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CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
The Short-Answer Questions, Exercises, and Problems marked with can be found on MyLab:
Accounting. Students can practise them as often as they want, and most feature step-by-step guided
instructions to help find the right answer. Items marked with have Excel templates available on
MyLab for students to use.
SHORT-ANSWER QUESTIONS
6-1 The budgeting cycle includes the following elements:
a. Planning the performance of the organization as a whole and of its subunits. The entire
management team agrees as to what is expected.
b. Providing a frame of reference, a set of specific expectations against which the actual results
can be compared.
c. Investigating variations from the plans. If necessary, corrective action follows investigation.
d. Planning again, considering feedback and changed conditions.
6-2 A master budget is a single comprehensive document that combines information from
many individual budgeted statements. The term “master” refers to its being a comprehensive
organization-wide set of budgets that coordinates all financial projections for a set period of time.
6-3 Plans can and sometimes should be changed if the feedback indicates an assumption
used in the budget was wrong. If the feedback indicates the plan was reasonable, then it is
necessary to understand the issues preventing the achievement of the planned results and
implement an appropriate remedy.
6-4 Strategy, plans, and budgets are interrelated and affect one another. Strategy is a broad
term that usually means selection of overall objectives. Strategic analysis underlies both long-run
and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide
feedback to managers about the likely effects of their strategic plans. Managers use this feedback
to revise their strategic plans.
6-5 Yes, budgeted performance is better than past performance for judging managers.
Why? Mainly because inefficiencies included in past results can be detected and eliminated in
budgeting. Also, new opportunities in the future, which did not exist in the past, may otherwise be
ignored if past performance is used.
6-6 A company that shares its own internal budget information with other companies can
gain multiple benefits. One benefit is better coordination with suppliers, which can reduce the
likelihood of supply shortages. Better coordination with customers can result in increased sales as
demand by customers is less likely to exceed supply. Better coordination across the whole supply
chain can also help a company reduce inventories and thus reduce the costs of holding inventories.
Suppliers and customers become “partners in profit.” Here satisfied customers sell the final product
to new customers.
6-7 A rolling budget is a budget or plan that is always available for a specified future
period by adding a month, quarter, or year in the future as the month, quarter, or year just ended is
dropped. For example, a 12-month rolling budget for the March 2018 to February 2019 period
becomes a 12-month rolling budget for the April 2018 to March 2019 period the next month, and
so on.
6-9 The revenue budget is typically the cornerstone for budgeting because production (and
hence costs) and inventory levels generally depend on the forecasted level of demand and revenue.
6-11 Padding is when budget figures are either inflated (in the case of expenses) or deflated
(in the case of revenues) in order to make it easier to achieve them during the actual operations of
the firm. This makes it easier for managers to meet their budget targets and earn performance
bonuses. Senior managers should look at outside (external) data to see if the internal budgets are
reasonable. Senior managers should also be familiar with the operations of the firms—this will
make it easier for them to spot unreasonable budget estimates.
6-12 Non-output-based cost drivers can be incorporated into budgeting by the use of
activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to
produce and sell products and services. Non-output-based cost drivers, such as the number of part
numbers, number of batches, and number of new products, can be used with ABB.
6-13 The choice of a responsibility centre type guides the variables to be included in the
budgeting exercise. For example, if a revenue centre is chosen, the focus will be on variables that
assist in forecasting revenue. Factors related to, say, costs of the investment base will be
considered only if they assist in forecasting revenue.
EXERCISES
6-15 (10 min.) Terminology.
A cash cycle, also known as an operating cycle, is the movement of cash arising from business
functions to inventories, to receivables, and back to cash when outputs are sold. It is a self-
liquidating cycle where all costs of a corporation are recovered when output is sold. Budgetary
slack is the practice of underestimating revenue and overestimating costs to make budget
constraints less challenging. Once the corporate budget is produced, all managers make a
commitment to reach budget targets. They are responsible for controllable cost that must be at or
below the budget constraint during each reporting time period. Some companies produce a rolling
budget that adds a reporting time period as one is completed. An investment budget affects the flow
in and out of cash either to make the investment or to pay to finance it.
6-17 (30 min.) Budgeting: direct material usage, manufacturing cost, and gross
margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Blue Rugs (100,000 rugs × 30 skeins and 0.5 L.) 3,000,0000 skeins 50,000 L.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Wool: 349,000 skeins $ 715,450
Dye: 5,000 litres $ 24,850
To be purchased this period
Wool: (3,000,000 - 349,000) skeins × $2 per skein 5,302,000
Dye: (50,000 – 5,000) L. × $5 per L. _________ 225,000
Direct materials to be used this period: (a) + (b) $6,017,450 $ 249,850 $6,267,300
2.
Weaving budgeted = $18,852,000
= $3.3664 per DMLH
overhead rate 5,600,000 DMLH
4. Revenue budget
Selling
Units Price Total Revenue
Blue Rugs 100,000 $2,000 $200,000,000
Blue Rugs 95,000 $2,000 $190,000,000
6.
100,000 rugs sold 95,000 rugs sold
Revenue $200,000,000 $190,000,000
Less: Cost of goods sold 121,928,300 115,832,750
Gross margin $ 78,071,700 $ 74,167,250
2.
2018 Planned 2019 Expected 2019 Expected 2019
McGrath & Sons Volume Selling Prices Change in Volume Volume
Radon Tests 11,000 $250 +10% 12,100
Lead Tests 15,200 $190 -5% 14,440
Expected revenue at the new 2019 prices are greater than the expected 2018 revenue of
$5,623,500 if the prices are unchanged. So, if the goal is to maximize sales revenue and if
Jim McGrath’s forecasts are reliable, the company should lower its price for a lead test in
2019.
Direct Materials
(in litres)
Direct materials needed for production (54,350 3) 163,050
Add target ending direct materials inventory 110,000
Total requirements 273,050
Deduct beginning direct materials inventory 117,350
Direct materials to be purchased 155,700
6-23 (30 min.) Budgeting; direct material usage, manufacturing cost, and gross
margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.) 7,200,000 skeins 160,000 gal.
Cost Budget
Available from beginning direct materials inventory:
(a)
Wool: 458,000 skeins $ 961,800
Dye: 4,000 gallons $ 23,680
To be purchased this period: (b)
Wool: (7,200,000 – 458,000) skeins × $2 per skein 13,484,000
Dye: (160,000 – 4,000) gal. × $6 per gal. 936,000
Direct materials to be used this period: (a) + (b) $14,445,800 $ 959,680 $15,405,480
3.
Budgeted Unit Cost of Blue Rug
Input per
Cost per Unit of
Unit of Input Output Total
Wool $ 2 36 skeins $ 72.00
Dye 6 0.8 gal. 4.80
Direct manufacturing labour 13 62 hrs. 806.00
Dyeing overhead 12 7.21 mach-hrs. 86.40
Weaving overhead 2.55 62 DMLH 158.10
Total $1,127.30
1
0.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs. per rug.
4.
Revenue Budget
Selling
Units Price Total Revenues
Blue Rugs 200,000 $2,000 $400,000,000
Blue Rugs 185,000 $2,000 $370,000,000
5a.
Sales = 200,000 rugs
Cost of Goods Sold Budget
5b.
Sales = 185,000 rugs
Production = 200,000 rugs
Cost of Goods Sold Budget
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar
expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of
goods sold budget will be as follows. The Cost of Goods Sold budget is higher because the fixed
overhead costs in the dyeing and weaving cost pools do not get “inventoried” in the closing
inventory of rugs but are instead expensed in the current period.
6.
185,000 rugs sold 185,000 rugs sold
200,000 rugs sold 200,000 rugs produced 185,000 rugs produced
Revenue $400,000,000 $370,000,000 $370,000,000
Less: Cost of goods sold 225,505,480 208,595,980 209,417,980
Gross margin $174,494,520 $161,404,020 $160,582,020
7. If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce
less to reduce variable costs and inventory costs.
8. Top management can look for ways to increase (stretch) sales and improve quality,
efficiency, and input prices to reduce costs in each cost category such as direct materials, direct
manufacturing labour, and overhead costs. Top management can also use the budget to
coordinate and communicate across different parts of the organization, create a framework for
judging performance and facilitating learning, and motivate managers and employees to achieve
“stretch” targets of higher revenues and lower costs.
Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very
close to the major manufacturer. Inventories are controlled by just-in-time (JIT) and similar
systems. Indeed, some direct materials inventories are almost nonexistent.
6-25 (15-25 min.) Budgets for production and direct manufacturing labour.
All Frame Company
Budget for Production and Direct Manufacturing Labour
For the Quarter Ended March 31, 2019
January February March Quarter
Budgeted sales (units) 10,000 12,000 8,000 30,000
Add target ending finished goods inventory* (units) 16,000 12,500 13,500 13,500
Total requirements (units) 26,000 24,500 21,500 43,500
Deduct beginning finished goods inventory (units) 16,000 16,000 12,500 16,000
Units to be produced 10,000 8,500 9,000 27,500
Direct manufacturing labour-hours (DMLH) per unit 2.0 2.0 1.5
Total hours of direct manufacturing labour time needed 20,000 17,000 13,500 50,500
Direct manufacturing labour costs:
Wages ($10.00 per DMLH) $200,000 $170,000 $135,000 $505,000
Pension contributions ($0.50 per DMLH) 10,000 8,500 6,750 25,250
Workers’ compensation insurance ($0.15 per DMLH) 3,000 2,550 2,025 7,575
Employee medical insurance ($0.40 per DMLH) 8,000 6,800 5,400 20,200
Employment insurance (employer’s share)
($10.00 0.075 = $0.75 per DMLH) 15,000 12,750 10,125 37,875
Total direct manufacturing labour costs $236,000 $200,600 $159,300 $595,900
*100% of the first following month’s sales plus 50% of the second following month’s sales.
Note that the employee employment insurance levy of 7.5% is irrelevant. Such taxes are withheld from employees’ wages and paid to the
government by the employer on behalf of the employees; therefore, the employee 7.5% amounts are not additional costs to the employer.
2. a. The projected number of the MZB-33 computer hardware units that TabComp Inc.
will order on January 25, 2019, is calculated as follows.
MZB-33
Units
March sales 110
Plus: Ending inventorya 27
Total needed 137
Less: Beginning inventoryb 33
Projected purchases in units 104
a
0.30 90 unit sales in April
b
0.30 110 unit sales in March
b.
Selling price = $2,025,000 675 units, or for March, $330,000 110 units
= $3,000 per unit
Purchase price per unit, 70% $3,000 $ 2,100
Projected unit purchases × 104
Total MZB-33 purchases, $1,800 104 $218,400
3. Monthly cash budgets are prepared by companies such as TabComp Inc. in order to plan
for their cash needs. This means identifying when both excess cash and cash shortages may
occur. A company needs to know when cash shortages will occur so that prior
arrangements can be made with lending institutions in order to have cash available for
borrowing when the company needs it. At the same time, a company should be aware of
when there will be excess cash available for investment or for repaying loans.
1.
Cost Soft Fresh Packaged
Activity Hierarchy Drinks Produce Food Total
Ordering
$90 14; 24; 14 Batch-level $1,260 $ 2,160 $1,260 $ 4,680
Delivery
$82 12; 62; 19 Batch-level 984 5,084 1,558 7,626
Shelf-stocking
$21 16; 172; 94 Output-unit-level 336 3,612 1,974 5,922
Customer support
$0.18 4,600; 34,200; 10,750 Output-unit-level 828 6,156 1,935 8,919
2. Refer to the last row of the table in requirement 1. Fresh produce, which probably
represents the smallest portion of COGS, is the product category that consumes the
largest share (63%) of the indirect resources. Fresh produce demands the highest level of
ordering, delivery, shelf-stocking, and customer support resources of all three product
categories—it has to be ordered, delivered, and stocked in small, perishable batches, and
supermarket customers often ask for a lot of guidance on fresh produce items.
3. An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each
activity area is:
By recognizing these differences, YM managers are better able to budget for different
unit sales levels and different mixes of individual product-line items sold. Using a single
cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support
activities) across product lines which does not occur at YM. Other benefits cited by
managers include: (1) better identification of resource needs, (2) clearer linking of costs
with staff responsibilities, and (3) identification of budgetary slack.
The March 2019 rates can be used to compute the total budgeted cost for each activity
area in March 2019:
Shelf- Customer
Ordering Delivery Stocking Support
Exercise 6-27 $4,680 $7,626 $5,922 $8,919
Exercise 6-28 (Kaizen) 4,661 7,596 5,899 8,869
The kaizen budget number will show unfavourable variances for managers whose
activities do not meet the required monthly cost reductions. This likely will put more
pressure on managers to creatively seek out cost reductions by working “smarter” within
YM or by having “better” interactions with suppliers or customers.
One limitation of kaizen budgeting, as illustrated in this question, is that it
assumes small incremental improvements each month. It is possible that some cost
improvements arise from large discontinuous changes in operating processes, supplier
networks, or customer interactions. Companies need to highlight the importance of
seeking these large discontinuous improvements as well as the small incremental
improvements.
PROBLEMS
This is a routine budgeting problem. The key to its solution is to compute the correct quantities of
finished goods and direct materials. Use the following general formula:
1. Fraser Corporation
Revenue Budget
For 2019
2. Fraser Corporation
Production Budget (in units)
For 2019
Widget Thingamajig
Budgeted sales in units 60,000 40,000
Add target finished goods inventories,
December 31, 2019 27,000 11,000
Total requirements 87,000 51,000
Deduct finished goods inventories,
January 1, 2019 22,000 10,000
Units to be produced 65,000 41,000
3. Fraser Corporation
Direct Materials Purchases Budget (in quantities) for 2019
Direct Materials
A B C
Direct materials to be used in production
• Widget (budgeted production of 65,000
units times 4 kg of A, 2 kg of B) 260,000 130,000 —
• Thingamajig (budgeted production of 41,000
units times 5 kg of A, 3 kg of B, 1 unit of C) 205,000 123,000 41,000
Total 465,000 253,000 41,000
Add target ending inventories, December 31, 2019 36,000 32,000 7,000
Total requirements in quantities 501,000 285,000 48,000
Deduct beginning inventories, January 1, 2019 32,000 29,000 6,000
Direct materials to be purchased (quantities) 469,000 256,000 42,000
4. Fraser Corporation
Direct Materials Purchases Budget (in dollars) for 2019
Budgeted Expected
Purchases Purchase
(Quantities) Price per Unit Total
Direct material A 469,000 $14 $6,566,000
Direct material B 256,000 7 1,792,000
Direct material C 42,000 5 210,000
Budgeted purchases $8,568,000
5. Fraser Corporation
Direct Manufacturing Labour Budget for 2019
Direct
Budgeted Manufacturing Rate
Production Labour-Hours Total per
(Units) per Unit Hours Hour Total
Widget 65,000 2 130,000 $15 $1,950,000
Thingamajig 41,000 3 123,000 19 2,337,000
Total $4,287,000
6. Fraser Corporation
Budgeted Finished Goods Inventory
At December 31, 2019
Widget:
Direct materials costs:
A, 4 kilograms at $14 $56
B, 2 kilograms at $7 14 $70
Direct manufacturing labour costs, 2 hours at $15 30
Manufacturing overhead costs at $24 per direct
manufacturing labour-hour (2 hours) 48
Budgeted manufacturing costs per unit $148
Easecom Company
Budgeted Operating Income Statement for 2019
(in thousands)
Revenue
Equipment ($6,000 × 1.06 × 1.15) $7,314
Maintenance contracts ($1,800 × 1.06) 1,908
Total revenue $9,222
Cost of goods sold ($4,600 × 1.03 × 1.06) 5,022
Gross margin 4,200
Operating costs:
Marketing costs ($600 + $250) 850
Distribution costs ($150 × 1.06) 159
Customer maintenance costs ($1,000 + $130) 1,130
Administrative costs 900
Total operating costs 3,039
Operating income $ 1,161
Rams blankets:
4. Budgeted input per f.g. unit – 6 – 1
5. Budgeted production – 205 – 205
6. Budgeted usage (4 × 5) – 1,230 – 205
7. Total direct materials
usage (3 + 6) 750 1,230 150 205
"En ole sitä koskaan ennen ajatellut — luulen että en edes ole sitä
tietänytkään… Äiti on minulle selittänyt nyt että se on laissa
kiellettynä, että — serkkujen välistä naimista pidetään aivan syntinä.
"En tiedä miten, mutta heti kun katsoin sinuun konttoorissa, kun
äiti alkoi siitä puhua, ymmärsin minä… Tahdoin vain päästä sen
kuulemisesta. Sehän on aivan yhdentekevä" — hän katsoi
itsepäisesti alas jalkoihinsa ja ääni hiljeni vieläkin. "Tarkoitan…" Hän
pysähtyi ja lausui sitte ääneensä kiivaasti:
"Olet kumminkin Lotti tädin oikea tytär, huomaan sen", sanoi hän
pilkallisesti, sokeasti vihastuneena hänen sitkeästä ja
odottamattomasta vastustuksestaan. "Viisas — järkevä — ennen
kaikkea"!
Rakkaat siskot!
Täällä on oikea täysi kesä jo, ja olisi oikein hyvä asia, jos äiti
voisi lähettää minulle vanhan kesähattuni jokapäiväiseksi, uusi,
kukkasineen käy niin pian pahaksi. Jos mamseli Fiken on hyvä ja
auttaa Beataa nauhojen pesemisessä, niin voi siitä tulla aivan
oivallinen ja piakkoin kai taas joku talonpoika tulee kaupunkiin.
"Miksikä ei", huusi Joachim tulistuen. "Kun hän tietää että käyn
täällä kiusaantuen kuoliaaksi, levottomuudesta, asiain näin ollessa.
Hän voisi tehdä sen mamseli Fikenin osoitteella, ja kirjoittaa sisällön
Beatalle… Se olisi yksinkertaisin asia maailmassa — niin helppo
kuin ei mitään!"
Karin Maria pudisti päätään. "Äiti oivaltaa sen oitis ja hän pitää sen
puoleltasi tyhmyytenä. Jutun loppu on vain se, ettet saa lähettää
kirjettä"!
Beata istui tuijottaen eteenpäin kynä kädessä — hän kumminkin
oli kaikessa tapauksessa seurannut mielipidettään.