CH 06 Practice Problems

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May 3, 2024

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Decision Points CH – 06 1. What are the long-term and short-term benefits of budgets?  Budgets look forward to the future to anticipate financial and nonfinancial achievements of the company.  In the long term, an annual budget cycle is integral to strategic analysis—the evaluation of how well the company fits with its environment.  In the short term, budgets provide financial targets and a framework for operating performance measurement and control. 2. Why is a master budget useful?  A master budget summarizes all the projections (plans) of the managers in different areas of the company.  It presents in a familiar and standardized financial statement format how the financial future of a company will arise, quarter by quarter, month by month, or even week by week.  The familiar format coordinates and communicates where the company is, where it wants to go, and how it will get there.  The output from a master budget is an operating budget. 3. What is a cash budget, and why is it useful?  A cash budget summarizes the timing and amount of cash inflows and outflows for a company over a specified time period.  The cash budget depends on the facts summarized in the operating budget.  One result of the cash budget is anticipated interest expense, which enables companies to produce a pro forma or budgeted income statement.  Input into the cash budget includes any capacity expansion requiring the acquisition of long-term assets reported in the capital budget.  Together, these budgets lead to the pro forma or budgeted balance sheet and cash flow statement. 4. How does responsibility differ from controllability?  Responsibility refers to holding accountable for achievement of performance targets those people who know best how to do so.  The complexity of most organizations means one person cannot be responsible for every decision without slowing decision making to a halt.  It is a decentralized type of budgeting that should converge with both incentives and compensation and organizational structure.  Individuals responsible for achievement of organizational targets rarely control all the factors contributing toward that achievement.  Controllability means the decisions about different key factors affecting cost, revenue, investment, or some combination of the three are within an individual’s control, even though the individual may not be responsible for them. 5. How do the strategies of sensitivity analysis, Kaizen budgeting, and ABB differ?  Sensitivity analysis is a way to alter the assumptions of the master budget.  This analysis permits managers to establish plans in advance of possible adverse events.  Kaizen budgeting is incremental cost reduction through elimination of waste in various business processes.  ABB is the reduction of non-value-added activities that fail to contribute to the customers’ value proposition.  They are all long-term strategies to reduce costs. 1 | P a g e

1. What are the long-term and short-term benefits of budgets? 2. Why is a master budget useful? 3. What is a cash budget, and why is it useful? 4. How does responsibility differ from controllability? 5. How do the strategies of sensitivity analysis, Kaizen budgeting, and ABB differ? 2 | P a g e

6-28 Revenue and production budgets. (CPA, adapted) [Excel template] (LO 2) Two products are manufactured by the Fraser Corporation: Widgets and Thingamajigs. In July 2021, the controller of Fraser, upon instructions from senior management, had the budgeting department gather the following data in order to prepare budgets for 2022: 2022 Projected Sales Product Units Price Widget 60,000 $198 Thingamajig 40,000 $300 2022 Inventories in Units Product Expected Jan. 1, 2022 Target Dec. 31, 2022 Widget 22,000 27,000 Thingamajig 10,000 11,000 The following direct materials are used to produce one unit of Widget and Thingamajig: Amount Used per Unit Direct Material Unit Widget Thingamajig A Kilograms 4 5 B Kilograms 2 3 C Each 0 1 Projected data for 2022 with respect to direct materials are as follows: Direct Material Anticipated Purchase Price Expected Inventories, Jan. 1, 2022 Target Inventories, Dec. 31, 2022 A $ 14 32,000 Kilograms 36,000 Kilograms B $ 7 29,000 Kilograms 32,000 Kilograms C $ 5 6,000 Units 7,000 Units Projected direct manufacturing labour requirements and rates for 2022 are as follows: Product Hours per Unit Rate per Hour Widget 2 $15 Thingamajig 3 19 Manufacturing overhead is allocated at the rate of $24 per direct manufacturing labour-hour. Required Based on the preceding projections and budget requirements for Widgets and Thingamajigs, prepare the following budgets for 2022: 1. Revenue budget (in dollars). 2. Production budget (in units). 3. Direct materials purchases budget (in quantities). 4. Direct materials purchases budget (in dollars). 5. Direct manufacturing labour budget (in dollars). 6. Budgeted finished goods inventory at December 31, 2022 (in dollars). 3 | P a g e

Revenue budget (in dollars). Production budget (in units). Direct materials purchase budget (in quantities). Direct materials purchase budget (in dollars). 4 | P a g e

Direct manufacturing labour budget (in dollars). Budgeted finished goods inventory at December 31, 2022 (in dollars). 5 | P a g e

6-29 Budgeted income statement. (CMA, adapted) (LO 2) Easecom Company is a manufacturer of video conferencing products. Regular units are manufactured to meet marketing projections, and specialized units are made after an order is received. Maintaining the video-conferencing equipment is an important area of customer satisfaction. With the recent downturn in the computer industry, the video-conferencing equipment segment has suffered, leading to a decline in Easecom’s financial performance. The following income statement shows results for the year. Easecom Company Income Statement For the year Ended December 31 (in $ thousands) Revenues: Equipment $6,000 Maintenance contracts 1,800 Total revenues $7,800 Cost of goods sold 4,600 Gross margin 3,200 Operating costs: Marketing 600 Distribution 150 Customer maintenance 1,000 Administration 900 Total operating costs 2,650 Operating income $ 550 Required Prepare a budgeted income statement for the year ending December 31. 6 | P a g e 1. Selling prices of equipment are expected to increase by 15% as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged. 2. Equipment sales in units are expected to increase by 6%, with a corresponding6% growth in units of maintenance contracts. 3. Cost of each unit sold is expected to increase by 3% to pay for the necessary technology and quality improvements. 4. Marketing costs are expected to increase by $250,000, but administration costs are expected to remain at the same levels. 5. Distribution costs vary in proportion to the number of units of equipment sold. 6. Two maintenance technicians are to be hired at a total cost of $130,000, which covers wages and related travel costs. The objective is to improve customer service and shorten response time. 7. There is no beginning or ending inventory of equipment.

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