credit sales made in April (0.15 × $160,000) $24,000
From credit sales made in May (0.75 × $210,000) $157,500
Estimated gross accounts receivable, May 31st $181,500
3. Net accounts receivable, May 31st:

Gross accounts receivable, May 31st (from (2) above) $181,500
Less: Allowance for uncollectible accounts:
Net accounts receivable, May 31st $163,000
4. Revised data/assumptions:
Actual credit sales for March $130,000
Actual credit sales for April $160,000
Estimated credit sales for May $210,000
Estimated collections in month of sale 60%
Estimated collections in first month following month of sale 25%
Estimated collections in the second month after month of sale 10%
Estimated provision for bad debts in month of sale 5%
a. Estimated cash receipts from collections in May:

Collection from sales in March (0.10 × $130,000) $13,000
Collection from sales in April (0.25 × $160,000) $40,000
Collection from sales in May (0.60 × $210,000) $126,000
Total cash collections in May $179,000
Education.
10-33 (Continued)
b. Gross accounts receivable, May 31st (after appropriate write-off of uncollectible

accounts)
Gross accounts receivable, May 31st $108,000
5. The principal benefit is the accelerated receipt of cash, which the company can
potentially employ to pay down debt, reduce borrowing, invest, etc. Principal costs
would relate to whatever programs are needed to secure the accelerated collection
of cash. These costs could include personnel, travel, mailings, telephone, incentive
programs, and costs related to customer relations.
Education.
10-34 Budgeting for Marketing Expenses; Strategy (50 minutes)
1. The following screen shots are from the Excel spreadsheet created for this problem.
It shows that the original monthly budgeted marketing expense is $338,000 and that
the revised (budgeted) amount is $372,628, an overall increase of 10.24%.
Education.
10-34 (Continued-1)
Monthly Marketing Expenses: Cost Change

Sales Commissions $125,400 4.50%
Sales Staff Salaries $44,000 10.00%
Telephone and mailing $44,308 16.60%
Rental--Sales office building $25,000 0.00%
Gas (utilities) $13,800 15.00%
Delivery charges $81,620 16.60%
Depreciation--Office furniture:
Exisiting furniture $8,000 0.00%
New furniture $500 100.00%
Marketing consultants $30,000 20.00%
Total Budgeted Costs $372,628 10.24%
2. To achieve the monthly targeted cost of $350,000, the rate of “telephone and mailing”
costs cannot increase at all (as is the case in the proposed budget); in fact, the
results of the Goal Seek analysis indicates that such rates must be decreased by
approximately 43%, as shown below:
Monthly Marketing Expenses: Cost Change

Sales Commissions $125,400 4.50%
Sales Staff Salaries $44,000 10.00%
Telephone and mailing $21,680 -42.95%
Rental--Sales office building $25,000 0.00%
Gas (utilities) $13,800 15.00%
Delivery charges $81,620 16.60%
Depreciation--Office furniture:
Exisiting furniture $8,000 0.00%
New furniture $500 100.00%
Marketing consultants $30,000 20.00%
Total Budgeted Costs $350,000 3.55%
These results are generated by completing the following dialog box that appears after
activating the Goal Seek command from the Data tab, then What-If Analysis menu in
Excel:
Education.
10-34 (Continued-2)
3. As indicated in the text, budgets can be used both for control and for planning
purposes. The relative importance of each can be linked either to the competitive
strategy the business is pursuing or to the product life-cycle. In the present case (a
start-up company, competing on the basis of a product-differentiation strategy), the
relative emphasis of the marketing budget is likely more for planning than control.
That is, the information contained in this budget can assist the company in
determining its financing needs. However, it probably should not be used for
“controlling” (i.e., cutting) expenses in situations where the underlying expenditures
are determinants of competitive success. Further, many types of so-called
“discretionary costs” (such as marketing) are fixed (or at least “sticky”) and therefore
difficult to cut in the short run. As such, the primary benefit of the budget in such
cases is to better plan for, rather than control, the underlying expenses.
Education.
10-34 (Continued-3)
See the following tutorials for additional information about performing What-If
analyses using Excel 2016, Excel 2013, and Excel 2010:

BF7A-E4645C446FB4


HP010342214.aspx


HP010342416.aspx
https://support.office.com/en-US/article/Define-and-solve-a-problem-by-using-Solver-
9ed03c9f-7caf-4d99-bb6d-078f96d1652c
Education.
10-35 What-If Analysis (25 Minutes)
1. What-if Analysis:
January February March
Credit Sales $100,000 $120,000 $110,000
Estimated Bad Debts Expense

January February March
Assumed rate of B/D
expense:
1% $1,000 $1,200 $1,100
3% $3,000 $3,600 $3,300
5% $5,000 $6,000 $5,500
8% $8,000 $9,600 $8,800
2. Managers today work in a world of uncertainty. One way to cope with uncertainty in the master budgeting process is
to model the underlying relationships associated with the various budgets that are prepared and then to perform
sensitivity analysis. One form of sensitivity analysis is the what-if analysis described above. For Tyson Company,
this type of analysis can help the firm decide whether it might need to implement a more restrictive credit-granting
policy and, if so, how much it might be willing to spend in this regard.
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10-36 Profit Planning and Sensitivity Analysis (45 minutes)
1. Sales volume in units:
Let "X" = required sales volume. Thus, when total cost at each alternative cost structure
is the same, we have:
$85.00X + $40,000 = $80.00X + $45,000

X = 1,000 units
2. Sales level needed (note: cm = contribution margin; sp = selling price; X =

sales volume, in units; FC = total fixed costs):
Pre-tax profit = (cm/unit × X) − FC = 5% (sp/unit × X)

0 = [(cm/unit × X) − 5% (sp/unit × X)] − FC
X = FC ÷ [(cm/unit) − 5% (sp/unit)]
Alternative 1 Alternative 2
Selling price/unit = $100.00 $100.00
Variable cost/unit = $85.00 $80.00
Contribution margin/unit = $15.00 $20.00
Operating profit target (%) = 5% 5%
Required Sales Volume (in units) = 4,000 3,000
Check:
Sales Revenue $400,000 $300,000
Variable Costs $340,000 $240,000
CM $60,000 $60,000
Fixed Costs $40,000 $45,000
Operating Profit $20,000 $15,000
Operating Profit ÷ Sales Revenue 5.00% 5.00%
3. Sales volume in dollars needed under each alternative to achieve a profit goal of 5% on sales.
Let X = sales dollars, then:

Pre-tax profit = [(cm ratio) × X] − FC = 5.00%X
FC = (cm ratio × X) − 5.00%X
FC = (cm ratio − 5.00%)X
X = FC ÷ [(cm ratio − 5.00%) × X]
Targeted pre-tax profit (% of sales) = 5.00% 5.00%
10-36 (Continued)
Alternative 1 Alternative 2
Selling price/unit = $100.00 $100.00
Contribution margin/unit = $15.00 $20.00
Contribution margin ratio = 15.00% 20.00%
Operating profit target (%) = 5% 5%

Required Sales Volume = $400,000 $300,000
Check:
Sales Revenue $400,000 $300,000
Variable Costs $340,000 $240,000
CM $60,000 $60,000
Fixed Costs $40,000 $45,000
Operating Profit $20,000 $15,000
Operating Profit ÷ Sales Revenue 5.00% 5.00%
10-37 Scenario Analysis (50 minutes)
1. Budgeted Operating Income--Current Year:
Sales Revenue (2,500 units × $1,500 per unit) = $3,750,000

Less: Variable Costs (2,500 units × $1,000 per unit) = $2,500,000
Contribution Margin (2,500 units × $500 per unit) = $1,250,000
Less: Fixed Costs = $200,000
Operating Income = $1,050,000
2. Scenario Analysis:
Percentage Change from Baseline

Sales Selling Variable
Volume Price Cost Total Fixed
Scenarios (units) per Unit per Unit Costs
a 0.00% 10.00% 0.00% 10.00%
b 0.00% 0.00% 5.00% (5.00%)
c (8.00%) 10.00% 0.00% 0.00%
Sales Selling Variable

Volume Price Cost Total Fixed
Scenario (units) per Unit per Unit Costs
Baseline 2,500 $1,500 $1,000 $200,000
a 2,500 $1,650 $1,000 $220,000
b 2,500 $1,500 $1,050 $190,000
c 2,300 $1,650 $1,000 $200,000
$ Difference % Change
Baseline Budgeted From from
Operating Operating Baseline Baseline
Scenario Income Income Op. Income Op. Income
Baseline $1,050,000 $1,050,000 $0 0.00%
a $1,050,000 $1,405,000 $355,000 33.81%
b $1,050,000 $935,000 ($115,000) (10.95%)
c $1,050,000 $1,295,000 $245,000 23.33%
10-38 Cash Budgeting: Not-for-Profit Context (45 minutes)
1. An endowment fund is a gift (contribution) whose principal must be maintained but whose income may be expended by
the receiver of the gift. (You might use the example of an “endowed professorship” as an example.)
2.
Cash Budget for Tri-County Social Service Agency
(in thousands)
Quarters
I II III IV Year
Cash Balance, beginning $11 $8 $8 $8 $11
Receipts:
Grants $80 $70 $75 $75 $300
Contracts (evenly during year) $201 $201 $201 $201 $80
Mental Health Income (+5 in Qtrs. II, III) $20 $25 $30 $30 $105
Charitable donations $250 $350 $200 $400 $1,200
Total Cash Available $3812 $473 $333 $533 $1,696
Less: Disbursements:
Salaries and Benefits $3354 $342 $342 $346 $1,365
Office expenses $70 $65 $71 $50 $256
Equipment purchases & maintenance $2 $4 $6 $5 $17
Specific assistance $20 $15 $18 $20 $73
Total disbursements $4273 $426 $437 $421 $1,711
Excess (deficiency) of cash available
over disbursements ($46) $47 ($104) $112 ($15)
Financing:
Borrow from endowment fund $545 $0 $112 $0 $166
Repayments $06 ($39) $0 ($104) ($143)
Total financing effects $547 ($39) $112 ($104) $23
Cash Balance, ending $88 $8 $8 $8 $8
Notes:
1 Annual total ($80,000) ÷ 4
2 $11,000 + $80,000 + $20,000 + $20,000 + $250,000 = $381,000
3 $381,000 – ($46,000) = $427,000
4 $427,000 – $20,000 – $2,000 – $70,000 = $335,000
5 ABS(($46,000) – $8,000) = $54,000
6 Must borrow in Qtr.; therefore, repayments = $0.
7 $54,000 (borrowings) + $0 repayments (entered as a negative)
8 Total financing effects ($54,000) + Excess (deficit) of cash available over disbursements (($46,000)) = $8,000
3. $23,000.
4. It is probable that both donations and requests for services are unevenly distributed over the year. Alternatively, the
recurring need to borrow money suggests an overreliance (dependency) on the endowment. Therefore, the agency may
want to increase requests for donations, seek additional grants, or petition for an increase in the present endowment
fund.
5. No. Assuming there is careful fiscal management, borrowing only occurs when necessary.
10-39 Budgeting: Not-for-Profit (NFP) Context (30 minutes)
1. Stewardship is defined by Merriam-Webster Online Dictionary as “the conducting, supervising, or managing of

something; especially: the careful and responsible management of something entrusted to one's care.”
The cited Socially Responsible Investment Guidelines (http://www.usccb.org/about/financial-reporting/socially-

responsible-investment-guidelines.cfm) state: “Although it is a moral and legal fiduciary responsibility of the trustees
to ensure an adequate return on investment for the support of the work of the church, their stewardship embraces
broader moral concerns.” Also, the principles of stewardship list two fundamental and interdependent principles:
“The Conference should exercise responsible financial stewardship over its economic resources” and “The
Conference should exercise ethical and social stewardship in its investment policy.”
In terms of investment policy, the Guidelines state that: “Socially responsible investment involves investment
strategies based on Catholic moral principles. These strategies are based on the moral demands posed by the
virtues of prudence and justice. They recognize the reality that socially beneficial activities and socially undesirable
or even immoral activities are often inextricably linked in the products produced and the policies followed by
individual corporations. Given the realities of mergers, buyouts and conglomeration, it is increasingly likely that
investments will be in companies whose policies or products make the holding of their stock a ‘mixed investment’
from a moral and social point of view. Nevertheless, by prudently applying traditional Catholic moral teaching, and
employing traditional principles on cooperation and toleration, as well as the duty to avoid scandal, the Conference
can reflect moral and social teaching in investments.”
2. “These two major principles work together to encourage the Conference to identify investment opportunities that
meet both our financial needs and our social criteria. These principles are carried out through strategies that seek: 1)
to avoid participation in harmful activities, 2) to use the Conference's role as stockholder for social stewardship, and
3) to promote the common good.”
3. No. (Reasons should vary.)
4. Yes.
10-40 Budgeting for a Service Firm (75 minutes)
1.
Total hours for the budgeted activities:

Hourly
Budgeted Charge
Revenue Rate Required
(Given) (Given) Hours
Business returns $1,000,000 $250 4,000
Complex individual returns $1,200,000 $100 12,000
Simple individual returns $1,640,000 $50 32,800
$3,840,000 48,800
Professional staff requirements for the budgeted revenue:

Senior
Total Hours Partner Manager Consultant _Consultant_
Required Each Total Each Total Each Total Each Total
Business returns 4,000 0.30 1,200 0.20 800 0.50 2,000 0.00 0
Complex individual returns 12,000 0.05 600 0.15 1,800 0.40 4,800 0.40 4,800
Simple individual returns 32,800 0.00 0 0.00 0 0.20 6,560 0.80 26,240
Total Hours 48,800 1,800 2,600 13,360 31,040
Hours per week 50 45 40 40
# of weeks needed 36 58 334 776
# of weeks per professional staff per year 40 45 45 48
# of professional staff needed 1 1 8 16
Excess (deficiency) hours 1,040 (320)
Note: Because Consultants can be hired on a part-time basis, we round the calculation DOWN for this class of labor. The
other three labor classes are given (i.e., do not have to be planned for based on data in the problem).
Since, according to the present staffing plan and anticipated workload needs, there is an excess of senior
consultant hours, the budgeted cost for overtime hours worked by senior consultants would be $0.
10-40 (Continued-1)
2. Number of full-time consultants needed for the year:
No. of consultant-weeks needed for the year = 776 (from solution to requirement #1,
above)
No. of weeks/full-time consultant/year = 48 (from solution to requirement #1, above)
No. of full-time consultants needed = 16 (776 ÷ 48, rounded down)
3. The manager's total compensation, assuming that the revenues from preparing tax
returns remains the same:
Consultant's pay:
Earning per year = $60,000
Hrs. worked/year = 1,920
Hourly pay rate = $31.25
No. of PT hours, consultants = 320
Annual Salaries:
Per partner = $250,000
Per manager = $90,000
Per senior consultant = $90,000
Per support staff = $40,000
Staffing Plan:
Partners = 1
Managers = 1
Senior consultants = 8
Full-time Consultants = 16
Support staff = 5
10-35
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-40 (Continued-2)
AccuTax Inc.
Budgeted Operating Income
For the Year ended August 31, 2019
Revenue $3,840,000
Payroll expenses:
Partner $250,000
Manager 90,000
Senior consultants—base pay 720,000
Senior consultants—pay for overtime hours 0
Consultants:
Full-time $960,000
Part-time 10,000 970,000
Support staff 200,000 $2,230,000
General and administrative expenses 373,000
Operating income before bonus to manager $1,237,000
Less: manager's bonus 73,700
Operating income before taxes $1,163,300
Total compensation for the manager:

Salary (given) $90,000
Bonus (0.10 × [$1,237,000 − $500,000]) 73,700
Total $163,700
10-36
10-41 Activity-Based Budgeting (ABB) (30 Minutes)
1. Total budgeted cost for each activity and for the Business Services Division for
January 2019:
Budgeted Cost-
Activity Activity Driver Rate Total Cost
Storage 400,000 $0.4925 $ 197,000
Requisition Handling 30,000 $12.50 $ 375,000
Pick Packing 800,000 $ 1.50 $1,200,000
Data Entry 800,000 $ 0.80 $ 640,000
30,000 $ 1.20 $ 36,000
Desktop Delivery 12,000 $30.00 $ 360,000
Total Budgeted Cost for the Division $2,808,000
2. Activity-related data are not available. The only data you have is that budgeted
fixed cost per month is $1,000,000 and budgeted variable cost per carton is
$1.30. Using this approach, what is the estimated cost for the month? Compare
and comment on how your answer here differs from the answer to Requirement 1.
Budgeted total Cost for the Division for the Month of January:
Budgeted Fixed Cost $1,000,000
Budgeted Variable Cost ($1.30 × 1,170,000) $1,521,000
$2,521,000
If the appropriate cost drivers have been chosen and the cost-driver rates are
correct, then the budget based on an ABC analysis should be more accurate in
terms of depicting the resource demands of support activities of the organization
for the coming month. Put another way, the use of a single, volume-based cost
driver will not likely capture the underlying economics of the company's support
activities and associated cost.
3. Expected saving in costs—January 2019:
Requisition Handling (30,000 @ $12.50/requisition) = $ 375,000

Data Entry: number of lines (800,000 @ $0.80/line) = 640,000
Data Entry: number of requisitions (30,000 @ $1.20/req.) = 36,000
Expected Cost Savings, January 2019 = $1,051,000
10-37
The ABC cost-rate data included above represent the estimated cost of resources
that are currently supplied by the company but which could be eliminated by the
introduction of an electronic order-processing system. Note, however, that to
achieve these savings, management of the company must take actions to cut
(eliminate) the underlying resource spending or deploy these resources
elsewhere. In other words, the savings will not likely occur automatically.
If the company uses a single cost-rate system based on the number of cartons
delivered, it will not be able to estimate the cost savings without special efforts to
gather additional information. That is, the existing one-variable, volume-based
model does not reflect the resource demands/resource consumption of the current
process regarding the processing of customer orders.
10-42 Activity-Based Budgeting (ABB) with Continuous Improvement (40 Minutes)
1. Unit-Level: Storage, Pick packing, Data entry—Lines

Batch-Level: Requisition handling, Data entry—Requisitions,
Desktop delivery
2. Budgeted cost for each activity and for the division as a whole, in February &
March:
Budgeted cost-driver rates:

Cost-Reduction Cost-Driver Rates
Activity Rate (per month) January February March
Storage -- $0.4925 $0.4925 $0.4925
Requisition Handling 2% $12.5000 $12.2500 $12.0050
Pick Packing 1% $ 1.5000 $ 1.4850 $ 1.4702
Data Entry—Lines 1% $ 0.8000 $ 0.7920 $ 0.7841
Data Entry—Requisitions 2% $ 1.2000 $ 1.1760 $ 1.1525
Desktop Delivery 2% $30.0000 $29.4000 $28.8120
Budgeted Costs by Activity and for the Division as a whole, February and March:
Activity
Activity Volume February March
Storage 400,000 $ 197,000 $ 197,000
Requisition Handling 30,000 $ 367,500 $ 360,150
Pick Packing 800,000 $1,188,000 $1,176,120
Data Entry—Lines 800,000 $ 633,600 $ 627,264
Data Entry—Requisitions 30,000 $ 35,280 $ 34,574
Desktop Delivery 12,000 $ 352,800 $ 345,744
Divisional Totals $2,774,180 $2,740,852
10-38
3. Factors that may influence the success of a continuous-improvement (kaizen)
program include:
▪ Reasonable or achievable cost reductions.
▪ Awareness of all employees on the expected (scheduled) cost improvements
over at least the immediate future periods.
▪ Acceptance by both management and employees.
▪ Commitment of both management and employees on the strategic
importance of the success of the continuous improvement program.
▪ Close link between the scheduled improvements and performance
evaluations and rewards.
▪ Cost reductions possible from small, incremental improvements, not from
large discontinuous changes in factors such as operating processes, capital
equipment, supplier networks, or customer interactions.
4. Primary criticisms of kaizen (continuous-improvement) budgets include the

following:
▪ The budgeting process tends to place enormous pressure on employees

to reduce all costs, which can lead to employee “burnout.”
▪ The use of kaizen budgets tends to motivate small, incremental rather
than major/significant process improvements.
▪ If the kaizen targets are confined to the manufacturing function (including
product and process design engineering), frictions can arise if
manufacturing believes that other parts of the organization (e.g.,
marketing) are not subjected to the same budgetary pressure.
10-39
10-43 Time-Driven Activity-Based Budgeting (TDABB) (60 minutes)
1. Calculation of budgeted resource costs per hour (at practical capacity):
Practical Budgeted
Budgeted Capacity Cost per
Resource Cost (Hours) Hour
Indirect labor support $1,000,000 20,000 $50
Computer support $500,000 500 $1,000
2. Cost-driver rates for each activity (handle production runs, and support products):
Activity #1: Handle Production Runs
(From 1
above) Unit Budgeted
Budgeted Times Cost-Driver
Resource Cost/Hour (hours) Rate
Indirect Labor $50 10.00 $500.00
Computer support $1,000 0.40 $400.00
$900.00 per run
Activity #2: Support Products
(From 1
above) Unit Budgeted
Indirect Labor $50 500.00 $25,000
Computer Support $1,000 50.00 $50,000
$75,000 per product
3. Cost of idle capacity for the quarter, by resource:
Cost of Resource Resource Cost of Cost of

Resource Units Units Resources Idle
Resource Supplied Supplied Used Used Capacity
Indirect labor $1,000,000 20,000 18,000 $900,000 $100,000
Computer support $500,000 500 450 $450,000 $50,000
10-40
10-43 (Continued)
Generally speaking, the cost of idle capacity should not be assigned to actual
units produced or customers served during the period. However, the cost of idle
capacity should not be ignored--it is someone's responsibility in the organization.
That is, the cost of idle capacity for a period should be assigned to the person or
office that authorized the level of capacity when that capacity was acquired.
Typically, this assignment would be made on a “lump-sum” basis. This
assignment provides feedback to managers regarding their resource supply/
demand decisions.
4. Post-TQM implementation results:

Efficiency gain: indirect labor consumed by "handling a production run": 10%
Original indirect labor hours: handling production runs = 16,000
Original indirect labor hours: computer support = 2,000
Revised Budgeted Cost-Driver Rate: Indirect labor support for "handling a
production run":
Unit Budgeted
Indirect Labor $50 9.00 $450.00 per run
Revised Cost of Idle Capacity--Indirect Labor Support Cost:
Cost of Resource Resource Cost of Cost of

Resource Units Units Resources Idle
Resource Supplied Supplied Used Used Capacity
Indirect labor $1,000,000 20,000 16,400* $820,000 $180,000
*Resource Units Used Calculation: 2,000 + (16,000 × (1 – 10%)) = 16,400

As can be seen, the efficiency gain resulted in "freed-up" indirect labor resources,
which are now available for use elsewhere in the company. In the event that
alternative uses for this labor cannot be found, then management faces the issue
of whether to reduce its workforce. Also, the reduced cost-driver rate ($50
reduction) would be of potential strategic use to management, for pricing and
product promotion purposes.
10-41
10-44 Rolling Financial Forecasts (25 minutes)
1. Schedule of forecasted sales, rolling forecast basis, January through June:
Month of Forecast for Month of

Forecast January February March April May June
December 100 95 100 110 120 125
January 90 100 105 110 120
February 95 105 105 120
March 105 100 110
April 90 105
May 105
2. Three-month forecast error rates, March through June (rounded to two decimal
places):
January February___March April May June

Actual Sales 98 95 92 108 98 100
Forecast error rate - - 8.70% 2.78% 7.14% 10.00%
Direction of error - - Below Above Below Below
Note: Error rate (%) = 1 – absolute forecast error %. For example, the absolute
forecast error rate (%) for March’s sales is found by dividing the absolute value of the
forecast error for this month by the actual sales volume for the month. For purposes
of this question, the forecast error for any month (e.g., March) is defined as the
difference between the actual sales volume for the month and the sales volume for
that month provided three months earlier (i.e., December).
Calculations:
March: (ABS(92 – 100)) ÷ 92 = 8.70% (below forecast)
April: (ABS(108 – 105)) ÷ 108 = 2.78% (above forecast)
May: (ABS(98 – 105)) ÷ 98 = 7.14% (below forecast)
June: (ABS(100 – 110)) ÷ 100 = 10.00% (below forecast)
10-42
10-45 Resource Capacity Planning/ABC (25 minutes)
1. Fixed cost per meal:
Current calculation, fixed operating cost per meal = $1,100 ÷ 175 meals/day
= $6.29/meal
Recalculated fixed operating cost per meal, based on available capacity (meals per
day) = $1,100 ÷ 200 meals = $5.50/meal
2. If demand (e.g., because of competitive pressures) should drop even further and the
daily fixed operating cost per meal were recalculated, based on the lower demand,
then the average fixed cost per meal (and total cost per meal) would increase even
further. Perhaps the owners would be tempted to raise prices once again, in an
attempt to recover “cost.” In all likelihood, however, the rising prices of meals would
exacerbate the situation, leading the business to a downward (or death) spiral. Apart
from this, one could question whether it makes sense to raise prices in the face of
increased competition, particularly given the context (college eatery).
3. The owners of this business should consider calculating the fixed operating cost per
meal based on “practical capacity.” This practice would avoid the downward business
spiral referred to above and attributable to an escalating “cost” per meal. In fact,
using some notion of capacity would allow the owners to make an assessment of the
existence (and estimated cost) of excess (idle) capacity. If actual and planned usage
is below the level of practical capacity, then the owners would be better motivated to
either reduce spending on capacity-related resources and/or to explore alternative
uses of available capacity. In short, the use of practical capacity to estimate fixed cost
per meal would facilitate the resource capacity-planning issue that the owners of this
business now face.
10-43
10-46 Kaizen Budgeting (50 minutes)
1. Recalculated budgeted factory overhead costs for June (rounded to nearest whole
dollar), under the assumption that, starting in May, each budgeted cost-driver rate
decreases by 0.5% relative to the preceding month.
Activity-Based Budget (ABB)

April May June
Activity- Budgeted Activity- Budgeted Activity- Budgeted
Cost Pools Cost Rate Overhead Cost Rate Overhead Cost Rate Overhead
Semi-skilled, hour-related $0.60 $6,750 $0.597 $8,955 $0.594 $11,138
Skilled, hour-related $0.40 $1,800 $0.398 $2,388 $0.396 $2,970
Machine-hour-related $3.20 $21,600 $3.184 $28,656 $3.168 $35,641
Batch-related $2,000 $18,000 $1,990 $23,880 $1,980 $29,701
Product-related $15,000 $15,000 $14,925 $29,850 $14,850 $44,551
Facility-level costs $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
Total $113,150 $143,729 $174,001
Sample Calculations:
1. Activity cost rates in April: Given (text Exhibit 10.19)

2. Budgeted overhead in April: Given (text Exhibit 10.19)
3. Activity cost rates in May: Rate from April × (1 – improvement rate/month, 0.5%). For
example, rate in May for Semi-skilled, hour-related = $0.60/hour × (1 – 0.005) =
$0.597/hour.
4. Budgeted overhead in May = budgeted activity (from text Exhibit 10.19) × activity cost
rate for May. For example, for Semi-skilled, hour-related Budgeted overhead for May
= $0.597/hour × 15,000 hours = $8,955.
5. Activity cost rates in June = rate for May × (1 – 0.005). For example, for semi-skilled,
hour-related, June’s activity cost rate = $0.597/hour × (1 – 0.005) = $0.594/hour.
6. Budgeted overhead in June = budgeted activity (from text Exhibit 10.19) × activity
cost rate for June. For example, for Semi-skilled, hour-related, Budgeted overhead
for June = $0.594/hour × 18,750 hours = $11,138.
10-44
10-46 (Continued-1)
2. In general, the benefits associated with a move to continuous (i.e., kaizen) budgeting
include the following:
• helps ensure that the budget is a forward-looking tool
• may help the organization stave off competition or otherwise secure a competitive
advantage
• is consistent with the move to "lean manufacturing" (to support total quality,
elimination of waste and inefficiency, etc.)
• used during the manufacturing stage and thus complements the use of target
costing (used during the design stage)
• necessarily involves employees (who are knowledgeable about operating
processes) in the planning/control system (i.e., under a kaizen approach, workers
are assumed to have better knowledge as to how cost-saving goals can be
achieved); as such, its use is consistent with theories of decentralization and
worker empowerment
3. Principal concerns or limitations associate with kaizen budgeting:
• a kaizen approach places pressure on employees to meet continually revised (and

stricter) performance goals; dysfunctional consequences include employee burnout
and internal conflicts among various parties in the organization
• the kaizen approach, by its very design, motivates incremental, not radical,
operational improvements and cost savings
4. The activity cost rates for KWS are calculated as budgeted spending (on resources)
divided by the practical capacity (i.e., supply) of resources acquired. Therefore, the rate
can go down either because total budgeted spending is decreased, or the supply of
activities is increased while holding spending constant. Both would seem to rest on
notions of increasing efficiency. Some examples, referenced to text Exhibit 10.19, might
10-45
10-46 (Continued-2)
• move to a JIT production system

• incorporate technology into (i.e., automate) the order-processing system used by
KWS
• analyze major expenditures to determine whether they are adding value in the
eyes of the consumer
• implement process improvements for all value-adding activities performed by the
business
• are there alternative forms of capacity that would be available at a less expensive
rate?
• greater attention to personnel planning, along the lines discussed in the text (see
section on budgeting for service organizations)
• requiring minimum order sizes (to eliminate short, unprofitable, production runs)
• effecting changes in the layout of the facility (e.g., to reduce movement and
storage of inventory
Notice, too, that in order to reduce spending (on resources), management has to take
direct and deliberate action to do so. This is due in large part because some of the
activity costs in an ABC model are considered short-term fixed costs. As such, the only
way to reduce spending on these activities is to eliminate the underlying resource or
deploy to excess resources (i.e., the unused supply of resources) elsewhere in the
organization. While the activity-cost rates seem to imply short-term variable costs, in
reality they do not.
10-46
10-47 Budgetary Slack and Zero-Base Budgeting (ZBB) (30 minutes)
1. Budgetary slack is a planned difference between budgeted revenue and expected

revenue, and/or budgeted expenditures and expected expenditures. Budgetary
slack describes the tendency of managers to under-estimate revenues and over-
estimate expenditures during the budgetary process in order to build in
allowances (“cushions”) for unexpected declines in revenue and/or unforeseen
expenses. Budgetary slack occurs because of conflicts between the personal
interests of a manager and the interests of the organization. These conflicts
include pressure from top management to achieve budgets and the desire on the
part of the manager to look favorable in the eyes of top management.
2. a. From the point of view of business unit managers, budgetary slack provides:
▪ performance that will “look better” in the eyes of their superiors
▪ a coping mechanism regarding uncertainty
▪ a way to obtain what is needed since initially submitted budgets tend to be
cut during the budget-negotiation process
However, the use of budgetary slack limits the objective evaluation of a

business unit and, therefore, limits the objective evaluation of the performance
of the unit manager. It also becomes more difficult for the business unit
manager to evaluate the performance of subordinates and to use the budget as
a control mechanism over subordinate performance.
b. From the perspective of corporate management, the use of budgetary slack

increases the probability that budgets will be achieved. This increased
probability facilitates the overall corporate budgeting process. Corporate
management may also allow budgetary slack as a form of reward to managers
for previous good performance.
However, from the point of view of corporate management, the use of budgetary
slack increases the likelihood of inefficient allocation of scarce resources, and
decreases the ability to identify potential weaknesses or trouble spots in
operating activities. Further, the above statement tacitly assumes that
“performance to budget” is desirable, which may not be the case. For example,
if marketing under projects sales, then production may legitimately under
produce, resulting in unfilled customer demand, increased customer complaints,
etc.
3. a. Zero-base budgeting (ZBB) is a budgeting technique that evaluates all

proposed operating and administrative expenditures as though they were being
initiated for the first time. Each manager must evaluate the proposed
expenditure for each activity to be undertaken during the upcoming budget
period, investigate alternative means of conducting each activity, and rank
10-47
expenditures in order of perceived importance.
b. Atlantis Laboratories could benefit from ZBB as each of the business unit
managers would be required to identify and justify all proposed expenditures for
the upcoming year. This increased evaluation of expenditures would make it
difficult to include budgetary slack in the budget for the upcoming year and
likely uncover opportunities of cost savings and operational improvements.
c. The biggest disadvantage of ZBB is the significant amount of time and cost
involved in its implementation. In addition, the concept of zero-based budgeting
may be difficult for management to learn and accept. Atlantis must be sure that
the benefits of ZBB outweigh the associated costs.
10-48
10-48 Budgetary Pressure and Ethics (30 minutes)
1. The use of alternative accounting methods to manipulate reported earnings is

professionally unethical because it violates the Standards contained in the IMA’s
Statement of Ethical Professional Practice (see: https://www.imanet.org/career-
resources/ethics-center?ssopc=1). The Competence standard is violated
because of failure to perform duties in accordance with relevant accounting
(technical) standards. It can probably be argued that the competence standard is
also violated because the accountant is not providing information that is
accurate. The Integrity standard is violated because the underlying activity
would discredit the profession. The Credibility standard is violated because of
failure to communicate information fairly and objectively.
2. Yes, costs related to revenue should be expensed in the period in which the
revenue is recognized (“matching principle”). Perishable supplies are purchased
for use in the current period, will not provide benefits in future periods, and should
therefore be matched against revenue recognized in the current period. In short,
the accounting treatment for supplies was not in accordance with generally
accepted accounting principles (GAAP). Note that similar issues, but on an
extremely large basis, occurred at WorldCom and at Global Crossing. In the case
of the latter, the company was engaging simultaneously in contracts to buy and to
sell bandwidth, treating the former as capitalized expenses and the latter as
revenue for the current accounting period.
3. The actions of Gary Woods were appropriate. Upon discovering how supplies
were being accounted for, Wood brought the matter to the attention of his
immediate superior, Gonzales. Upon learning of the arrangement with P&R,
Wood told Gonzales that the action was improper; he then requested that the
accounts be corrected and the arrangement discontinued. Wood clarified the
situation with a qualified and objective peer (advisor) before disclosing Gonzales’s
arrangement with P&R to Belco’s division manager, Tom Lin—Gonzales’s
immediate superior. Contact with levels above the immediate superior should be
initiated only with the superior’s knowledge, assuming the superior is not involved.
In this case, however, the superior is involved. According to the IMA’s statement
regarding Resolution of Ethical Conduct, Wood acted appropriately by
approaching Lin without Gonzales’s knowledge and by having a confidential
discussion with an impartial advisor.
10-49
PROBLEMS
10-49 Budgeting for a Merchandising Firm (50 minutes)
1. Budgeted cash collections—December:

From November’s sales = net A/R, November 30th (given) = $ 76,000
From December’s sales = $250,000 × 50% × 99% = 123,750
Budgeted cash collections--December $199,750
2. Net (i.e., book value of) accounts receivable—December 31st:

Budgeted sales in December (given) $250,000
Allowance for doubtful accounts $250,000 × 2% = 5,000
Net A/R from sales in December $245,000
Collections of December sales in December $250,000 × 50% = 125,000
Net Accounts Receivable—December 31st $120,000
3. Budgeted pre-tax operating income—December:

Total sales (given) $250,000
Gross margin ratio × 30%
Gross margin $ 75,000
Operating expenses:
Monthly cash operating expenses (given) $25,000
Bad-debts expense $250,000 × 2% = 5,000
Depreciation expense $216,000 ÷ 12 = 18,000 48,000
Pre-tax operating income $27,000
4. Budgeted Inventory—December 31st:
Inventory, December 31st = ($225,000 × 0.70) × 80% = $126,000
5. Budgeted Purchases—December:
Inventory, December 1st (given) = $132,000

Plus: Purchases during December (plug figure) = 169,000
Cost of goods available for sale ($126,000 + $175,000) = $301,000
Less: Cost of goods sold = $250,000 × 70% = 175,000
Inventory, December 31st (part 4 above) = $126,000
10-50
10-49 (Continued)
6. Budgeted Accounts Payable—December 31st:
Accounts Payable, December 1st (given) $162,000

Plus: Budgeted Purchases, December (part 5 above) $169,000
Total Accounts Payable during December $331,000
Less: Payments in December (entire beginning balance) $162,000
Budgeted Accounts Payable, December 31st $169,000
Alternatively, the end-of-December Accounts Payable Balance = Purchases

made in December = answer to Part 5 above.
10-50 Comprehensive Profit Plan (90 minutes)
1. Sales Budget
Spring Manufacturing Company

Sales Budget
2019
C12 D57 Total

Sales (in units) 12,000 9,000
× Selling Price per unit $150 $220
Total Sales Revenue $1,800,000 $1,980,000 $3,780,000
2. Production Budget

Production Budget
2019
C12 D57
Budgeted Sales (in units) 12,000 9,000
+ Desired finished goods ending inventory 300 200
– Beginning finished goods inventory 400 150
Budgeted Production (in units) 11,900 9,050
10-51
10-50 (Continued-1)
3. Direct Materials Purchases Budget

Direct Materials Purchases Budget (units and dollars)
2019
C12 D57 Total

Raw Material (RM) 1:
Budgeted Production 11,900 9,050
Pounds per Unit × 10 ×8
RM 1 needed for production 119,000 72,400 191,400
Plus: Desired Ending Inventory (lbs.) 4,000
Total RM 1 needed (lbs.) 195,400
Less: Beginning inventory (lbs.) 3,000
Required purchases of RM 1 (lbs.) 192,400
Cost per pound $2.00
Budgeted purchases, RM 1 $384,800

Pounds per Unit ×0 ×4
RM 2 needed for production 0 36,200 36,200

10-52
10-50 (Continued-3)
4. Direct Manufacturing Labor Budget

Direct Labor Budget
2019
C12 D57 Total

Direct labor hours per unit × 2 × 3
Total direct labor hours needed 23,800 27,150 50,950
Hourly wage rate $25.00
Budgeted direct labor costs $1,273,750
5. Factory Overhead Budget

Factory Overhead Budget
2019
Variable Factory Overhead:

Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor 40,000
Payroll taxes and fringe benefits 250,000
Maintenance costs 10,080
Heat, light, and power 11,000 $326,080
Fixed Factory Overhead:

Supervision $120,000
Heat, light, and power 43,420
Total Cash Fixed Factory Overhead $183,420
Depreciation 71,330 $254,750
Total Budgeted Factory Overhead $580,830
10-53
10-50 (Continued-4)
6. Budgeted Cost of Goods Sold

Ending Finished Goods Inventory and Budgeted CGS
2019
C12 D57 Total

Sales volume 12,000 9,000 21,000
Cost per unit (Schedule 1 and 2) $93.80 $135.70
Cost of Goods Sold $1,125,600 $1,221,300 $2,346,900
Ending Finished Goods Inventory 300 200

Budgeted ending inventories $28,140 $27,140 $55,280
Schedule 1: Cost per Unit--Product C12:

Inputs_____ Cost
Cost Element Unit Input Cost Quantity Per Unit
RM-1 $2.00 10 $20.00
RM-3 $0.50 2 $1.00
Direct labor $25.00 2 $50.00
Variable factory OH ($326,080 ÷ 50,950) $6.40 2 $12.80
Fixed factory OH ($254,750 ÷ 50,950) $5.00 2 $10.00
Manufacturing cost per unit $93.80
Schedule 2: Cost per Unit--Product D57:

Inputs Cost
RM-1 $2.00 8 $16.00
RM-2 $2.50 4 $10.00
RM-3 $0.50 1 $0.50
Direct labor $25.00 3 $75.00
Fixed factory OH ($254,750 ÷ 50,950) $5.00 3 $15.00
10-54
10-50 (Continued-5)
7. Budgeted selling and administrative expenses:

Selling and Administrative Expense Budget
2019
Selling Expenses:
Advertising $60,000
Sales salaries 200,000
Travel and entertainment 60,000
Administrative expenses:
Offices salaries $60,000
Executive salaries 250,000
Supplies 4,000
Total selling and administrative expenses $645,000
8. Budgeted Income Statement:

Budget Income Statement
For the Year 2019
C12 D57 Total

Sales (part 1) $1,800,000 $1,980,000 $3,780,000
Cost of Goods Sold (part 6) 1,125,600 1,221,300 2,346,900
Gross Profit $674,400 $758,700 $1,433,100
Selling and Administrative Expenses (part 7) $645,000
Pre-tax Operating Income $788,100
Income Taxes (@40%) $315,240
After-tax Operating Income $472,860
10-55
10-51 Spring Manufacturing Company—Comprehensive Profit Plan (90 Minutes, but
much less if used in conjunction with 10-50 and completed with an Excel
spreadsheet)
1. Revised budgets:
Sales Budget

Sales Budget
2019
C12 D57 Total

Sales (in units) 12,000 18,000
× Selling Price per Unit $160 $180
Total revenue $1,920,000 $3,240,000 $5,160,000
Production Budget

Production Budget
2019
C12 D57
Plus: Desired Ending Finished Goods Inventory 300 200
Less: Beginning Finished Goods Inventory 400 150
10-56
10-51 (Continued-1)

2019
C12 D57 Total
Pounds per Unit × 10 ×8


10-57
10-51 (Continued-2)
Direct Manufacturing Labor Budget

Direct Labor Budget
2019
C12 D57 Total

Direct labor hours (DLH) per unit × 2 × 3
Total DLHs needed 23,800 54,150 77,950

We are told that for Prob. 10-51 there is no change in the variable overhead rate.
Prob. 10-50 indicates that the company uses direct labor hours (DLHs) to apply
overhead costs to outputs. Therefore, to prepare the revised budget for Factory
Overhead we need to first calculate the variable overhead (OH) rate per DLH, as
follows:
Variable OH per DLH (from Pr. 10-50):

Total budgeted variable overhead (from Pr. 10-50) $326,080
÷ Budgeted DLHs (from Pr. 10-50) ÷ 50,950 $6.40

2019
Variable Factory Overhead ($6.40/DLH × 77,950 DLHs) $498,880

Fixed Factory Overhead:
Total Budgeted Factory Overhead $753,630
Variable OH rate per DLH (calculated above) $6.40

Fixed OH rate per DLH ($254,750 ÷ 77,950 DLHs) $3.26812
10-58
10-51 (Continued-3)
Budgeted CGS and Ending Finished Goods Inventory Budget

2019
C12 D57 Total

Sales volume 12,000 18,000 30,000

Schedule 1: Cost per Unit—Product C12:

Inputs Cost
RM-1 $2.00 10 $20.00
RM-3 $0.50 2 $1.00
Direct labor $25.00 2 $50.00
Variable factory OH ($498,880÷ 77,950 DLHs) $6.40 2 $12.80
Fixed factory OH ($254,750 ÷ 77,950 DLHs)$3.26812 2 $6.53624
Schedule 2: Cost per Unit—Product D57:

_______ Inputs___ Cost
RM-1 $2.00 8 $16.00
RM-2 $2.50 4 $10.00
RM-3 $0.50 1 $0.50
Direct labor $25.00 3 $75.00
Variable factory OH ($498,880÷ 77,950 DLHs) $6.40 3 $19.20
Fixed factory OH ($254,750 ÷ 77,950 DLHs)$3.26812 3 $9.80436
10-59
10-51 (Continued-4)

2019
Selling Expenses:
Advertising $60,000
Supplies 4,000
Total Selling and Administrative Expenses $645,000
Budgeted Income Statement

For the Year 2019
C12 D57 Total

Sales $1,920,000 $3,240,000 $5,160,000
Cost of Goods Sold 1,084,035 2,349,079 3,433,114
Gross Profit $835,965 $890,921 $1,726,886
Selling and Administrative Expenses $645,000
Pre-tax Operating Income $1,081,886
Income taxes (@40%) $432,754
After-Tax Operating Income $649,132
10-60
10-51 (Continued-5)
2. The projected increase in after-tax operating income =
$649,132 – $472,860 = $176,272
3. While the changes are projected to increase after-tax operating income, the
company should examine the decision more closely. Although the company
increases its after-tax operating income by 37% ($176,272 ÷ $472,860), it requires a
doubling of units of D57 to achieve this. In fact, a 100% increase in units sold of D57
increases the gross profit of D57 from $758,700 to $890,921, an increase of
$132,221, while the total change in gross profit is $293,786 (from $1,433,100 to
$1,726,886). The 100% increase in D57 accounts for only 45% ($132,221 
$293,786) of the increase in gross profit; C12 contributes 55% of the increase.
Further, the price increase in C12 has no effect on the units sold. This may be an
indication that C12 may have a higher potential than the firm perceived.
10-61
10-52 Comprehensive Profit Plan with Kaizen (90 minutes, but much less if assigned in
conjunction with 10-50 and completed with an Excel spreadsheet)
1. Revised Budgets:
Sales Budget

Sales Budget
2019
C12 D57 Total

Sales (in units) 12,000 9,000 21,000
× Selling Price Per Unit $150 $220
Total revenue $1,800,000 $1,980,000 $3,780,000
Production Budget

Production Budget
2019
C12 D57
Plus: Desired finished goods ending inventory 300 200
Total units needed
12,300 9,200
Less: Beginning finished goods inventory 400 150
Blocher, Stout, Juras, Smith, Cost Management, 8/e 10-62 ©The McGraw-Hill Companies 2018
10-52 (Continued-1)

2019
C12 D57 Total


Pounds per Unit ×0 × 3.6
Raw Material 3:
Pounds per Unit × 1.8 × 0.8
10-52 (Continued-2)
Direct Manufacturing Labor Budget

Direct Labor Budget
2019
C12 D57 Total

Direct labor hours per unit × 1.5 × 2
Total direct labor hours needed 17,850 18,100 35,950

2019
Original Variable OH Budget:

Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor 40,000
Payroll taxes and fringe benefits 250,000
Total Variable Factory Overhead $326,080
Reduction Rate for Variable OH Costs 10.00%
Original Fixed OH, Excluding Depreciation:

Depreciation 71,330
Total Original Fixed OH $254,750
Reduction Rate for Cash Fixed OH Costs = 5.00%
10-52 (Continued-3)
Budgeted Variable OH:

($326,080 × (1 − 0.10)) = $293,472
Budgeted Fixed OH:
Cash Charges = ($183,420 × (1 − 0.05)) = $174,249
Depreciation (same as last year) = $71,330
Total Budgeted Fixed OH = $245,579
Budgeted CGS and Ending Finished Goods Inventory Budget

2019
C12 D57 Total

Sales volume 12,000 9,000 21,000
Cost per unit (see above schedule) $86.39170 $113.38893

Cost per unit (see above schedule) $86.39170 $113.38893
Schedule 1: Cost per Unit—Product C12:

Inputs __ Cost
Cost Element Unit Input Cos Quantity Per Unit
RM-1 $2.00 9 $18.00
RM-3 $0.50 1.8 $0.90
Direct labor $30.00 1.5 $45.00
Variable factory OH ($293,472 ÷ 35,950) $8.1633 1.5 $12.2450
Fixed factory OH ($245,579 ÷ 35,950) $6.8311 1.5 $10.2467
10-52 (Continued-4)
Schedule 2: Cost per Unit—Product D57:

Inputs Cost
RM-1 $2.00 7 $14.00
RM-2 $2.50 3.6 $9.00
RM-3 $0.50 0.8 $0.40
Direct labor $30.00 2 $60.00
Fixed factory OH ($245,579 ÷ 35,950) $6.8311 2 $13.6622

2019
Selling Expenses:
Advertising $60,000
Supplies 4,000
Total Selling and Administrative Expenses $645,000
10-52 (Continued-5)
Budgeted Income Statement

For the Year 2019
C12 D57 Total

Sales (see above schedule) $1,800,000 $1,980,000 $3,780,000
Cost of Goods Sold (see above) 1,036,699 1,020,499 2,057,198
Gross Profit $763,300 $959,500 $1,722,802
Selling and administrative expenses (see above) $645,000
Pre-tax Operating Income $1,077,802
Income Taxes (@40%) $431,121
After-tax Operating Income $646,681
2. The revised budgeted after-tax operating income with Kaizen is $646,681. The
immediate benefit, therefore, is an increase of $173,820 in operating income, or 37%
from $472,860.
The firm is also likely to benefit in the long-run from the reductions in direct materials,
direct labor hours, and factory overhead required in production. Decreases in
consumption of manufacturing elements reduce wear and tear of equipment and other
facilities and lessens the need for additional capital investments/replacements.
10-53 Cash-Flow Analysis; Sensitivity Analysis (60 minutes)
1. Estimated Cash Receipts, April 2019:

April Cash Receipts:
April cash sales (30.0% × $425,000) = $127,500
April credit card sales ($425,000 × 65% × 97%) = 267,963
From April Sales (5% × $425,000 × 20%) = 4,250
From March Sales (5% × $400,000 × 50%) = 10,000
From February Sales (5% × $550,000 × 27%) = 7,425
Total $417,138
2. Purchase Order for Hardware, executed January 25th:
a) Estimated number of units to be ordered:

Estimated Unit Sales, March (given) = 90
Plus: Desired Ending Inv., March (30% × 100) = 30
Total Needs (in Units) = 120
Less: Beginning Inventory, March (30% × 90) = 27
Required Purchases (in Units) = 93
b) Estimated cost (per unit and total) of purchases:

Selling price per unit ($270,000 ÷ 90 units) = $3,000
Estimated cost per unit (@ 60% of selling price) = $1,800
Total cost of purchases (93 units × $1,800/unit) = $167,400
Note that the cash outflow associated with these purchases will be on
4/10/2019.
10-53 (Continued-1)
Estimated Cash
March Sales Payment
Scenario (units) CGS % April 10th
1 100 55% $165,000
2 100 60% $180,000
3 100 65% $195,000
4 90 55% $153,450
5 90 60% $167,400
6 90 65% $181,350
7 80 55% $141,900
8 80 60% $154,800
9 80 65% $167,700
Maximum = $195,000
Minimum = $141,900
Range = $53,100
Algorithm:
Estimated payments on 10 April 2019 for purchases made on January 25th = budgeted
cost of goods sold (purchase price) per unit × number of units purchased
= budgeted CGS/unit × [Estimated sales in March + Desired EI, March – BI, March]
= budgeted CGS/unit × [Estimated sales in March + (0.3 × Estimated Sales, April) – (0.3
Estimated sales, March)]
= budgeted CGS/unit × [(Estimated sales in March + (0.3 × 100) – (0.3 Estimated Sales,
March)]
which (because April sales are assumed known and equal to 100 units) reduces to:
= budgeted CGS/unit × [((1 – 0.3) × Estimated sales, March) + 30]
Given a selling price per unit of $3,000 (calculated earlier), we can evaluate the
preceding equation if we know or assume values for CGS % and Estimated sales in
March.
10-53 (Continued-2)
Examples:
When CGS % = 55% and Estimated Sales in March = 100 units:
Estimated Cash Payment on April 10th
= Purchase price/unit × Number of Units Purchased on January 25 th
= ($3,000/unit × 55%) × [(0.7 × 100) units + 30 units]
= $1,650/unit × 100 units purchased on January 25th = $165,000
When CGS% = 60% and Estimated Sales in March = 100 units:
Estimated Cash Payment on April 10th
= Purchase price/unit × Number of Units Purchased on January 25 th
= ($3,000 × 60%) × [(0.7 × 100 units) + 30 units]
= $1,800/unit × 100 units purchased on January 25th = $180,000
10-53 (Continued-2)
4. Monthly cash budgets are prepared by companies such as CompUSA Inc., 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 is excess cash available for investment or repaying loans so that
planned usage of the excess can be made.
Sensitivity analysis, one type of which is illustrated in requirement (3) above, can be
used to help managers deal with uncertainties in the budgeting process. Sensitivity
analysis enables managers to examine how a budget would change in response to
changes in one or more underlying assumptions (such as sales volume level and
CGS%). As such, the process enables managers to monitor key assumptions and to
make timely adjustments to plans. In practice, management might view the baseline
outcome as the expected value prediction. It might define, subjectively, "optimistic"
and "pessimistic" values as those having a small probability (e.g., 10% or less).
See the following tutorials for additional information about performing what-if analyses
using Excel 2016, Excel 2013, and Excel 2010:

BF7A-E4645C446FB4


HP010342214.aspx


HP010342416.aspx
4d99-bb6d-078f96d1652c
10-54 Profit Planning and What-If Analysis (60 minutes)
1. Break-even volume, in units and dollars, for the coming year:
Annual fixed costs = $1,200,000

Contribution margin, per unit:
Selling price per unit = $100.00
Variable cost, per unit = $70.00
Contribution margin, per unit = $30.00
Contribution margin ratio:
Selling price, per unit = $100.00
Contribution margin, per unit = $30.00
Contribution margin ratio = 30.00%
Annual break-even volume (units) = 40,000 units

Annual break-even volume (dollars) = $4,000,000
2. Units needed to be sold for the company to meet the $300,000 pre-tax profit goal:
Annual fixed costs (FC) = $1,200,000

Pre-tax profit target (dollars) = $300,000
Required sales volume (units) = 50,000 Units*
*($1,200,000 + $300,000) ÷ $30.00/unit
3. What-If Analysis
% Change
in $25 DL cost Revised Revised Breakeven Unit Change % Change in
Component Variable Cost Contribution volume in Breakeven Breakeven
Situation (given) per Unit Margin per Unit (units) Point Point
Baseline 0.00% $70.00 $30.00 40,000 0 0.00%
1 4.00% $71.00 $29.00 41,379 1,379 3.45%
2 6.00% $71.50 $28.50 42,105 2,105 5.26%
3 8.00% $72.00 $28.00 42,857 2,857 7.14%
Notes:
1. Revised variable cost/unit = baseline cost/unit + (assumed % change in DL cost
component × labor cost component of variable cost/unit). For example, Situation
1: If there is a 4% increase in the DL cost per unit, the revised variable cost/unit
would be $71.00/unit = $70.00/unit + (0.04 × $25.00/unit) = $70.00/unit +
$1.00/unit = $71.00/unit.
2. Revised contribution/unit = selling price/unit – revised variable cost/unit. For
example, Situation 1: With a 4% increase in the DL cost/unit, the revised
contribution margin/unit = $29.00 = $100.00 – $71.00/unit.
10-54 (Continued-1)
Notes (continued):
3. Breakeven volume (units) = Fixed costs ÷ contribution margin/unit. For example,

Situation 1: After a 4% increase in the DL cost/unit, the revised breakeven point =
41,379 units = $1,200,000 ÷ $29.00/unit.
4. Unit Change in Breakeven Point = Revised Breakeven Point – Original
(Baseline) Breakeven Point (40,000 units). For example, for Situation 1: After a
4% increase in the DL cost/unit, the new breakeven point (41,379 units) is 1,379
units more than the baseline breakeven point (40,000 units).
5. % Change in Breakeven Point = Unit change in Breakeven Point/Baseline
Breakeven Point (40,000 units). For example, for Situation 1: After a 4% increase
in the DL cost/unit, the revised breakeven point is 3.45% higher than the original
(baseline) breakeven point = 1,379 units ÷ 40,000 units.
4. Selling price per unit the company must charge to maintain the budgeted ratio of
contribution margin to sales (hint: Use the Goal-Seek function in Excel to answer this
question):
Original selling price per unit = $100.00

Original variable cost per unit = $70.00
Original contribution margin per unit = $30.00
Original contribution margin ratio = 30.00%
Increase in labor-cost component of vc per unit = 5.00% (assumed)

Labor-cost component of variable cost per unit (given) = $25.00
Revised variable cost per unit ($70.00 + (0.05 × $25.00)) = $71.25
Solution without Using Goal Seek
Solution Using Goal Seek in Excel (NOTE: Before running Goal Seek, make
sure under File → Options→ Formulas, that the box labeled “Iterative
Calculation” is checked, that a large number is entered into the space for
“Number of Iterations,” and that "Maximum Change" is set at 0.0001.)
10-54 (Continued-2)
Step One: Set Up the Model
Note: formula in cell E97 is: =E95-E96; formula in cell E98 is: =E97/E95
Step Two: Call the Goal Seek Routine in Excel (go to Data, then Data Tools, What-If
Analysis, then Goal Seek). Set up Goal Seek as follows:
Step Three: Results (based on Excel 2010)
5. As stated in the chapter, inputs to the construction of individual budgets are subject to
uncertainty. That is, the inputs represent forecasts (e.g., selling price per unit, sales
volume, and sales mix) and therefore are subject to estimation error. What-if analysis
is a tool that allows us to vary one or more of these inputs in order to examine the
resulting effect on one or more budgets (e.g., operating income or cash
10-54 (Continued-3)
flows). In essence, we attempt to determine how sensitive our budgets and

forecasted financial statements are with respect to assumptions we are making as to
the value of input factors. For example, the analysis in 3 above suggests that the
budgeted breakeven point for the company is sensitive (i.e., it reacts significantly) to
changes in the labor-cost component of variable cost per unit. As such, management
would want to control this cost as carefully as it could.
using Excel 2016, Excel 2013, and Excel 2010:

BF7A-E4645C446FB4


HP010342214.aspx


HP010342416.aspx
4d99-bb6d-078f96d1652c
10-55 Budgeting Customer Retention and Insurance-Policy Renewal; Sensitivity Analysis (75-90 Minutes)
1. Budget for Customer-Retention and Premiums Earned
Budget Item January February March April May June

No. of active policyholders,
beginning of the month 100,000 99,500 99,003 98,507 98,015 97,525
Mid-term cancelation rate (%) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
No. of active policyholders, end of
the month 99,500 99,003 98,507 98,015 97,525 97,037
Average no. of active policyholders
during the month 99,750 99,251 98,755 98,261 97,770 97,281
Average monthly premium per
policy $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
Total premiums earned from active
policyholders $9,975,000 $9,925,125 $9,875,499 $9,826,122 $9,776,991 $9,728,106
Budget Item July August September October November December

No. of active policyholders, end of
the month 96,552 96,069 95,589 95,111 94,635 94,162
Average no. of active policyholders
during the month 96,795 96,311 95,829 95,350 94,873 94,399
policy $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
Total premiums earned from active
policyholders $9,679,466 $9,631,068 $9,582,913 $9,534,999 $9,487,324 $9,439,887
10-55 (Continued-1)
Active policies, end of December 94,162

Policy renewal rate 85.00%
No. of estimated policyholders, beginning of new year 80,038
2.
As stated in the chapter, inputs to the construction of individual budgets are subject to
uncertainty. That is, the inputs represent forecasts (e.g., selling price per unit, sales
volume, and sales mix) and therefore are subject to estimation error. What-if analysis
is a tool that allows us to vary one or more of these inputs in order to examine the
resulting effect on one or more budgets (e.g., operating income or cash flows). In
essence, we attempt to determine how sensitive our budgets and forecasted financial
statements are with respect to assumptions we are making as to the value of input
factors. For example, in the present case we might be interested in knowing how the
assumption of mid-term cancelation rate affects monthly premium--is premium revenue
sensitive to this assumption? If so, then management may want to carefully monitor
and control this rate.
using Excel 2016 Excel 2013, and Excel 2010:

BF7A-E4645C446FB4

http://office.microsoft.com/en-us/excel-help/switch-between-various-sets-of-values-by-
using-scenarios-HP010072669.aspx

HP010342214.aspx


HP010342416.aspx
https://support.office.com/en-US/article/Define-and-solve-a-problem-by-using-Solver-9ed03c9f-
7caf-4d99-bb6d-078f96d1652c
10-10-55 (Continued-2)
1
3. Sensitivity Analysis: Revision of the original 12-month budget created above in (1) to
reflect a decrease in the policy-renewal rate to 80.0% and a change in the mid-term
cancellation rate to 0.75%. (See following page for answer.)
10-55 (Continued-3)
Budget Item January February March April May June

No. of active policyholders, end
of the month 99,250 98,506 97,767 97,034 96,306 95,584
Average no. of active
policyholders during the month 99,625 98,878 98,136 97,400 96,670 95,945
policy $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
Total premiums earned from
active policyholders $9,962,500 $9,887,781 $9,813,623 $9,740,021 $9,666,971 $9,594,468
Budget Item July August September October November December

No. of active policyholders, end
of the month 94,867 94,155 93,449 92,748 92,053 91,362
Average no. of active
policyholders during the month 95,225 94,511 93,802 93,099 92,400 91,707
policy $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
Total premiums earned from
active policyholders $9,522,510 $9,451,091 $9,380,208 $9,309,856 $9,240,032 $9,170,732
10-55 (Continued-4)
Active policies, end of December 91,362

Policy renewal rate 80.00%
No. of estimated policyholders, beginning of new year 73,090
Recap:
Premiums Earned, original assumptions $116,462,500
Premiums Earned, revised assumptions $114,739,793
% change -1.48%
Estimated policy renewals, end of year:
Original assumption 80,038
Revised assumption 73,090
% change -8.68%
4. This question is meant to reinforce real-world complexities in the budget-
preparation process and the interrelationship (articulation) of various sub-budgets.
The following are some additional considerations for the present insurance
company example:
a) The schedules presented above assumed that the renewal date for all
policyholders was the end of December. Naturally, this is a simplification. In
reality, policyholders renew their policies throughout the entire year. Thus,
one can view the present analysis as 1/12th of the budgets that would have to
be prepared.
b) Policyholder attrition rate is a variable that has to be modeled. Most

organizations working in financial services, such as an insurance company
where there are large numbers of policyholders paying monthly premiums,
would have sophisticated policyholder-retention models that measure the
separate elements of mid-term cancellations and policy renewals. With
appropriate predictive models, a company could quickly forecast the number
of active customers in any given period. In the present case, the two
components of customer attrition were assumed given.
c) In the case of life insurance, where different policyholders pay different

monthly premiums, the estimation of insurance premiums earned each month
becomes more challenging.
1010-55 (Continued-5)
d) For simplicity we assumed a constant monthly mid-term cancellation rate. The

use of sophisticated business analytics tools might provide finer forecasts
each period.
e) This problem provides an excellent opportunity to introduce, within a financial

services context, the important role that "rolling financial forecasts" can play,
and the associated superficiality of a traditional 12-month fixed budget.
f) It is likely that some of the nonfinancial indicators in this company's budget

(e.g., customer attrition rates) would also be included in the customer
perspective of the company's Balanced Scorecard (BSC). This is principally
because these nonfinancial performance indicators are leading indicators of
future financial performance.
10-56: Budgeting Insurance Policy Volume and Monthly Revenues (75-90 Minutes)
1. Monthly budgets broken down into three parts: market size and volume; volume for National Auto Insurance
Company; and, Premium Revenues earned.
January February March April May June

Part a: Market Size &
Volumes
Total # of households (market
size) 100,000,000 100,050,000 100,100,025 100,150,075 100,200,150 100,250,250
% of households--car
ownership 80.00% 80.00% 80.00% 80.00% 80.00% 80.00%
avg. # of cars owned per
household 2.2 2.2 2.2 2.2 2.2 2.2
% of car owners with insurance 85.000% 85.085% 85.170% 85.255% 85.341% 85.426%
total # of insured autos
(market-wide) 149,600,000 149,824,475 150,049,286 150,274,435 150,499,922 150,725,747
market share of National Auto
Insurance 10.00% 10.001% 10.001% 10.002% 10.002% 10.003%
# of autos insured by National,
end of mo. 14,960,000 14,983,197 15,006,429 15,029,698 15,053,002 15,076,343
10-56 (Continued-2)

Part b: Volume for National
Auto Insurance
# of autos insured, beginning
of month 14,940,000 14,921,325 14,902,673 14,884,045 14,865,440 14,846,858
cancelations during the month 18,675 18,652 18,628 18,605 18,582 18,559
# of insured autos, end of
month 14,921,325 14,902,673 14,884,045 14,865,440 14,846,858 14,828,300
avg. # of insured autos during
the month 14,930,663 14,911,999 14,893,359 14,874,742 14,856,149 14,837,579

Part c: Volume for
National Auto Insurance
avg. # of autos insured
during the month 14,930,663 14,911,999 14,893,359 14,874,742 14,856,149 14,837,579
avg. insurance premium
per auto per month $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
monthly premiums
revenue $1,493,066,250 $1,491,199,917 $1,489,335,917 $1,487,474,247 $1,485,614,905 $1,483,757,886
Change in Total Premiums Revenue, January to June:

January's Total Premiums = $1,493,066,250
June's Total Premiums = $1,483,757,886
Six-month Dollar Change = -$9,308,364
Six-month % change = -0.623%
10-56 (Continued-3)
2. What additional real-life refinements would you envision for the budgets you
prepared above in (1)? What additional budgets would you anticipate preparing for
the company were you in charge of the budget-preparation process?
• As the person in charge of the budget-preparation process, one obvious

recommended change would be to report separately the number of new
policies written (the logical offset in Part 1b to the number of policy
cancelations). Currently the number of new policyholders is buried
somewhere in part a of the budget. Thus, a significant improvement is to
disclose prominently each month the net change in (average) policies
outstanding, which is defined as the difference between the number of new
policies written and the number of policy cancellations.
• In the example problem we assumed, for simplicity, that all policyholders

paid the same premium. Alternatively, we used an average premium rate
per month per policy, which is acceptable for budgeting purposes as long
as the mix of policyholders was not anticipated to change from the mix
used to calculate the weighted-average premium amount.
• The budget we created applied to those individuals whose policies

covered the calendar year, January through December. A fuller, more
realistic analysis would gather similar data for policyholders whose
anniversary date is something other than January 1st. Whether the profile
of such policyholders is different from the profile assumed above is an
empirical question.
• The cancelation rate, and growth rate in new underwritings, would

probably be monitored carefully since these are key drivers of future
financial performers. That is, they are "leading indicators" of financial
performance and as such would probably be included in the customer
perspective of the company's balanced scorecard (BSC).
• The problem includes information regarding a midterm policy-cancelation

rate (i.e., policies cancelled before the annual renewal date). It would
seem appropriate, however, to include in the model a policy-renewal rate
(85%, 90%, etc.).
• The above calculations and budgets deal solely with forecasted volume (#
of policies) and premiums revenue ($). The output of the budgets we
prepared would then be used to prepare other budgets for the company.
In this sense, and similar to the extended example in the chapter, we say
that the budgets articulate with one another. For example, once a budget
for volume and sales has been prepared, the company can proceed to
prepare a "cost of claims" budget. In turn, information from both of these
budgets would be used to forecast staffing needs, what we might call
"claims handling." Claims processing times, the mix of "simple" versus
"complicated" claims, the average time to process a claim, the time
available per day (month) for each claims handler, the % of submitted
claims that are paid would all be "drivers" that would be incorporated into
the claims-processing budget.
• The budget as presented is static in nature and covers a fixed period of

time. For reasons discussed more fully in the chapter, the limitations of
such budgets can be addressed by generating "rolling forecasts."
3. The budgets you prepared above in (1) can be referred to as “driver-based

budgets.” List some of the pros and the cons of such budgets, relative to traditional
budgeting practices.
Pros
1. Driver-based budgeting (e.g., traditional activity-based budgeting (ABB) or
time-driven activity-based budgeting) reduces the time to produce a budget
or to reforecast.
2. Driver-based budgeting requires fewer iterations--that is, it reduces the "give
and take" and time devoted to the "negotiations" aspect of traditional
budgets.
3. Driver-based budgeting saves costs--for example, overtime payments
(required to support time-consuming traditional budgeting processes) can
be eliminated; similarly, part-time (temporary) help to support the traditional
budget-preparation process can be reduced or eliminated. Managers are
"freed" to attend to more strategic imperatives.
4. Driver-based budgets make managers accountable--situations such as
decreases in efficiency or idle capacity become more visible under driver-
based budgeting.
5. Driver-based budgeting provides insight and agility--if drivers are
appropriately chosen, then information about # of transactions and cost-
driver quantities for the period aid in the end-of-month evaluation of
operating performance. As well, this budgeting process provides valuable
non-financial information, which can be incorporate into the organization's
Balanced Scorecard (BSC).
6. Driver-based budgeting reduces risk exposure--if performance drivers are
appropriately defined and included in the budget, then management can
readily evaluate different risks and scenarios (mix of products/services sold,
productivity ratios, unit resource costs, etc.).
7. Driver-based budgeting may decrease the amount of "gaming behavior" on
the part of managers and employees. With driver-based budgeting causal
relationships are transparent, a situation that can limit the opportunity for
"gaming." There is simply less opportunity to fool senior managers if all of
the assumptions in budgets are laid out for everyone to see.
Cons
1. Driver-based budgeting is perceived to be difficult to implement.
2. Driver-based budgets require a sophisticated information processing system-
-that is, the ability to capture, across the organization, key resource drivers,
activity cost drivers, and activities.
10-57 Budgets for a Service Firm (45-60 Minutes)
1. The annual cash budget is presented on the next page.
2. Operating problems that Triple-F Health Club could experience include:
▪ The cash contribution from lessons and classes will decrease because the
projected wage increase for lesson and class employees is significantly greater
than the projected increases in revenues (i.e., in additional volume). Last year
(2010), the cash generated from these operations was $39,000 ($234,000 –
$195,000). The 2021 projection is only $12,675 ($304,200 – $291,525).
▪ Operating expenses are increasing faster than revenues from membership fees.
Last year (2020), cash generated from regular operations was $91,000
[($355,000 + $2,000) – ($461,000 – $195,000)]. The 2021 projection is only
$92,482 [($402,215 + $2,667) – ($603,925 – $291,525)]. The increase in cash
from regular operations is projected to be about 1.6% [($92,482 - $91,000) ÷
$91,000], whereas these revenues are projected to increase 13%.
▪ Triple-F Health Club seems to have a cash-management problem. The club does
not generate enough cash from operations to meet its obligations. It may not be
able to meet expenditures for day-to-day operations if the trend continues. To
avoid cash crises, the club should prepare monthly cash budgets to help cash
management.
▪ Non-operational payments are projected to use up virtually all of the cash

generated from operations. Given the recent declines in mortgage interest rates,
management should consider refinancing this debt to reduce this cash drain.
3. Jane Crowe's concern regarding the board's expansion goals is justified. The 2021
budget projections show only a minimal increase in the cash balance (i.e., an
increase of only $2,757). The total cash available is well short of the $60,000 annual
additional cash needed for the land purchase. If the Board desires to purchase the
adjoining property, it is going to have to consider increases in fees, refinancing
existing debt, or other methods of financing the acquisition (such as additional
mortgage debt or membership bonds).
10-57 (continued)
TRIPLE-F HEALTH CLUB

Cash Budget
For the Year Ending October 31, 2021
Price
2020 Growth Increase 2021
Operating Cash Inflows:
Annual membership fees $355,000 3.0% 10.0% $402,215
Lesson and class fees 234,000 30.0% 304,200
Miscellaneous 2,000 33.33% 2,667
Total Operating Cash Inflows $591,000 $709,082
Operating Cash Outflows:

Manager’s salary and benefits $36,000 15.0% $41,400
Employee wages and benefits:
Regular employees 190,000 15.0% 218,500
Lesson and class employees 195,000 30.0% 15.0% 291,525
Towels and supplies 16,000 25.0% 20,000
Utilities (heat and lights) 22,000 25.0% 27,500
Miscellaneous 2,000 25.0% 2,500
Payoff of outstanding A/P N/A given 2,500
Total Operating Cash Outflows $461,000 $603,925
Net Operating Cash Flow $130,000 $105,157
Non-Operating Cash Outflows:

Payoff of equipment payable given $15,000
Mortgage principal given 30,000
Mortgage interest 32,4001
Planned equipment purchases given 25,000
Total Non-Operating Cash Outflow $102,400
Net Cash Flow $2,757

Beginning Cash Balance (given) 7,300
Budgeted Ending Cash Balance $10,057
1$360,000 × 0.09 = $32,400 ($360,000 = principal balance at beginning of the year)

Also note that the cash budget is not the same as the statement of cash flows prepared
for external users, so we include interest expense as part of the financing activities.
10-58 Budgeting and Sustainability (75 minutes)
Requirement 1: Short-Term Financial Analysis
For purposes of illustration (and for requirement 3 below), the cell reference for $13,125
(above) is G24; the cell reference for $60,000 (above) is G14.
Requirement #2: Assume the Switch to the New Compound and the Introduction of Continuous-
Improvement (Kaizen) Budgeting
Estimated increase in processing cost, per year with new compound (from above) = $73,125
Estimated annual cost savings, per Kaizen budget:

Original Monthly Processing Costs (other than materials):
Commercial:
Labor ($4.00/batch x 7,500 batches/year ÷ 12 months/year) $2,500.00
Electricity ($1.50/batch x 7,500 batches/year ÷ 12 months/year) $937.50
Individual:
Labor ($4.00/batch x 3,000 batches/year ÷ 12 months/year) $1,000.00
Electricity ($1.00/batch x 3,000 batches/year ÷ 12 months/year) $250.00
Total Monthly Processing Costs (Other than Materials) $4,687.50
Original Annual Processing Costs (other than materials) $56,250.00
Cell references (in Excel file solution): $73,125 = cell G54 (=cell G44); $4,687.50 = cell
G64 (=SUM(G59:G63)); $56,250.00 = cell G65.
10-58 (Continued-1)
Revised Level of Monthly Processing Costs (other than materials):

Month Labor Electricity
1 $3,465.00 $1,175.63
2 $3,430.35 $1,163.87
3 $3,396.05 $1,152.23
4 $3,362.09 $1,140.71
5 $3,328.47 $1,129.30
6 $3,295.18 $1,118.01
7 $3,262.23 $1,106.83
8 $3,229.61 $1,095.76
9 $3,197.31 $1,084.80
10 $3,165.34 $1,073.95
11 $3,133.68 $1,063.21
12 $3,102.35 $1,052.58
Total--Yr. 1 $39,367.64 $13,356.88 $52,724.52
\ Year 1 Kaizen-based cost savings (processing costs other than material) $3,525.48
Net Increase in Year-One Processing Costs (materials + labor + electricity) = $69,599.52
Difference between fine and net increase in year-one processing costs $9,599.52
Thus, strictly speaking, it is better to incur the fine rather than change to the new cleaning
compound, even after implementing Kaizen budgeting.
Note: Net increase in year-one processing costs ($69,599.52) = Increase in processing

costs, with the new compound ($73,125.00) less the year-one kaizen-based cost
savings ($3,525.48).
For Requirement 3 (below), assume the following input data (cell entries):
Education.
10-58 (Continued-2)
Requirement 3
a. Determine the Monthly Cost-Reduction Rate that would Equate the net increase in year-one total
processing costs (materials + labor + electricity) with the anticipated fine
Step One: Define the Indifference Cost Equation
Difference between the fine and net increase in year-one processing costs $9,599.52
Step Two: Run Goal Seek
Note: cell E19 contains the assumed monthly rate of cost decrease; cell G95
contains arithmetic difference between the cost of the fine and the net increase in
processing costs—other than materials cost, and after implementing kaizen
budgeting. The value “0” in the above formulation essentially solves for the
breakeven level: that is, the rate of monthly cost savings needed to equate the
value of the fine and the increased processing costs due to the new compound, but
after implementing kaizen. As shown below, Goal Seek provides the answer:
4.164% per month.
In other words, in order to be indifferent between incurring the fine

($60,000) and incurring extra processing costs per year, after
implementing kaizen budgeting, the monthly rate of cost decrease must
be 4.164%. At this level, the year-one kaizen-based cost savings would
be $13,125, while the net year-one processing cost increase would be
Education.
$60,000 ($73,125 − $13,125)--an amount exactly equal to the estimated
fine. Note, however, that such a dramatic increase in productivity is highly
questionable.
10-58 (Continued-3)
b. The cost per pound for the new compound that would equate the anticipated fine with
the net year-one costs, assuming no kaizen budgeting plan (i.e., no reduction per month
in processing costs):
Step One: Set Up the Cost Equation
Cost differential: anticipated fine and net one-year processing costs, with no kaizen
budgeting plan = $13,125
Note: the above value is contained (in this example) in cell G121, which in turn is
defined as the contents from cell G45, which contains the difference between the
anticipated cost of the fine, $60,000 (entered in cell G35) and the expected increase
in material cost associated with the use of the new compound (G44), as shown
below:
Step Two: Run Goal Seek
Education.
10-58 (Continued-4)
Cell E17 contains the cost of the new compound, per pound of laundry; cell G121
contains the cost difference: the anticipated fine versus the increased processing
cost attributable to the use of the new compound.
Step Three: Results
In other words, if the price of the new compound were to be reduced from $2.25
per pound of laundry to $2.00 per pound of laundry, with no other changes, then
the owner would be indifferent between incurring the estimated fine ($60,000) and
using the new (higher-priced) compound. Of course, other considerations may
affect the ultimate decision.
4. Operational Changes Needed to Ensure Kaizen Cost Savings
The reduction in labor time might be realized by improving the efficiency of

operations, including a decrease in machine downtime. It is probably the case that
line employees (i.e., operating personnel) would have suggestions for ways to
improve operational efficiency (e.g., changes that would reduce idle time as well as
processing time).
To achieve aggressive cost reductions in labor, however, it might be necessary to

institute some type of employee incentive program.
Savings in electricity consumption may be more difficult to achieve. Some reduction

would likely accompany any planned reductions in labor cost. However, ultimately it
may be necessary to invest in more modern technology to improve electricity
consumption. This is particularly true given recent (and anticipated) increases in
utility rates.
Finally, as the present example shows, effective kaizen budgeting may require
collaborative work with individuals/companies across the value chain. David Duncan
is more likely to achieve his cost-reduction goals by working with his suppliers. As
indicated above, if the cost of the new compound can be decreased by only $0.25
per pound of laundry processed, David would be indifferent (solely on an expected
cost basis) between incurring the fine ($60,000) and the increased processing cost
associated with the use of the new compound ($60,000 as well). Note, however, that
a $0.25/pound reduction amounts to about 11%. This level of reduction may not be
possible if the supplier cannot also reduce costs (e.g., via kaizen [continuous-
improvement] methods).
Education.
10-58 (Continued-5)
5. Other (Strategic and Operational) Considerations that Might Affect the Ultimate
Decision:
• What impact, perhaps negative, will the kaizen budgeting approach have on
employee morale?
• Will the quest to achieve aggressive levels of cost reduction have a negative
effect on service quality?
• Will the use of the new, environmentally friendly cleaning compound have a
beneficial effect on the image of the business and therefore on sales?
• Would the use of the new cleaning compound have a beneficial impact on
employee health/working conditions?
• If the existing cleaning compound were to continue to be used, would it require
any special handling costs/preventative measures (e.g., employee health and
safety)?
• Would incurring a fine (rather than incurring increased operating costs)
negatively affect the image of the business, and therefore future service
demand? (Would negative media coverage reduce demand?)
• Does the existing cleaning compound create a hazardous work environment for
employees (the problem is silent on this issue)?
• If the existing cleaning compound is considered hazardous to employee well-
being, is there an effect on employee absenteeism? Or, more critically, are there
potential liability issues should employees become sick, permanently disabled, or
suffer death as a result of long-term exposure to the compound?
• Duncan's business essentially consists of two service lines/segments:
commercial and individual. Is there a differential effect on marketing activity for
these two groups? (That is, do these groups differ in their response to either
positive or negative media coverage?)
• Would it make more sense for Duncan to invest in new technology, which might
bring the company into full compliance with current emission requirements?
Education.
10-59 Ethics in Budgeting/Budgetary Slack (40 minutes)
1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack include
the following:
▪ These employees are hedging against the unexpected (i.e., they use slack to
deal with or reduce uncertainty and risk).
▪ Budgetary slack allows employees to “look good,” (i.e., to exceed
expectations and/or show consistent performance). This is particularly
important when performance is evaluated on the basis of actual versus
budgeted results.
▪ Employees who are able to blend personal and organizational goals through
budgetary slack and show good performance generally are rewarded with
higher salaries, promotions, and bonuses.
▪ By “padding the budget,” the manager is more likely to get what he/she
actually needs in terms of resources for the upcoming period.
b. The use of budgetary slack can adversely affect Atkins and Granger, and the
organization as a whole by:
▪ limiting the usefulness of the budget to motivate their employees to top

performance.
▪ affecting their ability to identify trouble spots and take appropriate corrective
action.
▪ reducing their credibility in the eyes of management.
▪ reducing the ability of top management to effectively allocate resources to
organizational subunits based on actual economic performance. For example,
the use of budgetary slack may affect management decision-making, as the
budgets will show lower contribution margins (lower sales, higher expenses).
Decisions regarding the profitability of product lines, staffing levels,
incentives, etc. could have an adverse effect on Atkins's and Granger's
departments.
2. The use of budgetary slack, particularly if it has a detrimental effect on the company,
may be unethical. In assessing the situation, the IMA’s Statement of Ethical
Professional Practice can be consulted (www.imanet.org). This statement notes that
“a commitment to ethical professional practice” includes: overarching principles
(expressions of core values) and a set of standards intended to guide actual conduct
and practice.
Education.
10-59 (Continued)
The IMA’s overarching principles include: Honesty, Fairness, Objectivity, and

Responsibility. The list of standards includes the following: Competence,
Confidentiality, Integrity, and Credibility. The following Standards could be
referenced in conjunction with the use of budgetary slack, as described above:
▪ Competence: Provide decision support information and recommendations that

are accurate, clear, concise, and timely.
▪ Integrity: Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
▪ Credibility: Communicate information fairly and objectively; disclose all relevant
information that could reasonably be expected to influence an intended user’s
understanding of the reports, analyses, or recommendations.
Though not asked for in the original CMA exam problem, you might want to discuss
with students how, in practice, they would deal with ethical dilemmas. In its
Resolution of Ethical Conflict statement, the IMA provides the following guidance:
1. Discuss the issue with your immediate supervisor except when it appears that
the supervisor is involved. In that case, present the issue to the next level. If
you cannot achieve a satisfactory resolution, submit the issue to the next
management level. If your immediate superior is the chief executive officer or
equivalent, the acceptable reviewing authority may be a group such as the
audit committee, executive committee, board of directors, board of trustees, or
owners. Contact with levels above the immediate superior should be initiated
only with your superior’s knowledge, assuming he or she is not involved.
Communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate, unless you believe
there is a clear violation of the law.
2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA

Ethics Counselor or other impartial advisor to obtain a better understanding of
possible courses of action.
3. Consult your own attorney as to legal obligations and rights concerning the
ethical conflict.
Education.
10-60 Criticisms of Traditional Budgeting/Incentive Issues (45 Minutes)
Many critics of conventional budgeting procedures cite dysfunctional consequences of

using fixed-performance budgets in managerial compensation contracts. These
individuals believe, among other problems, that such contracts motivate managers and
employees to “game the performance indicator,” that is, to take actions that improve the
performance indicator but are not value-adding to the organization. The following are
selected examples of “gaming behavior”:
• managing earnings by pushing expenses into the future (e.g., by delaying
purchases, delay making new hires, delaying an important product-development
initiative, or delaying needed expenditures)
• managing earnings by moving future revenues to the present (e.g., by booking
orders early or by offering excessive discounts to customers)
• managing earnings from the present to the future (e.g., by prepaying expenses,
or by taking write-offs, or by delaying the realization of revenues)
• managing earnings by pushing profits to the future (e.g., by accelerating
expenses or postponing sales)
• “channel stuffing” (or “trade loading”)—that is, shipping excessive amounts of
products to distributors to meet near-term sales goals, recognizing that many
such products are likely to be returned; such items are sometimes referred to as
“sale-or-return” products
• announcing price hikes for the next fiscal year, in an attempt to motivate
increases in end-of-current-year sales
• shifting funds between accounts to avoid budget overruns (costly, non-value-
added managerial activity)
Other dysfunctional consequences of traditional fixed-performance reward systems
• negotiating low targets and high rewards (i.e., pushing for targets that are
inwardly comfortable yet appear outwardly difficult to achieve)
• failure to take appropriate risks by deviating from the budget (i.e., “if it’s not in the
budget, why take the risk?)
• planning to meet, but not exceed, budgeted performance because such
increased performance might be incorporated into future budgets, which works
against the manager
• spending whatever is in your budget (“use it or lose it”)
• intentionally asking for more resources than you need, anticipating that
reductions to your request will be made during the upcoming budget negotiation
process
Education.
10-60 (Continued)
In addition to gaming behavior, some critics suggest that excessive reliance on budget-
based incentive contracts leads to unethical and even fraudulent behavior. This
conclusion is based on the view that in an attempt to meet budgeted performance
requirements (which are tied to compensation), managers resort to questionable, if not
illegal, behaviors. Enron and WorldCom serve as good examples.
Critics of conventional budgeting practices, including those in the Beyond Budgeting

Roundtable (BBRT), believe that the annual fixed-performance contract should be
replaced with a new management model, one in which the tie between budgets and
annual compensation is severed. As discussed in the chapter, this can be accomplished
(for example) by the use of a “linear compensation plan” or the use of relative-
performance contracts combined with “rolling financial forecasts.” Because of its focus
on budgeting activities and activity costs, one might argue that the use of activity-based
budgeting (ABB) decreases some of the negative incentive effects of traditional
budgeting systems. Because of the use of time equations, and therefore greater
specification of resource requirements, the use of time-driven activity-based budgeting
(TDABB) may be particularly useful.
Education.
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doing they may be considered in connection with the remarks of their
critics and a just comparison made. In presenting the views of
Quaker educators reference may be made to salient points in the
criticism, which seem out of keeping with the ideas set forth and
without foundation as matters of fact.
There are quite a number of men, in the brief [Sidenote: Only a
period studied, who stand out clearly and express few of the leaders’
themselves definitely in favor of education, though statements to be
considered]
they do not consider it the first requisite for a
minister of the gospel.[76] From this number it will be feasible to
select only a few for the chief consideration, relegating the remainder
to a place of comparative unimportance and incidental notice. The
work of George Fox, though he was poorly educated, had a
remarkable effect on the educational work of the society. But it is not
necessary to review that in the present chapter as it has been
presented in the first.[77]
By far the most familiar of all characters in Quaker history is that of
William Penn. And to his influence must be attributed largely the
hearty interest in education shown, not only in Philadelphia, but also
in the surrounding communities. He was well educated, but it is not
desired to make a case for or against him on the basis of his
education; let us judge by his written or spoken expression and
actual procedure in practice. No attempt is made to prove or
disprove his contentions as to what was right or wrong, necessary or
unnecessary in education. The questions asked in his case and the
others that follow is: What did they approve or disapprove of in
education?
Not only in works that might be called strictly [Sidenote: Penn
educational did Penn give educational advice, recommends
valuable alike to youth and to parents, the directors practical virtues]
of youth. His advice to his children on the value of
diligence and its necessity for success, and the propriety of frugality,
even in the homes of the rich, embodies many of the most essential
principles in education at any time. It is especially applicable to the
education of the man of business, emphasizing the importance of the
practical duties in life. Some pointed statements are especially
worthy of repetition.
[Sidenote:
Diligence ... is a discreet and understanding Diligence]
application of onesself to business; ... it loses
not, it conquers difficulties.... Be busy to a [Sidenote:
Frugality]
purpose; for a busy man and a man of business
are two different things. Lay your matters and diligence
succeeds them, else pains are lost.... Consider well your end,
suit your means to it, and diligently employ them, and you will
arrive where you would be....[78] Frugality is a virtue too, and
not of little use in life, the better way to be rich, for it hath less
toil and temptation.... I would have you liberal, but not
prodigal; and diligent but not drudging; I would have you
frugal but not sordid.[79]
This bit of philosophy is educational in its bearing in very much the

same way as that of Benjamin Franklin.
In the letters to his wife and children, referring to the care for their
education, he is more specifically concerned with actual school
education.
[Sidenote: School
For their learning, be liberal. Spare no cost, education
for by such parsimony all is lost that is saved; recommended;
but let it be useful knowledge such as is the useful
emphasized]
consistent with truth and godliness, not
cherishing a vain conversation or idle mind; but ingenuity
mixed with industry is good for the body and the mind too. I
recommend the useful parts of mathematics, as building
houses, or ships, measuring, surveying, dialing, navigation;
but agriculture especially is my eye. Let my children be
husbandmen and housewives; it is industrious, healthy,
honest and of good example, ...[80]
His preference, as might be expected from an [Sidenote: Private
Englishman of that time, was for a tutorial system tutors desired]
of education. His reasons therefore seem to have
been based chiefly on moral grounds.
Rather have an ingenious person in the house to teach

them, than send them to schools; too many evil impressions
being received there.[81]
The above quotation alone would seem to be adequate proof that

Penn did not oppose education, but urged it for others and in his own
family. But still more convincing and irrefutable evidence is found in
the preamble to this school charter, whence an extract is taken.
[Sidenote: Public
Whereas, the prosperity and welfare of any education
people depend in great measure upon the good essential for the
welfare of a
education of youth, and their early instruction in people]
the principles of true religion and virtue, and
qualifying them to serve their country and themselves, by
breeding them in writing and reading and learning of
languages, and useful arts and sciences, suitable to their sex,
age and degree; which cannot be effected in any manner or
so well as by erecting public schools for the purposes
aforesaid, therefore....[82]
If, as must be admitted, the previous statement [Sidenote: His

points out the lack of any opposition to the ordinary ideals expressed
rudimentary education that is necessary for the in action]
everyday walks of life, the last one certainly does [Sidenote: Yearly
the same in reference to his attitude towards a meeting
higher classical education. Moreover, this is not a recommend
French, High and
mere skeleton of words never clothed with the flesh Low Dutch,
of action. The principles set forth in the charter Danish, etc.]
were actually incorporated in the work of the
schools established in Philadelphia, and we find them maintaining a
classical school for languages and higher mathematics.[83] The
practical elements received the just emphasis which belonged to
them; it was necessary that the boys and girls be made able to earn
a living and be at least ordinarily intelligent citizens. The example of
Philadelphia was followed by other communities; practical needs
were given the first consideration and a higher classical education
offered when it became possible. Not only were these studies, which
we would term higher education, mentioned by Penn and other
writers among Quakers, but they were taken up and recommended
by the yearly meeting. For example, in 1737, the minutes
recommend that as opportunity can be found, children should be
privileged to learn “French, High and Low Dutch, Danish, etc.”[84]
This particular recommendation was made by the meeting because
of a felt need.[85] If then in case of a need for a particular subject,
they were willing to recommend that it be taught, can it be truly said
that they opposed all education?
It may be well to examine Barclay, since it is with [Sidenote:
him and his writings that Cox takes issue. In his Barclay’s position
Apology for Christian Divinity Vindicated is to be defined]
found a very clear statement of his position on the
subject, and he voices it as the principle of the whole society as well.
He seems to be answering some critic, who has taken him to task for
his educational views:
[Sidenote: In his
He goes on after his usual manner saying, I Apology]
inveigh against all human learning that has
been made use of any ways in Theology; but where he finds
this asserted I know not, whether the words he would declare
it from, to wit: that man hath rendered the plain and naked
truth obscure and mysterious by his wisdom, will bear such a
consequence is left to the reader’s judgment. But he thinks he
has found out our secret design of being against learning and
schools of learning, which is neither our affirmation nor our
principle, but his own false supposition. We would, saith he,
have all those banished, that we might more easily prevail
with our errors. But methinks the man should be more wary in
venting his own false imaginations, unless he would bring
some ground for them; for his assertion is so far untrue, that if
he had been rightly informed, he might have known that we
have set up schools of learning for teaching of the languages
and other needful arts and sciences,[86] and that we never
denied its usefulness; only we denied it be a qualification
absolutely necessary for a minister, in which case alone we
have opposed its necessity.[87]
Another character of very great importance in [Sidenote:

this connection is Anthony Benezet. Born, 1713, at Benezet’s early
St. Quentin in France, of “an ancient and life and education]
respectable family” he spent his early years in
France and then in Holland, whither his father had fled for refuge.[88]
A few months were spent in Rotterdam and the family then moved to
London where the father entered into the mercantile business and
retrieved to some extent his fallen fortunes. This enabled him to give
Anthony sufficient education to qualify him for that business, for
which, however, he seemed to evince but little taste. Being of a very
religious nature, he became a member of Friends at about fourteen
years of age, and in that society found the field of his whole life’s
activity, which was chiefly educational.[89] Considerable space will be
devoted to his work in respect to the education of Negroes, so that
will be entirely omitted in this place.[90] He was a voluminous writer,
producing chiefly tracts and letters, and a great majority of these
have a definite educational bearing. Because of the great number of
them it is impossible really to do them justice, but an attempt will be
made to state a few brief theses for which he unchangingly stands.
First, education is a religious and social duty.[91] [Sidenote:
It is exceedingly interesting to notice that he looks Education a
function of
upon education as in the first place a governmental government, but
function, if the governments of this world were often neglected
influenced by true wisdom, they would make the as such; hence
individual effort
proper education of youth their first and special necessary]
care;[92] but since governments have neglected to
do this, it occurs to him that it is a service for which Quakers are
remarkably well fitted. It is a service for which the wage is very small
and which secures no return of special social favors for the laborer.
But they, being a quiet people, not wishing to gain great wealth or to
shine in social positions, can find their sphere of activity in the
education of the youthful members of society.
Second, a special care in the education of the [Sidenote:
poor is urged.[93] This should become the duty and Children
represent
secure the interest of the well-to-do public spirited “capital”; they
man, for if the upper class does not safeguard it, must be
they cannot be educated. The poor child educated]
represents so much unimproved property, the
owner being unable to improve it, which, if taken over by
philanthropists, may become of some consequence to himself and
perform great services for society at large. Such a movement would,
besides being a great aid to the poor and uneducated, be also a
worthy occupation for those who at present have nothing but time
and money to spend. It would help them to realize that there is
something real in the world, something greater than wealth and
broader than religious denominations. The heart of Benezet knew no
bounds; in his philanthropy he included all classes.
Third, a definite stand is made for higher standards for teachers.
I do not know how it is amongst you, but here any person of

tolerable morals, who can read and write, is esteemed
sufficiently qualified for a schoolmaster; when indeed, the
best and wisest men are but sufficient for so weighty a
charge.[94]
He endeavors to show that the work of a teacher is pleasant and

should interest a better class of masters than it has in the past. The
experiences of Benezet in the school work were of most pleasant
nature. Not only by his own statement, but judged also by the
accounts given in his memoirs by Robert Vaux, it seems that he was
unusually kind and sympathetic as a master, which won him the
greatest respect of his pupils.[95] The tasks of schoolteaching are
only unpleasant when being performed merely for the sake of the
wage obtained. Those who attempt to teach large numbers for the
sake of a large income find it disagreeable; they form the class of
teachers against whom he would discriminate.[96] Add to these three
principles, his great contribution toward the freedom and education
of the Negroes, his long life of service, and we have all for which he
lived. It is stated that he had no private life; at any rate it sinks into
oblivion in comparison with his interest and active work in public
philanthropies.[97]
The educational influence of John Woolman in [Sidenote: John
regard to Negro and Indian education will be Woolman, his
position in regard
mentioned in another chapter,[98] but concerning to education]
education generally he was equally outspoken, and
being a member of some consequence he was [Sidenote: The
able to make his influence felt. Like Benezet, he responsibility
tutors and
of
regarded education as a social duty, both to each parents]

individual and to the community of individuals. This
duty could not be performed by immoral tutors and schoolmasters,
for the pupil could be made to rise no higher than the master; so the
result would be an immoral society.[99] The responsibility, in the last
analysis, for the right conduct of schools falls upon the parents. If
they are indifferent, nothing can be accomplished for the schools, for
the whole community is no better or more insistent in its demands
than the individuals constituting it. For this reason he urges individual
philanthropy to come to the aid of the schools, which are badly
neglected; those who possess wealth can do no better, for, as he
says:
Meditating on the situation of schools in our provinces, my

mind hath, at times, been affected with sorrow, and under
these exercises it hath appeared to me, what if those that
have large estates were faithful stewards, and laid no rent or
interest nor other demand, higher than is consistent with
universal love; and those in lower circumstances would under
a moderate employ, shun unnecessary expense, even to the
smallest article; and all unite humbly in seeking the Lord, he
would graciously instruct and strengthen us, to relieve the
youth from various snares, in which many of them are
entangled.[100]
If to this list of advocates of education, it is [Sidenote: Tuke,

necessary to add others, mention should be made Whitehead,
of Henry Tuke, George Whitehead, and William Crouch as
advocates of
Crouch. In defending certain differences between education]
the Quaker doctrine and that of other
denominations, the former discusses this one, in not considering
human learning essential to a minister of the gospel.[101] The
reasons adduced are chiefly biblical; the knowledge of human
literature is not recommended by the New Testament as being
necessary for a minister, and this is considered conclusive proof.
Moreover, it is pointed out that Paul, though a well educated man,
disclaimed the value of his education for that service, and wished
always to appear to the people as an unlettered man of God.[102] But
Tuke goes on to explain that though it is not essential for a minister,
learning is not unesteemed nor its usefulness slighted.[103] Members
are desired to direct their attention to education, for a right use of it
may promote religion and benefit civil society.[104] That the use of
Latin and Greek is not decried may be seen in the work of Penn and
Whitehead, who were both scholars, and whose works are full of
classical references and illustrations. In one instance their chief
argument against swearing is produced from certain references to
the works of Socrates and Xenocrates, pointing out that the Greeks
were aware of a higher righteousness excelling that of the legal
Jews.[105] The same point of view with reference to a knowledge of
the classics is taken by William Crouch, as is understood at once by
this statement:
They acknowledge the understanding of languages,

especially of Hebrew, Greek and Latin, formerly was and still
is very useful, yet they take them not therefore to be
necessary to make a minister nor so profitable as that one
unacquainted with them must be styled an idiot, illiterate and
of no authority.[106]
Moreover, from various sources one is assured [Sidenote: The

that a classical education was not abhorred by the Latin School of
Quakers of Philadelphia. The work offered in the Philadelphia
exemplifies
classical school was for any one who had the contention of
ability to do it and its attainment was encouraged those quoted
by Friends. The higher education was for girls as above]
well as for boys, as we may judge from reading the [Sidenote:
journal kept by Sally Wister (or Wistar), a Quaker Education an
girl of the days of the Revolution.[107] She attended asset; but apt to
be perverted]
the school kept by Anthony Benezet,[108] which
was one of the highest class, moral and literary, and patronized by
the best classes of the citizens. Extracts from her Journal indicate
that her education had not been limited to the mere rudiments, but
that she enjoyed also an elementary knowledge, at least, of Latin
and French.[109] This sort of education was clearly not uncommon
among Friends and it was not the object of opposition on their part. It
must, however, be kept in mind that the Quakers never confused
education necessarily with true Christianity.[110] Religion in this life
and the salvation of one’s soul in the next was a problem which
concerned the poor as well as the rich, the untutored as well as the
learned. How could the demands be greater for one than the other;
the same tests had to be met and passed by all, the educated one
received no favors though more might be expected of him.[111]
Education was looked upon as an asset which might be turned to
great use for Christianity, but the lack of it was never a bar to
Christianity.[112] On the other hand, education might easily become,
according to the Quakers’ views, a definite hindrance to Christianity.
[113]
It would be quite improper in connection with this [Sidenote:

subject to fail to mention the scheme, Utopian in Scheme of
that day, which was conceived in the mind of education
Thomas Budd, for the development of a system of suggested by
Thomas Budd]
education for Pennsylvania and New Jersey. At the
very outset it seems more comprehensive than anything suggested
by any other leader, and in fact it embodied so much that it was quite
beyond the limit of expectation for either of the colonies. Thomas
Budd, though not at first a member of Friends, became convinced of
the justice of their principles and joined the society before the year
1678.[114] He was a man of affairs and became greatly interested in
the colonization of Pennsylvania and New Jersey, whither he soon
came as a colonist himself. At that time it was equally true, as at the
present, that if a scheme or undertaking was to be put through, it
must be made as attractive as possible to the prospector. The
attempt to do this called forth a considerable exercise of individual
initiative, and one result was the educational plan outlined by
Thomas Budd and published in Philadelphia in 1685. The details of
the scheme as outlined are deemed of sufficient interest and
importance to warrant their reproduction here.
[Sidenote:
1. Now it might be well if a law were made by Children to be in
the Governors and General Assemblies of public school
Pennsylvania and New Jersey, that all persons seven
more]
years or
inhabiting the said provinces, do put their

children seven years to the Public School, or longer, if the
parent please.
2. That schools be provided in all towns and [Sidenote: To

cities, and persons of known honesty, skill and receive instruction
understanding be yearly chosen by the in the arts and
sciences and to
Governor and General Assembly, to teach and learn a trade]
instruct boys and girls in all the most useful arts
and sciences that they in their youthful capacities may be
capable to understand, as the learning to read and write true
English and Latin, and other useful speeches and languages,
and fair writing, arithmetic and bookkeeping; the boys to be
taught and instructed in some mystery or trade, as the making
of mathematical instruments, joinery, turnery, the making of
clocks and watches, weaving, shoemaking or any other useful
trade or mystery that the school is capable of teaching; and
the girls to be taught and instructed in spinning of flax and
wool, and knitting of gloves and stockings, sewing, and
making of all sorts of useful needlework, and the making of
straw work, as hats, baskets, etc., or other useful art or
mystery that the school is capable of teaching.
3. That the scholars be kept in the morning [Sidenote: Eight

two hours at reading, writing, bookkeeping, etc., hours per day
and other two hours at work in that art, mystery allotted to studies
and chosen trade]
or trade that he or she most delighteth in, and
then let them have two hours to dine, and for recreation and
in the afternoon two hours at reading, writing, etc., and the
other two hours at work at their several employments.
4. The seventh day of the week the scholars [Sidenote:

may come to school only in the forenoon, and at Regular school
a certain hour in the afternoon let a meeting be work five and
one-half days per
kept by the schoolmasters and their scholars, week; moral
where good instruction and admonition is given instruction on
by the masters to the scholars and thanks Saturday]
returned to the Lord for his mercies and
blessings that are daily received from him, then let a strict
examination be made by the masters, of the conversation of
the scholars in the week past, and let reproof, admonition and
correction be given to the offenders, according to the quantity
and quality of their faults.
5. Let the like meetings be kept by the school [Sidenote: Similar

mistresses, and the girls apart from the boys. arrangement for
By strictly observing this good order our girls educated
separately]
children will be hindered from running into that
excess of riot and wickedness that youth is incident to, and
they will be a comfort to their tender parents.
6. Let one thousand acres of land be given
and laid out in a good place, to every public [Sidenote: Land
endowment for
school that shall be set up, and the rent or schools]
income of it to go towards the defraying of the
charge of the school.
7. And to the end that the children of the poor [Sidenote: Indians
people, and the children of Indians may have and the poor to be
the like good learning with the children of the educated
cost]
free of
rich people, let them be maintained free of

charge to their parents, out of the profits of the school, arising
by the work of the scholars, by which the poor and the Indians
as well as the rich, will have their children taught, and the
remainder of the profits, if any be to be disposed of in the
building of the schoolhouses and improvements on the
thousand acres of land, which belongs to the school.[115]
The author does not claim to be entirely original [Sidenote: The

in his scheme, having been influenced, he says, by industrial and
a similar thing described by Andrew Yarenton in a commercial
values to be
book, England’s Improvements by Sea and Land. derived are
[116] His chief interest seems to be in the benefit to pointed out]
be derived for the commercial life of the colonies,
and for that reason there is accordingly a great stress on the
industrial education. By this introduction of the industrial schools,
spinning for example, in the larger cities and the preparation of
children at an early age for participation in that great occupation, the
production of linen cloth could be made equal not only to the
domestic demands but also a considerable margin for the foreign
trade.[117] It is pointed out that the colonial consumer pays twice as
much for his purchase as its cost of production in France or
Germany, and that he pays this extra cost into the coffers of the
English merchants. This profit should accrue to the home merchants.
The educational and also the industrial scheme [Sidenote:
is to receive the backing of the colonial Scheme to be
government. It is recommended that laws be
passed for the encouragement of linen encouraged by
manufacturers and that farmers “that keep a plow” the government]
should sow an acre of flax and two of hemp, with [Sidenote:
which to supply the manufacturers.[118] Educational Essential points
urged in the
support by the government was not secured, as is scheme]
amply evidenced by the unsurpassed development
of private and parochial schools of all [Sidenote: The
denominations. The churches were the sponsors lack of
governmental
for education. It is worthy of note, however, that the support; supplied
elements emphasized by Budd, (1) education in the through meetings
arts and sciences for all those capable of it, (2) of Quakers]
industrial education for a trade for every one, (3)
moral and religious training, and (4) equal educational opportunities
for poor and rich or otherwise unfavored classes, are the same as
those urged officially by the Quakers.[119]
Far from receiving governmental support, it was necessary that
the schools be supported by individual or small group enterprise.
The society recognized this, and it is stated in the organization of the
church that the duty of the monthly meeting is to provide for the
subsistence of the poor and for their education.[120] Furthermore it is
recommended that all special bequests of Friends be kept as a
distinct fund for the purpose originally intended by the donor, and
that if expended for any other purpose, it must be again made up by
the quarterly meeting.[121] One of the most frequent uses
designated, judging from the records, seems to have been the
educational.[122]
The reader may have perused the foregoing [Sidenote: Have
pages with more or less interest; a curiosity may Quaker schools
have been aroused concerning the present-day kept pace with the
public?]
attitude of Friends, educationally. Have they
experienced any considerable change? The institutional evidences
of their continued interest are familiar enough to the educationist. But
what is the attitude within the schools: Is instruction stiff and more
formal there than in the public schools, and what can be said of the
progress among the teachers? To answer all of these questions and
similar ones is not the purpose of this present work. And in the
following excerpt, taken from an expression drawn up by a body of
teachers, it is not hoped to find conclusive proof of this or that, but
perhaps it may be taken as a fairly reliable indication of the present
professional attitude.
[Sidenote: The
The teachers’ subjects are not Mathematics, pupil as an
nor Latin, nor Scripture, nor Quakerism—they individual to be
emphasized]
are boys and girls. The information imparted is,
in a sense, a minor matter: the growth of the [Sidenote: Well-
mind that assimilates it is all-important—growth equipped
teachers needed;
in keenness, efficiency and power.... and their
To the Society at large we would put forward academic
freedom
this view that the principles urged above are essential]
deserving of careful consideration in making
any forward move. The quality of the teaching given in our
schools is in a measure in the hands of Friends; they have
raised admirable buildings in many places—these are a small
matter compared with the character of the staff. The freedom
of the teacher, which is an indispensable condition of
excellence is a gift they can grant or withhold. And that we
who are responsible for the term of school life may have the
best chance and the best reward, we would press upon
Friends the need of laying foundations and awakening
interest in the days of childhood, and of turning to best
account the powers of those who go forth from our schools.
[123]
SUMMARY
This chapter treats of the attitude of Friends [Sidenote:
towards education. At the beginning there is Summary of
presented a criticism of S. H. Cox, which is a Cox’s position]
concrete example of the type of criticism referred to
in these pages. Following this there are presented the educational
views of several Friends,—Penn, Barclay, Benezet, Woolman,
Whitehead, Crouch, Tuke, and Thomas Budd, in order that the
reader may judge of the truth or error presented in the criticism. The
chief points made in Cox’s criticism are: (1) hostility of the Quaker
system to classical education, (2) general hostility of the Friends to
colleges and seminaries of learning, and (3) that the “light within”
was sufficient without any education.
From the material next presented it is shown [Sidenote:
that: (1) Penn recommended both practical and Summary of
higher education, (2) useful arts and sciences are points maintained
by certain Quaker
recommended to be taught in public schools, (3) leaders]
the classics were introduced as a part of the
curriculum in the Penn Charter School, and also in other schools
established by the society, (4) Barclay explains that the society holds
a classical education not absolutely necessary for a minister, though
it is useful, (5) the learning of languages is recommended by the
London Yearly Meeting, (6) education is advocated by Benezet as a
religious and social duty; the education of the poor and unfortunate
classes and races is urged; a higher education for schoolmasters is
recommended, (7) Woolman urges the education of Negroes and
Indians as a social duty; the responsibility is placed on the individual,
(8) Crouch states that Hebrew, Greek, and Latin are recognized as
useful and are not opposed when taught for that purpose, (9) Budd,
one of the early Quakers in Pennsylvania, introduced a very
comprehensive and Utopian scheme for (a) industrial education and
(b) higher education, proposing to organize it under the control of the
General Assembly, and (10) indications are that progress, within the
teaching body in Friends’ institutions, is quite comparable with that of
other institutions, though there is no attempt to produce conclusive
evidence either to that effect or the contrary.
CHAPTER IV
EDUCATION IN PHILADELPHIA[124]
On ye 27th day of October, 1682, arrived before ye Towne

of New Castle from England, William Penn, Esqe., whoo
produced twoo deeds of feofment for this Towne and twelve
myles about itt, and also for ye twoo lower counties, ye
Whoorekills and St. Jones’s—wherefore ye said William Penn
received possession of ye Towne ye 28th of October, 1682.
[125]
It is probable that Penn reached Philadelphia in [Sidenote: The

the latter days of October or the early part of date of Penn’s
coming disputed]
November,[126] though no student of Philadelphia
history has yet been able to settle the question of the day absolutely.
Tradition says he came up the river in an open boat and landed at
the landing on Dock Street near the new tavern, the Blue Anchor,
which had just been erected by George Guest, a Quaker.[127] The
formal ceremony of transferring the territory which had been
arranged between Penn and the Duke of York before leaving
England,[128] was accomplished with the Duke’s commissioners,
Moll and Herman,[129] and the official debut of Pennsylvania in
colonial society was no longer a hope but a reality.
The foundation of the colony’s educational [Sidenote:
institutions had, however, not been delayed till the Education
formalities of “making” a colony were over. provided for in
first Frame of
Education received early consideration in the Government]
Frame of Government which was drawn up from
England by Penn and agreed to on April 25, 1682, before he
prepared to depart for Pennsylvania.[130] In that document it is
clearly set forth that education was the function of the civil authority,
though the intentions of the author were not realized fully for more
than a hundred and fifty years.[131] The same idea is present in each
of the three Frames of Government which were drawn up; the first,
April 25, 1682;[132] the second, April 2, 1683;[133] and the third,
November 7, 1696,[134] under Governor Markham. The instrument
drawn on April 2, 1683, contained in part the following stipulations,
which bear the impression of the Quaker ideal of education.
[Sidenote: The
Tenth. That the Governor and the Provincial provisions]
Council shall erect and order all public schools
and encourage and reward the authors of useful sciences and
laudable inventions in the said provinces and territories
thereof.
Eleventh. That one-third of the Provincial Council residing
with the Governor from time to time shall, with the Governor,
have the care and management of public affairs relating to
peace, justice, treasury and improvement of the province and
territories, and to the good education of the youth, and
sobriety of the manner of the inhabitants therein aforesaid.
[135]
The plan for education as above set forth was [Sidenote: Quaker
not destined to be the one followed consistently for Council provides
more than a century and a half of development, a school]
though throughout the first decades the relations
between the schools of Friends and the governing Council were very
close.[136] It is significant that the first school was actually ordered by
the Council, in keeping with Penn’s provisions. About one year after
Penn’s arrival in Philadelphia the educational problem came to the
attention of the Council and received decided recognition, as the
following witnesses:
The Governor and Provincial Council having taken into their

serious consideration the great necessity there is of a
schoolmaster for the instruction and sober education of the
youth in the town of Philadelphia, sent for Enock Flower, an
inhabitant of said town, who for twenty years past has been
exercised in that care and employment in England, to whom
having communicated their minds, he embraced it upon the
following terms: to learn to read English 4s by the quarter, to
learn to read and write 6s by the quarter, to learn to read,
write and cast accounts 8s by the quarter; for boarding a
scholar, that is to say, diet, washing, lodging, and schooling,
ten pounds for one whole year.[137]
Thus the first impetus to education in [Sidenote:

Pennsylvania came through properly constituted Additional
governmental authority. The Council records show provisions or
books]
that the interest in educational affairs was
maintained for some time. In the month following a [Sidenote: Charter
law was proposed for making several sorts of of 1701 does not
refer to education
books for the use of persons in the province, and as did the former
also recommended that care be taken about ones]
“Learning and Instruction of youth, to witt: a school
in the arts and sciences.”[138] This interest in, and the close relation
of the Council to, education were not long continued however; for
this there is no satisfactory explanation, though it is very clear that
the attitude on the part of the government did change.[139] This
change is evidenced in the policy as outlined by the Charter of 1701,
in which there is no reference made to education or the responsibility
of the Governor or Council therefor.[140] To the writer it seems that
the withdrawal of the Council from any very active participation in the
affairs of education may have been due to two reasons: first, the
willingness evinced by private interests to establish schools and thus
take over to themselves the duties of educators (evidenced by the
establishment of Keith’s school by Friends in 1689 without the
assistance or advice of the Council);[141] and second, the urgent
details of establishing a new government, which occupied their first
attention.
If further proof of the withdrawal of the colonial government from
the active establishment of schools, and of the fact that they did
accept and recognize the assistance of private agencies is desired, it
is to be found in various acts of legislation of the first half century.
Specific instances of such permissive legislation were the acts of
May 28, 1715,[142] and also of February 6, 1730-1.[143] This
legislation is chiefly concerned with granting privileges to purchase
and hold land and erect buildings for the use of institutions stated
therein, among which schools are mentioned. In this connection the
statute of 1715, which evidences the facts stated above, is quoted.
Be it enacted by Charles Gookin, Esq., by the royal

approbation Lieutenant-Governor, under William Penn, Esq.,
Proprietary and Governor-in-Chief of the Province of
Pennsylvania, by and with the advice and consent of the
freemen of the said provinces in General Assembly met, and
by the authority of the same, that it shall and may be lawful to
and for all religious societies or assemblies and
congregations of Protestants, within this province, to
purchase any lands or tenements for burying grounds, and for
erecting houses of religious worship, schools and hospitals;
and by trustees, or otherwise, as they shall think fit, to receive
and take grants or conveyances for the same, for any estate
whatsoever, to and for the use or uses aforesaid, to be holden
of the lord of the fee by the accustomed rents and services.
And be it further enacted by the authority aforesaid, that all
sales, gifts or grants made to any of the said societies, or to
any person or persons in trust for them, or any of them, for or
concerning any lands, tenements or hereditaments within this
province, for and in any estate whatsoever, to and for the use
and uses aforesaid, shall be and are by this Act ratified and
confirmed according to the tenor and true meaning thereof,
and of the parties concerned therein. And where any gifts,
legacies or bequests have been or shall be made by any
person or persons to the poor of any of the said respective
religious societies, or to or for the use or service of any
meeting or congregation of the said respective societies, the
same gifts and bequests shall be employed only to those
charitable uses, or to the use of those respective societies or
meetings, or to the poor people to whom the same are or
shall be given or intended to be given or granted, according to
what may be collected to be the true intent and meaning of
the respective donors or grantors.
On “11th month, 9th, 1682,” the Friends met and [Sidenote: The
enacted business relating chiefly to the sick, a first meeting of
meeting house, purchase of books and such other record]
details of importance, but made no reference to [Sidenote: The
schools or the education of youth.[144] This probable length of
Flower’s tenure
remained true for all meetings till 1689,[145] the as teacher]
chief part of business in the meantime having to do
with either (1) strictly religious affairs or (2) raising money for the
poor and the orphans. The absence of any remarks or any plans for
schools from 1682 to 1689 is more easily understood when it is
recalled that the school under Enock Flower was set up in 1683.[146]
There is no evidence to prove definitely that Flower continued as
schoolmaster during the whole of this time, but (1) the absence of
any record of change, (2) no record of schools kept by the Friends
Meeting, (3) the fact that he was a teacher of long experience
(twenty years) and probably as satisfactory as any to be found, and
(4) the absence of keen competition on the part of neighboring
places to draw him away, would lead one to believe it probable that
he remained there for the greater part of the period at least.
In 1689 Friends determined to establish a school, designed to
meet the demands of rich and of poor,[147] which does not seem at
all strange since they were known to have been supporting their poor
and the orphans by subscriptions since their first establishment.[148]
The transaction of the business relating thereto was performed in the
monthly meeting and referred to the quarterly meeting (higher) for its
approval. The following extract from the records of the meeting gives
the result of their decision:

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10-8 Zero-base budgeting (ZBB) is a budgeting process that requires managers to

1. Introduction to What-If Analysis:

2. Using Excel to Perform Scenario Analysis:

3. Using Excel to Create Data Tables:

5. Using Solver to Perform What-If Analysis:

The term “rolling financial forecast” refers to a process of continually updating

The use of both “relative-performance contracts” and “rolling financial forecasts”

10-15 Payment history:

Expected cash disbursements:

10-16 Number of units produced in Qtr. 1:

Units produced in Qtr. 1 = lbs. of DM used/lbs. of DM per unit of

DM requirements (in lbs.), Qtr. 2 = Planned production, Qtr. 2 × DM lbs./unit

10-17 Scheduled Production, Quarter 2:

10-18 Current level of monthly operating costs = $10,000:

Collection of credit sales—December:

10-20 Collection of Credit Sales—December:

10-21 Estimated interest expense—April = borrowing in April × (annual rate ÷ 12)

Estimated financing transactions—May:

10-22 Direct Material (DM) Purchases, December = (DM issued to production +

Sales volume (units):

Total budgeted marketing expense and cash payments, 4th quarter:

10-24 Purchase Discounts (25 minutes)

Opportunity cost (%) = [discount % ÷ (1 − discount %)] × [365 ÷ no. of

= [0.02 ÷ (1 − 0.02)] × [365 ÷ 20] = 0.020408 × 18.25 = 37.24%

= [0.01 ÷ (1 − 0.01)] × [365 ÷ 20] = 0.010101 × 18.25 = 18.43%

3. Given the significant opportunity cost of not taking advantage of early-

2nd Quarter 3rd Quarter

1. Budgeted Cash Receipts:

2. Budgeted Cash Disbursements:

1. Budgeted cash payments for merchandise purchases:

2. Budgeted cash payments for merchandise purchases:

Opportunity cost (%) = [discount % ÷ (1 – discount %)] × [365 ÷ no. of extra

= [0.02 ÷ (1 − 0.02)] × [365 ÷ 15] = 0.020408 × 24.33 = 49.66%

Basically, if the company chooses not to take the early-payment discount, it is

Hartz & Co.

Cash balance, beginning $75,000 $99,000

Cash disbursements, prior to financing (B) $450,500 $550,000

Excess (deficiency of) cash, before

Ending cash balance = (A) − (B) + (E) $99,000 $50,480

Beginning cash balance $15,000

2. Appropriate accounting treatment for:

b) Cash discounts allowed on collection of receivables: These are offered as an

1. Budgeted cash collections in December 2018 from November 2018 credit

2. Budgeted total cash receipts in January 2019:

3. Budgeted total cash payments in December 2018 for inventory purchases:

1. Budgeted merchandise purchases: May and June

May June July

2. Budgeted cash disbursements: June