Solution manual cost accounting a managerial emphasis 13e by horngren ch06

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CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1
a.
b.
c.
d.

The budgeting cycle includes the following elements:
Planning the performance of the company as a whole as well as planning the performance
of its subunits. Management agrees on what is expected.
Providing a frame of reference, a set of specific expectations against which actual results
can be compared.
Investigating variations from plans. If necessary, corrective action follows investigation.
Planning again, in light of feedback and changed conditions.

6-2
The master budget expresses management’s operating and financial plans for a specified
period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial
plan of what the company intends to accomplish in the period.
6-3
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its 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.
6-4
We agree that budgeted performance is a better criterion than past performance for

judging managers, because inefficiencies included in past results can be detected and eliminated
in budgeting. Also, future conditions may be expected to differ from the past, and these can also
be factored into budgets.
6-5
Production and marketing traditionally have operated as relatively independent business
functions. Budgets can assist in reducing conflicts between these two functions in two ways.
Consider a beverage company such as Coca-Cola or Pepsi-Cola:
 Communication. Marketing could share information about seasonal demand with
production.
 Coordination. Production could ensure that output is sufficient to meet, for example,
high seasonal demand in the summer.
6-6
In many organizations, budgets impel managers to plan. Without budgets, managers drift
from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and
improve their performance. Thus, many top managers believe that budgets meet the cost-benefit
test.
6-7
A rolling budget, also called a continuous budget, is a budget or plan that is always
available for a specified future period, by continually adding a period (month, quarter, or year) to
the period that just ended. A four-quarter rolling budget for 2009 is superseded by a four-quarter
rolling budget for April 2009 to March 2010, and so on.

6-1


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6-8

The steps in preparing an operating budget are as follows:

1. Prepare the revenues budget
2. Prepare the production budget (in units)
3. Prepare the direct material usage budget and direct material purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement

6-9
The sales forecast is typically the cornerstone for budgeting, because production (and,
hence, costs) and inventory levels generally depend on the forecasted level of sales.
6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to
examine how budgeted amounts change with changes in the underlying assumptions. This assists
managers in monitoring those assumptions that are most critical to a company in attaining its
budget and allows them to make timely adjustments to plans when appropriate.
6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the
budget period into the budget numbers.
6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activitybased budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce
and sell products and services. Nonoutput-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 the type of responsibility center determines what the manager is
accountable for and thereby affects the manager’s behavior. For example, if a revenue center is
chosen, the manager will focus on revenues, not on costs or investments. The choice of a
responsibility center type guides the variables to be included in the budgeting exercise.
6-14 Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
currency for reporting to shareholders, by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates, and where possible, plan

financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations. In developing budgets for operations in different countries, they must also have good
understanding of political, legal and economic issues in those countries.
6-15 No. Cash budgets and operating income budgets must be prepared simultaneously. In
preparing their operating income budgets, companies want to avoid unnecessary idle cash and
unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights
periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost
effective ways of either using excess cash or raising cash from outside to achieve the company’s
operating income goals.

6-2


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6-16

(15 min.) Sales budget, service setting.

1.
McGrath & Sons
Radon Tests
Lead Tests

2009
Volume
11,000
15,200

At 2009

Selling Prices
$250
$200

Expected 2010
Change in Volume
+5%
-10%

Expected 2010
Volume
11,550
13,680

McGrath & Sons Sales Budget
For the Year Ended December 31, 2010

Radon Tests
Lead Tests

Selling
Price
$250
$200

Units
Sold
11,550
13,680

Total
Revenues
$2,887,500
2,736,000
$5,623,500

2.

McGrath & Sons
Radon Tests
Lead Tests

2009
Volume
11,000
15,200

Planned 2010
Selling Prices
$250
$190

Expected
2010
Expected
Change in
2010
Volume
Volume
+5%

11,550
-5%
14,440

McGrath & Sons Sales Budget
For the Year Ended December 31, 2010

Radon Tests
Lead Tests

Selling
Price
$250
$190

Units Sold
11,550
14,440

Total
Revenues
$2,887,500
2,743,600
$5,631,100

Expected revenues at the new 2010 prices are $5,631,100, which are greater than the expected
2010 revenues 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 2010.

6-3


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6-17

(5 min.)

Sales and production budget.

Budgeted sales in units
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced
6-18

(5 min.)

Direct materials purchases budget.

Direct materials to be used in production (bottles)
Add target ending direct materials inventory (bottles)
Total requirements (bottles)
Deduct beginning direct materials inventory (bottles)
Direct materials to be purchased (bottles)
6-19

200,000

25,000
225,000
15,000
210,000

2,500,000
80,000
2,580,000
50,000
2,530,000

(10 min.) Budgeting material purchases.
Production Budget:

Budgeted sales
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced

Finished Goods
(units)
45,000
18,000
63,000
16,000
47,000

Direct Materials Purchases Budget:

Direct materials needed for production (47,000  3)
Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
Direct materials to be purchased

6-4

Direct Materials
(in gallons)
141,000
50,000
191,000
60,000
131,000


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6-20

(30 min.) Revenues and production budget
budget.

1.

12-ounce bottles
4-gallon units
a
b

Selling
Price
$0.25
1.50

Units
Sold
4,800,000a
1,200,000b

Total
Revenues
$1,200,000
1,800,000
$3,000,000

400,000 × 12 months = 4,800,000
100,000 × 12 months = 1,200,000

2.

Budgeted unit sales (12-ounce bottles)
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced

4,800,000
600,000

5,400,000
900,000
4,500,000

3.

Beginning = Budgeted +
Target
 Budgeted
inventory
sales
ending inventory production
= 1,200,000 + 200,000  1,300,000
= 100,000 4-gallon units

6-21 (30 min.) Budgeting: direct material usage, manufacturing cost and gross margin
margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool
Physical Units Budget
Direct materials required for
Blue Rugs (100,000 rugs × 30 skeins and 0.5 gal.) 3,000,0000 skeins
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Wool: 349,000 skeins
$ 715,450
Dye: 5,000 gallons

To be purchased this period
Wool: (3,000,000 - 349,000) skeins × $2 per skein 5,302,000
_
Dye: (50,000 – 5,000) gal. × $5 per gal.
________
Direct materials to be used this period: (a) + (b)
$6,017,450

6-5

Dye

Total

50,000 gal.

$ 24,850

225,000
$ 249,850

$6,267,300


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2.
$18,852,000
Weaving budgeted =
= $3.3664 per DMLH

overhead rate
5,600,000 DMLH
Dyeing budgeted = $12,809,000 = $28.4644 per MH
overhead rate
450,000 MH
3.
Budgeted Unit Cost of Blue Rug

Wool
Dye
Direct manufacturing labor
Dyeing overhead
Weaving overhead
Total
10.15

Input per
Unit of
Output
30 skeins
0.5 gal.
56 hrs.
1
4.5 mach-hrs.
56 DMLH

Cost per
Unit of Input
$2
5

15
28.4644
3.3664

Total
60.00
2.50
840.00
128.09
188.52
$1219.11
$

machine hour per skein  30 skeins per rug = 4.5 machine-hrs. per rug.

4.
Revenue Budget

Blue Rugs
Blue Rugs

Selling
Units
Price Total Revenues
100,000 $2,000 $200,000,000
95,000 $2,000 $190,000,000

5a.
Sales = 100,000 rugs
Cost of Goods Sold Budget

From Schedule
Beginning finished goods inventory
Direct materials used
Direct manufacturing labor ($840 × 100,000)
Dyeing overhead ($128.09 × 100,000)
Weaving overhead ($188.52 × 100,000)
Cost of goods available for sale
Deduct ending finished goods inventory
Cost of goods sold

6-6

Total
$

$ 6,267,300
84,000,000
12,809,000
18,852,000

0

121,928,300
121,928,300
0
$121,928,300


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5b.
Sales = 95,000 rugs
Cost of Goods Sold Budget
From Schedule
Beginning finished goods inventory
Direct materials used
Direct manufacturing labor
($840 × 100,000)
Dyeing overhead
($128.09 × 100,000)
Weaving overhead
($188.52 × 100,000)
Cost of goods available for sale
Deduct ending finished goods inventory
($1,219.11 × 5,000)
Cost of goods sold

Total
$

0

$ 6,267,300
84,000,000
12,809,000
18,852,000

121,928,300
121,928,300
6,095,550

$115,832,750

6.
Revenue
Less: Cost of goods sold
Gross margin

100,000 rugs sold
$200,000,000
121,928,300
$ 78,071,700

95,000 rugs sold
$190,000,000
115,832,750
$ 74,167,250

6-22

(15–20 min.) Revenues, production, and purchases budget.

1.

900,000 motorcycles  400,000 yen = 360,000,000,000 yen

2.

Budgeted sales (motorcycles)
Add target ending finished goods inventory
Total requirements

Deduct beginning finished goods inventory
Units to be produced

3.

Direct materials to be used in production,
880,000 × 2 (wheels)
Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
Direct materials to be purchased (wheels)
Cost per wheel in yen
Direct materials purchase cost in yen

6-7

900,000
80,000
980,000
100,000
880,000

1,760,000
60,000
1,820,000
50,000
1,770,000
16,000
28,320,000,000

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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 and similar systems. Indeed,
some direct materials inventories are almost nonexistent.
6-23

(15-25 min.) Budgets for production and direct manufacturing labor.
Roletter Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2010

Budgeted sales (units)
Add target ending finished goods
inventorya (units)
Total requirements (units)
Deduct beginning finished goods
inventory (units)
Units to be produced
Direct manufacturing labor-hours
(DMLH) per unit
Total hours of direct manufacturing
labor time needed
Direct manufacturing labor costs:
Wages ($10.00 per DMLH)
Pension contributions
($0.50 per DMLH)
Workers’ compensation insurance
($0.15 per DMLH)

Employee medical insurance
($0.40 per DMLH)
Social Security tax (employer’s share)
($10.00  0.075 = $0.75 per DMLH)
Total direct manufacturing
labor costs

January
10,000

February
12,000

March
8,000

Quarter
30,000

16,000
26,000

12,500
24,500

13,500
21,500

13,500
43,500

16,000
10,000

16,000
8,500

12,500
9,000

16,000
27,500

× 2.0

× 2.0

 1.5

20,000

17,000

13,500

50,500

$200,000

$170,000

$135,000

$505,000

10,000

8,500

6,750

25,250

3,000

2,550

2,025

7,575

8,000

6,800

5,400

20,200

15,000

12,750

10,125

37,875

$236,000

$200,600

$159,300

$595,900

a100%

of the first following month’s sales plus 50% of the second following month’s sales.
Note that the employee Social Security tax 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 7.5% amounts are not
additional costs to the employer.

6-8


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6-24

(20–30 min.) Activity-based budgeting.

1.
This question links to the ABC example used in the Problem for Self-Study in Chapter 5
and to Question 5-23 (ABC, retail product-line profitability).
Cost
Hierarchy

Activity
Ordering
$90  14; 24; 14
Delivery
$82  12; 62; 19
Shelf-stocking
$21  16; 172; 94
Customer support
$0.18  4,600; 34,200; 10,750
Total budgeted indirect costs

Soft
Drinks

Fresh
Produce

Packaged
Food

Total

Batch-level

$1,260

$ 2,160

$1,260

$ 4,680

Batch-level
Output-unitlevel
Output-unitlevel

984

5,084

1,558

7,626

336

3,612

1,974

5,922

828

$3,408

6,156
$17,012

1,935
$6,727

8,919
$27,147

13%

63%

Percentage of total indirect costs
(subject to rounding)

25%

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:

Activity
Ordering
Delivery
Shelf-stocking
Customer support

Cost
Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level

Soft
Drinks
27%
13
6
9

Fresh
Produce
46%
67
61
69

Packaged

Food
27%
20
33
22

Total
100%
100
100
100

By recognizing these differences, FS 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 FS. Other benefits cited by managers include: (1) better
identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3)
identification of budgetary slack.

6-9


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6-25

(20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-24).

1.
Activity

Ordering
Delivery
Shelf-stocking
Customer support

Cost Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level

Budgeted Cost-Driver Rates
January
February
March
$90.00
$89.82000
$89.64
82.00
81.83600
81.67
21.00
20.95800
20.92
0.18
0.17964
0.179

The March 2008 rates can be used to compute the total budgeted cost for each activity area in
March 2008:

Activity
Ordering
$89.64  14; 24; 14
Delivery
$81.67  12; 62; 19
Shelf-stocking
$20.92  16; 172; 94
Customer support
$0.179  4,600;
34,200; 10,750
Total

Cost
Hierarchy

Soft
Drinks

Fresh
Produce

Packaged
Food

Total

Batch-level

$1,255

$ 2,151

$1,255

$ 4,661

Batch-level

980

5,064

1,552

7,596

Output-unit-level

335

3,598

1,966

5,899

Output-unit-level

823
$3,393

6,122
$16,935

1,924
$6,697

8,869
$27,025

2.
A kaizen budgeting approach signals management’s commitment to systematic cost
reduction. Compare the budgeted costs from Question 6-24 and 6-25.

Question 6-24
Question 6-25 (Kaizen)

Ordering
$4,680
4,661

Delivery
$7,626
7,596

ShelfStocking
$5,922
5,899

Customer

Support
$8,919
8,869

The kaizen budget number will show unfavorable 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 FS or by having “better”
interactions with suppliers or customers.
One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small
incremental improvements each month. It is possible that some cost improvements arise from
large discontinuous changes in operating processes, supplier networks, or customer interactions.
Companies need to highlight the importance of seeking these large discontinuous improvements
as well as the small incremental improvements.

6-10


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6-26

(15 min.) Responsibility and controllability.
1. (a) Salesman
(b) VP of Sales
Permit the salesman to offer a reasonable discount to customers, but require that he
clear bigger discounts with the VP. Also, base his bonus/performance evaluation not
just on revenues generated, but also on margins (or, ability to meet budget).
2. (a) VP of Sales
(b) VP of Sales
VP of Sales should compare budgeted sales with actuals, and ask for an analysis of all

the sales during the quarter. Discuss with salespeople why so many discounts are
being offered—are they really needed to close each sale. Are our prices too high (i.e.,
uncompetitive)?
3. (a) Manager, Shipping department
(b) Manager or Director of Operations (including shipping)
Shipping department manager must report delays more regularly and request
additional capacity in a timely manner. Operations manager should ask for a review
of shipping capacity utilization, and consider expanding the department.
4. (a) HR department
(b) Production supervisor
The production supervisor should devise his or her own educational standards that all
new plant employees are held to before they are allowed to work on the plant floor.
Offer remedial in-plant training to those workers who show promise. Be very specific
about the types of skills required when using the HR department to hire plant workers.
Test the workers periodically for required skills.
5. (a) Production supervisor
(b) Production supervisor
Get feedback from the workers, analyze it, and act on it. Get extra coaching and
training from experienced mentors.
6. (a) Maintenance department
(b) Production supervisor
First, get the requisite maintenance done on the machines. Make sure that the
maintenance department head clearly understands the repercussions of poor
maintenance. Discuss and establish maintenance standards that must be met
(frequency of maintenance and tolerance limits, for example). Test and keep a log of
the maintenance work.

6-11

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6-27

(30 min.) Cash flow analysis, chapter appendix.

1.

The cash that TabComp, Inc., can expect to collect during April 2006 is calculated below.
April cash receipts:
April cash sales ($400,000  .25)
April credit card sales ($400,000  .30  .96)
Collections on account:
March ($480,000  .45  .70)
February ($500,000  .45  .28)
January (uncollectible-not relevant)
Total collections

$100,000
115,200
151,200
63,000
0
$429,400

2.
(a) The projected number of the MZB-33 computer hardware units that TabComp, Inc.,
will order on January 25, 2006, is calculated as follows.

March sales

Plus: Ending inventorya
Total needed
Less: Beginning inventoryb
Projected purchases in units
a0.30

 90 unit sales in April

b0.30

 110 unit sales in March

MZB-33
Units
110
27
137
33
104

(b)
Selling price = $2,025,000  675 units, or for March, $330,000 110 units
= $3,000 per unit
$ 1,800
Purchase price per unit, 60%  $3,000
Projected unit purchases
x 104
$187,200
Total MZB-33 purchases, $1,800  104
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 is excess cash
available for investment or for repaying loans.

6-12


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6-28

(40 min.) Budget schedules for a manufacturer.

1a.

Revenues Budget
Units sold
Selling price
Budgeted revenues

b.

Executive
Line
740
$ 1,020
$754,800

Chairman
Line
390
$ 1,600
$624,000

$1,378,800

Production Budget in Units
Executive
Line
740
30
770
20
750

Budgeted unit sales
Add budgeted ending fin. goods inventory
Total requirements
Deduct beginning fin. goods. inventory
Budgeted production

c.

Total

Chairman
Line

390
15
405
5
400

Direct Materials Usage Budget (units)
Red
Oak

Oak
Executive Line:
1. Budgeted input per f.g. unit
2. Budgeted production
3. Budgeted usage (1 × 2)
Chairman Line:
4. Budgeted input per f.g. unit
5. Budgeted production
6. Budgeted usage (4 × 5)
7. Total direct materials
usage (3 + 6)
Direct Materials Cost Budget
8. Beginning inventory
9. Unit price (FIFO)
10. Cost of DM used from
beginning inventory (8 × 9)
11. Materials to be used from
purchases (7 – 8)
12. Cost of DM in March
13. Cost of DM purchased and

used in March (11 × 12)
14. Direct materials to be used
(10 + 13)

Oak
Legs

Red Oak
Legs

Total

16
750
12,000

–
–
–

4
750
3,000

–
–
–

–
–

–

25
400
10,000

–
–
–

4
400
1,600

12,000

10,000

3,000

1,600

320

150

100

40

$18

$23

$11

$17

$5,760

$3,450

$1,100

$680

11,680
$20

9,850
$25

2,900
$12

1,560
$18

$233,600

$246,250

$34,800

$28,080

$542,730

$239,360

$249,700

$35,900

$28,760

$553,720

6-13

$10,990


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Direct Materials Purchases Budget
Oak
Budgeted usage
(from line 7)
Add target ending inventory

Total requirements
Deduct beginning inventory
Total DM purchases
Purchase price (March)
Total purchases

d.

10,000
200
10,200
150
10,050
$25
$251,250

3,000
80
3,080
100
2,980
$12
$35,760

Output
Units
Produced
750
400

Direct
Manuf. LaborHours per
Output Unit
3
5

Total
Hours
2,250
2,000
4,250

1,600
44
1,644
40
1,604
$18
$28,872

Total

________
$553,322

Hourly
Rate
$30
$30

Total
$ 67,500
60,000
$127,500

Manufacturing Overhead Budget
Variable manufacturing overhead costs (4,250 × $35)
Fixed manufacturing overhead costs
Total manufacturing overhead costs
$191,250
Total manuf. overhead cost per hour =
=
4,250
$42,500
Fixed manuf. overhead cost per hour =
=
4,250

f.

Red Oak
Legs

Direct Manufacturing Labor Budget

Executive Line
Chairman Line

e.

12,000
192
12,192
320
11,872
$20
$237,440

Oak
Legs

Red Oak

$148,750
42,500
$191,250
$45 per direct manufacturing labor-hour
$10 per direct manufacturing labor-hour

Computation of unit costs of ending inventory of finished goods
Executive
Chairman
Line
Line
Direct materials
Oak top ($20 × 16, 0)
$320
$
0
Red oak ($25 × 0, 25)

0
625
Oak legs ($12 × 4, 0)
48
0
Red oak legs ($18 × 0, 4)
0
72
Direct manufacturing labor ($30 × 3, 5) 90
150
Manufacturing overhead
Variable ($35 × 3, 5)
105
175
Fixed ($10 × 3, 5)
30
50
Total manufacturing cost
$593
$1,072

6-14


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Ending Inventories Budget
Cost per Unit

Units

Direct Materials
Oak top
Red oak top
Oak legs
Red oak legs

$ 20
25
12
18

192
200
80
44

$ 3,840
5,000
960
792
10,592

Finished Goods
Executive
Chairman

593
1,072

30
15

17,790
16,080
33,870
$44,462

Total
g.

2.

Total

Cost of goods sold budget
Budgeted fin. goods inventory, March 1, 2009 ($10,480 + $4,850)
15,330
Direct materials used (from Dir. materials purch. budget)
$553,720
Direct manufacturing labor (Dir. manuf. labor budget)
127,500
Manufacturing overhead (Manuf. overhead budget)
191,250
Cost of goods manufactured
Cost of goods available for sale
Deduct ending fin. goods inventory, March 31, 2009 (Inventories budget)
Cost of goods sold
$853,930

$

872,470
887,800
33,870

Areas where continuous improvement might be incorporated into the budgeting process:
(a) Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts could be related to the maximum improvement
(current usage – minimum possible usage) of 1 square foot for either desk:
• Executive: 16 square feet – 15 square feet minimum = 1 square foot
• Chairman: 25 square feet – 24 square feet minimum = 1 square foot
Thus, a 1% reduction target per month could be:
• Executive: 15 square feet + (0.99 × 1) = 15.99
• Chairman: 24 square feet + (0.99 × 1) = 24.99
Some students suggested the 1% be applied to the 16 and 25 square-foot amounts.
This can be done so long as after several improvement cycles, the budgeted amount is
not less than the minimum desk requirements.
(b) Direct manufacturing labor. The budgeted usage of 3 hours/5 hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labor cost per
hour of $30 could be continuously revised down. The former appears more feasible
than the latter.
(c) Variable manufacturing overhead. By budgeting more efficient use of the allocation
base, a signal is given for continuous improvement. A second approach is to budget
continuous improvement in the budgeted variable overhead cost per unit of the
allocation base.
(d) Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as
fixed, then they are more difficult to adjust down on a monthly basis.
6-15

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6-29 (45 min.) Activity-based budget: kaizen improvements.
1.
Revenue Budget
For the Quarter Ending March 31, 20xx
Units
20,000
Selling price

$120
Total revenues
$2,400,000

2.
Direct Material Usage Budget in Quantity and Dollars
For the Quarter Ending March 31, 20xx
Physical units budget
Direct materials required
(20,000 units  10 oz.)
200,000 oz.
Cost budget
To be purchased this period
(200,000 oz.  $4 per oz.)
$8,000,000
Direct materials to be used this period
$8,000,000
3.

Direct Manufacturing Labor Costs Budget
For the Quarter Ending March 31, 20xx
Output units produced
20,000
Direct manufacturing labor-hours per unit
2
Total direct manufacturing labor-hours
40,000
Hourly wage rate

$15
Total direct manufacturing labor costs
$600,000
4.
Manufacturing Overhead Costs Budget
For the Quarter Ending March 31, 20xx
Machine setup overhead
(400 setup-hours  $80 per hour)
$32,000
Operations overhead
(40,000 hours  $1.60 per hour)
64,000
Total manufacturing overhead costs
$96,000
20,000 units
= 200 batches. Each batch requires 2 setup hours, so
100 units per batch
200 batches  2 setup-hours per batch = 400 setup-hours

6-16

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5.
Budgeted Unit Cost
For the Quarter Ending March 31, 20xx
Cost per
Unit of
Input per
Input
Unit of Output
Direct material
$ 4
10 oz.
Direct manufacturing labor
15
2 DMLH
Machine setup overhead
80
0.02 setup-hours1
Operations overhead
1.60
2 DMLH
Total cost per gizmo
1Setup-hours

Total
$40.00
30.00

1.60
3.20
$74.80

per gizmo = 400 setup-hours ÷ 20,000 gizmos = 0.02 setup-hours per gizmo.

Alternatively,
Budgeted Unit Cost
For the Quarter Ending March 31, 20xx
Total
Per unit
(1)
(2) = (1) ÷ 20,000
Direct material costs
(requirement 2)
$ 800,000
$40.00
Direct manufacturing labor costs
(requirement 3)
600,000
30.00
Machine setup overhead costs
(requirement 4)
32,000
1.60
Operations overhead costs
(requirement 4)
64,000
3.20
Total costs

$1,496,000
$74.80
6.
Cost of Goods Sold Budget
For the Quarter Ending March 31, 20xx
Total
Beginning finished goods inventory, Jan. 1
Direct materials used
Direct manufacturing labor
Manufacturing overhead
Cost of goods manufactured
Cost of goods available for sale
Deduct: Ending finished goods inventory, Mar. 311
Cost of goods sold
1Under

$

72,000

$800,000
600,000
96,000
1,496,000
1,568,000
72,000
$1,496,000

LIFO cost flow assumption, the 1,000 gizmos in beginning finished goods inventory that remain in
inventory on March 31 continue to be valued at $72,000.

6-17


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7.
Budgeted Gross Margin
For the Quarter Ending March 31, 20xx
Revenues
$2,400,000
Cost of goods sold
1,496,000
Gross margin
$ 904,000
8.

Direct material
Direct manufacturing labor
Machine setup overhead
Operations overhead

1st Quarter
Quantity
(1)
10 oz
2 DMLH
0.02 setup-hours
2 DMLH

Proposed
Decrease
(2)
1%
1%
3%
1%

2d Quarter
Revised Quantity
×(100% ─ (2))
(3) = (1)
(1)×
9.9 oz.
1.98 DMLH
0.0194 setup-hours
1.98 DMLH

3rd Quarter Revised
Quantity
×(100% ─ (2))
(4) = (3)
(3)×
9.8 oz.
1.96 DMLH
0.01882 setup-hours
1.96 DMLH

Budgeted Unit Cost
For the Quarters Ending June 30 and Sept. 30, 20xx

Direct material
Direct manufacturing labor
Machine setup overhead
Operations overhead
Total

Cost per
Unit of
Input
$ 4
15
80
1.60

2d Quarter
Input per
Unit of Output
9.9 oz.
1.98 DMLH
0.0194 setup hrs.
1.98 DMLH

Budgeted
Unit Cost
June 30
$39.60
29.70
1.55
3.17

$74.02

Budgeted Gross Margin
For the Quarters Ending
June 30, 20xx
$2,400,000

Revenues
Cost of goods sold
($74.02; $73.24 × 20,000)
Gross margin

1,480,400
$ 919,600

3rd Quarter
Input per
Unit of Output
9.80 oz
1.96 DMLH
0.0188 setup-hr
1.96 DMLH

Budgeted
Unit Cost
Sept. 30
$39.20
29.40
1.50
3.14

$73.24

Sept. 30, 20xx
$2,400,000
1,464,800
$ 935,200

9.
Reduction in materials can be accomplished by reducing waste and scrap. Reduction in
direct labor and setup time can be accomplished by improving the efficiency of operations and
decreasing down time.
Employees who make the gizmos may have suggestions for ways to do their jobs more
efficiently. For instance, employees may recommend process changes that reduce idle time,
setup time, and scrap. To motivate workers to improve efficiency, many companies have set up
programs that share productivity gains with the workers. Korna must be careful that productivity
improvements and cost reductions do not in any way compromise product quality.

6-18


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6-30

(30–40 min.) Revenue and production budgets.

This is a routine budgeting problem. The key to its solution is to compute the correct quantities
of finished goods and direct materials. Use the following general formula:
错误！未指定开关参数。= 错误！未指定开关参数。+ 错误！未指定开关参数。– 错误！未指定开关参数
。

Scarborough Corporation
Revenue Budget for 2010

1.

Thingone
Thingtwo
Budgeted revenues
2.

Units
60,000
40,000

Total
$ 9,900,000
10,000,000
$19,900,000

Scarborough Corporation
Production Budget (in units) for 2010

Budgeted sales in units
Add target finished goods inventories,
December 31, 2010
Total requirements
Deduct finished goods inventories,
January 1, 2010
Units to be produced

3.

Price
$165
250

Thingone
60,000

Thingtwo
40,000

25,000
85,000

9,000
49,000

20,000
65,000

8,000
41,000

Scarborough Corporation
Direct Materials Purchases Budget (in quantities) for 2007
Direct Materials
A
B
Direct materials to be used in production

• Thingone (budgeted production of 65,000
units times 4 lbs. of A, 2 lbs. of B)
• Thingtwo (budgeted production of 41,000
units times 5 lbs. of A, 3 lbs. of B, 1 lb. of C)
Total
Add target ending inventories, December 31, 2010
Total requirements in units
Deduct beginning inventories, January 1, 2010
Direct materials to be purchased (units)

6-19

C

260,000

130,000

--

205,000
465,000
36,000
501,000
32,000
469,000

123,000
253,000
32,000

285,000
29,000
256,000

41,000
41,000
7,000
48,000
6,000
42,000


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Scarborough Corporation
Direct Materials Purchases Budget (in dollars) for 2010

4.

Budgeted
Purchases
(Units)
469,000
256,000
42,000

Direct material A
Direct material B
Direct material C
Budgeted purchases

Total
$5,628,000
1,280,000
126,000
$7,034,000

Scarborough Corporation
Direct Manufacturing Labor Budget (in dollars) for 2010

5.

Thingone
Thingtwo
Total
6.

Expected
Purchase
Price per unit
$12
5
3

Budgeted
Production
(Units)
65,000
41,000

Direct
Manufacturing
Labor-Hours
per Unit
2
3

Rate
Total
per
Hours
Hour
130,000 $12
123,000 16

Total
$1,560,000
1,968,000
$3,528,000

Scarborough Corporation
Budgeted Finished Goods Inventory
at December 31, 2010
Thingone:
Direct materials costs:
A, 4 pounds × $12
$48
B, 2 pounds × $5
10
Direct manufacturing labor costs,

2 hours × $12
Manufacturing overhead costs at $20 per direct
manufacturing labor-hour (2 hours × $20)
Budgeted manufacturing costs per unit
Finished goods inventory of Thingone
$122 × 25,000 units
Thingtwo:
Direct materials costs:
A, 5 pounds × $12
$60
B, 3 pounds × $5
15
C, 1 each × $3
3
Direct manufacturing labor costs,
3 hours × $16
Manufacturing overhead costs at $20 per direct
manufacturing labor-hour (3 hours × $20)
Budgeted manufacturing costs per unit
Finished goods inventory of Thingtwo
$186 × 9,000 units
Budgeted finished goods inventory, December 31, 2010

6-20

$ 58
24
40
$122
$3,050,000

$ 78
48
60
$186
1,674,000
$4,724,000


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6-31

(30 min.) Budgeted income statement.
Easecom Company
Budgeted Income Statement for 2008
(in thousands)
Revenues
Equipment ($6,000 × 1.06 × 1.10)
Maintenance contracts ($1,800 × 1.06)
Total revenues
Cost of goods sold ($4,600 × 1.03 × 1.06)
Gross margin
Operating costs:
Marketing costs ($600 + $250)
Distribution costs ($150 × 1.06)
Customer maintenance costs ($1,000 + $130)
Administrative costs
Total operating costs
Operating income

6-32

$6,996
1,908
$8,904
5,022
3,882
850
159
1,130
900
3,039
$ 843

(15 min.) Responsibility of purchasing agent.

The time lost in the plant should be charged to the purchasing department. The plant manager
probably should not be asked to underwrite a loss due to failure of delivery over which he had no
supervision. Although the purchasing agent may feel that he has done everything he possibly
could, he must realize that, in the whole organization, he is the one who is in the best position to
evaluate the situation. He receives an assignment. He may accept it or reject it. But if he accepts,
he must perform. If he fails, the damage is evaluated. Everybody makes mistakes. The important
point is to avoid making too many mistakes and also to understand fully that the extensive
control reflected in responsibility accounting is the necessary balance to the great freedom of
action that individual executives are given.
Discussions of this problem have again and again revealed a tendency among students (and
among accountants and managers) to “fix the blame”––as if the variances arising from a
responsibility accounting system should pinpoint misbehavior and provide answers. The point is
that no accounting system or variances can provide answers. However, variances can lead to

questions. In this case, in deciding where the penalty should be assigned, the student might
inquire who should be asked––not who should be blamed.
Classroom discussions have also raised the following diverse points:
(a) Is the railroad company liable?
(b) Costs of idle time are usually routinely charged to the production department. Should the
information system be fine-tuned to reallocate such costs to the purchasing department?
(c) How will the purchasing managers behave in the future regarding willingness to take risks?
The text emphasizes the following: Beware of overemphasis on controllability. For
example, a time-honored theme of management is that responsibility should not be given without
accompanying authority. Such a guide is a useful first step, but responsibility accounting is more
far-reaching. The basic focus should be on information or knowledge, not on control. The key

6-21


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question is: Who is the best informed? Put another way, “Who is the person who can tell us the
most about the specific item, regardless of ability to exert personal control?”
6-33 (60 min.) Comprehensive problem with ABC costing
1.
Revenue Budget
For the Month of April

Cat-allac
Dog-eriffic
Total

Units Selling Price Total Revenues
500

$160
$ 80,000
300
250
75,000
$155,000

2.
Production Budget
For the Month of April

Budgeted unit sales
Add target ending finished goods inventory
Total required units
Deduct beginning finished goods inventory
Units of finished goods to be produced

Product
Cat-allac Dog-eriffic
500
300
35
15
535
315
15
30
520
285

3a.
Direct Material Usage Budget in Quantity and Dollars
For the Month of April
Material
Plastic
Metal
Physical Units Budget
Direct materials required for
Cat-allac (520 units × 4 lbs. and 0.5 lb.)
Dog-errific (285 units × 6 lbs. and 1 lb.)
Total quantity of direct material to be used

2,080 lbs.
1,710 lbs.
3,790 lbs.

Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Plastic: 250 lbs. × $3.80 per lb.
$ 950
Metal: 60 lbs. × $3 per lb.
To be purchased this period
.
Plastic: (3,790 – 250) lbs.  $4 per lb.
14,160
Metal: (545 – 60) lbs.  $3 per lb.
__ ____
Direct materials to be used this period
$15,110

6-22

Total

260 lbs.
285 lbs.
545 lbs.

$ 180

1,455
$ 1,635

$16,745


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Direct Material Purchases Budget
For the Month of April
Material
Plastic
Metal
Physical Units Budget
To be used in production (requirement 3)
Add target ending inventory
Total requirements
Deduct beginning inventory
Purchases to be made

Cost Budget
Plastic: 3,920 lbs.  $4
Metal: 540 lbs.  $3
Purchases

3,790 lbs.
380 lbs.
4,170 lbs.
250 lbs.
3,920 lbs.

$15,680
______
$15,680

Total

545 lbs.
55 lbs.
600 lbs.
60 lbs.
540 lbs.

$ 1,620
$ 1,620

$ 17,300

4.
Direct Manufacturing Labor Costs Budget

For the Month of April

Cat-allac
Dog-errific
Total

Output Units
Produced
(requirement 2)
520
285

DMLH
per Unit
3
5

Total
Hours
1,560
1,425

Hourly
Wage
Rate
$10
10

Total
$15,600

14,250
$29,850

5. Machine Setup Overhead
Units to be produced
Units per batch
Number of batches
Setup time per batch
Total setup time

Cat-allac
520
÷ 20
26
 1.5 hrs.
39 hrs.

Dog-errific
285
÷15
19
 1.75 hrs.
33.25 hrs.

Total

72.25 hrs.

Budgeted machine setup costs = $100 per setup hour  72.25 hours
= $7,225

Processing Overhead
Budgeted machine-hours (MH) = (10 MH per unit × 520 units) + (18 MH per unit × 285 units)
= 5,200 MH + 5,130 MH = 10,330 MH
Budgeted processing costs = $5 per MH × 10,330 MH
= $51,650
Inspection Overhead
Budgeted inspection-hours = (0.5  26 batches) + (0.6  19 batches)
= 13 + 11.4 = 24.4 inspection hrs.
Budgeted inspection costs = $16 per inspection hr.  24.4 inspection hours
= $390.40
6-23


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Manufacturing Overhead Budget
For the Month of April
Machine setup costs
$ 7,225
Processing costs
51,650
Inspection costs
390
Total costs
$59,265
6.
Unit Costs of Ending Finished Goods Inventory
April 30, 20xx
Product
Cat-allac

Dog-errific
Cost per Input per
Input per
Unit of
Unit of
Unit of
Input
Output
Total
Output
Total
Plastic
$ 4
4 lbs.
$ 16.00
6 lbs.
$ 24.00
Metal
3
0.5 lbs.
1.50
1 lb.
3.00
Direct manufacturing labor 10
3 hrs.
30.00
5 hrs.
50.00
Machine setup
100

0.075 hrs. 1
7.50
0.1167 hr1
11.67
Processing
5
10 MH
50.00
18 MH
90.00
2
2
Inspection
16
0.025 hr
0.40
0.04 hr.
0.64
Total
$105.40
$179.31
1
2

39 setup-hours ÷ 520 units = 0.075 hours per unit; 33.25 setup-hours ÷ 285 units = 0.1167 hours per unit
13 inspection hours ÷ 520 units = 0.025 hours per unit; 11.4 inspection hours ÷ 285 units = 0.04 hours per unit

Ending Inventories Budget
April 30, 20xx
Quantity

Direct Materials
Plastic
Metals
Finished goods
Cat-allac
Dog-errific
Total ending inventory

Cost per unit

Total

380
55

$4
3

$1,520
165

35
15

$105.40
179.31

$3,689
2,690

6-24

$1,685

6,379
$8,064


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7.
Cost of Goods Sold Budget
For the Month of April, 20xx
Beginning finished goods inventory, April, 1 ($1,500 + $5,580)
Direct materials used (requirement 3)
Direct manufacturing labor (requirement 4)
Manufacturing overhead (requirement 5)
Cost of goods manufactured
Cost of goods available for sale
Deduct: Ending finished goods inventory, April 30 (reqmt. 6)
Cost of goods sold

$
$16,745
29,850
59,265

8.
Nonmanufacturing Costs Budget
For the Month of April, 20xx

Salaries ($36,000 ÷ 2  1.05)
$18,900
Other fixed costs ($36,000 ÷ 2)
18,000
Sales commissions ($155,000  1%)
1,550
Total nonmanufacturing costs
$38,450
9.
Budgeted Income Statement
For the Month of April, 20xx
Revenues
$155,000
Cost of goods sold
106,561
Gross margin
48,439
Operating (nonmanufacturing) costs
38,450
Operating income
$ 9,989

6-25

7,080

105,860
112,940
6,379
$106,561