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

1. (a) Salesperson
(b) VP of sales
Permit the salesperson to offer a reasonable discount to customers, but require that he/she
clear bigger discounts with the VP. Also, base his/her bonus/performance evaluation not just
on revenue generated, but also on margins (or, ability to meet budget).
2. (a) VP of sales
(b) VP of sales
VP of sales should compare budgeted sales with actuals, and ask for an analysis of all the sales
during the quarter. Discuss with salespeople why so many discounts are being offered—and if
they are really needed to close each sale. Are our prices too high (i.e., uncompetitive)?
3. (a) Manager, shipping department
(b) Manager or director of operations (including shipping)
The shipping department manager must report delays more regularly and request additional
capacity in a timely manner. Operations manager should ask for a review of shipping
capacity utilization, and consider expanding the department.
4. (a) HR department
(b) Production supervisor
The production supervisor should devise his or her own educational standards that all new
plant employees are held to before they are allowed to work on the plant floor. Offer
remedial in-plant training to those workers who show promise. Be very specific about the
types of skills required when using the HR department to hire plant workers. Test the
workers periodically for required skills.
5. (a) Production supervisor
(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.
 6-18 (15 min.) Sales budget, service setting.
1.
2018 At 2018 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 $200 -10% 13,680
McGrath & Sons Sales Budget
For the Year Ended December 31, 2019
Selling Price Units Sold Total Revenue
Radon Tests $250 12,100 $3,025,000
Lead Tests $200 13,680 2,736,000
$5,761,000

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

McGrath & Sons Sales Budget

For the Year Ended December 31, 2019
Selling Price Units Sold Total Revenue
Radon Tests $250 12,100 $3,025,000
Lead Tests $190 14,440 2,743,600
$5,768,600

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.

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

Budgeted sales in units 135,000

Add target ending finished goods inventory 16,300
Total requirements 151,300
Deduct beginning finished goods inventory 9,700
Units to be produced 141,600
 6-20 (5 min.) Direct materials budget.

Direct materials to be used in production (bottles) 2,100,000

Add target ending direct materials inventory (bottles) 55,000
Total requirements (bottles) 2,155,000
Deduct beginning direct materials inventory (bottles) 23,700
Direct materials to be purchased (bottles) 2,131,300

6-21 (10 min.) Budgeting material purchases.

Finished Goods
(units)
Budgeted sales 52,250
Add target ending finished goods inventory 29,400
Total requirements 81,650
Deduct beginning finished goods inventory 27,300
Units to be produced 54,350

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

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

1.
Selling Units Total
Price Sold Revenues
12-ounce bottles $0.30 6,000,000a $1,800,000
1-gallon units 1.60 1,560,000b 2,496,000
$4,296,000
a
500,000 × 12 months = 6,000,000
b
130,000 × 12 months = 1,560,000

2. Budgeted unit sales (12-ounce bottles) 6,000,000

Add target ending finished goods inventory 660,000
Total requirements 6,660,000
Deduct beginning finished goods inventory 980,000
Units to be produced 5,680,000
 3. Beginning = Budgeted + Target  Budgeted
inventory sales ending inventory production
= 1,560,000 + 300,000  1,200,000
= 660,000 1-gallon units

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

2. Weaving budgeted = $31, 620, 000

= $2.55 per DMLH
overhead rate 12, 400, 000 DMLH

Dyeing budgeted = $17, 280, 000 = $12 per MH

overhead rate 1, 440, 000 MH
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

From Schedule Total

Beginning finished goods inventory $ 0
Direct materials used $ 15,405,480
Direct manufacturing labour ($806 × 200,000) 161,200,000
Dyeing overhead ($86.40 × 200,000) 17,280,000
Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480
Cost of goods available for sale 225,505,480
Deduct ending finished goods inventory 0
Cost of goods sold $225,505,480
5b.
Sales = 185,000 rugs
Production = 200,000 rugs
Cost of Goods Sold Budget

From Schedule Total

Beginning finished goods inventory $ 0
Direct materials used $ 15,405,480
Direct manufacturing labour ($806 ×
200,000) 161,200,000
Dyeing overhead ($86.40 × 200,000) 17,280,000
Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480
Cost of goods available for sale 225,505,480
Deduct ending finished goods inventory
($1,127.30 × 15,000) 16,909,500
Cost of goods sold $208,595,980

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.

Sales = 185,000 rugs

Cost of Goods Sold Budget for Producing 185,000 rugs

From Schedule Total

Beginning finished goods inventory $ 0
Direct materials useda $ 14,253,480
Direct manufacturing labour ($806 × 185,000) 149,110,000
Variable dyeing overhead ($70.55b × 185,000) 13,051,750
Fixed dyeing overheadc 3,170,000
Variable weaving overhead ($119.15d × 185,000) 22,042750
Fixed weaving overheade 7,790,000 209,417,980
Cost of goods available for sale 209,417,980
Deduct ending finished goods inventory 0
Cost of goods sold $209,417,980
a
[$961,800 + (185,000 rugs×36 skeins−458,000)×$2] + [$23,680 + (185,000 rugs×0.8 gallons−4,000)×$6]
b
Variable dyeing overhead cost per rug = ($6,560,000 + $7,550,000) ÷ 200,000 rugs = $70.55 per rug
c
Fixed dyeing overhead costs = $347,000 + $2,100,000 + $723,000 = $3,170,000
d
Variable weaving overhead cost per rug = ($15,400,000 + $5,540,000 + $2,890,000) ÷ 200,000 rugs = $119.15 per rug
e
Fixed weaving overhead costs = $1,700,000 + $274,000 + $5,816,000 = $7,790,000
 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.

6-24 (15-20 min.) Revenue, production, and purchases budget.

1. 985,000 motorcycles  505,000 yen = 497,425,000,000 yen

2. Budgeted sales (units) 985,000

Add target ending finished goods inventory 115,000
Total requirements 1,100,000
Deduct beginning finished goods inventory 152,000
Units to be produced 948,000

3. Direct materials to be used in production, 948,000  2 1,896,000

Add target ending direct materials inventory 28,000
Total requirements 1,924,000
Deduct beginning direct materials inventory 19,000
Direct materials to be purchased 1,905,000
Cost per wheel in yen 21,300
Direct materials purchase cost in yen 40,576,500,000

Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very
close to the major manufacturer. Inventories are controlled by just-in-time (JIT) and similar
systems. Indeed, some direct materials inventories are almost nonexistent.
 6-26 (30 min.) Cash flow analysis.
1. The cash that TabComp Inc. can expect to collect during April 2019 is calculated below:
April cash receipts:
April cash sales ($400,000  .25) $100,000
April credit card sales ($400,000  .30  .96) 115,200
Collections on account:
March ($480,000  .45  .70) 151,200
February ($500,000  .45  .28) 63,000
January (uncollectable–not relevant) 0
Total collections $429,400

2. a. The projected number of the MZB-33 computer hardware units that TabComp Inc.
will order on January 25, 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.
 6-33 (60 min.) Comprehensive operating budget.
1. Schedule 1: Revenues Budget for January 2018
Units Selling Price Total Revenues

Snowboards 2,900 $650 $1,885,000

2. Schedule 2: Production Budget (in Units) for January 2018

Snowboards
Budgeted unit sales (Schedule 1) 2,900
Add target ending finished goods inventory 200
Total requirements 3,100
Deduct beginning finished goods inventory 500
Units to be produced 2,600

3. Schedule 3A: Direct Materials Usage Budget for January 2018

Wood Fiberglass Total
Physical Units Budget
Wood: 2,600 × 9 b.f. 23,400
Fiberglass: 2,600 × 10 yards _______ 26,000
To be used in production 23,400 26,000
Cost Budget
Available from beginning inventory
Wood: 2,040 b.f. × $32.00 $ 65,280
Fiberglass: 1,040 b.f. × $8.00 $ 8,320
To be used from purchases this period
Wood: (23,400 – 2,040) × $34.00 726,240
Fiberglass: (26,000 – 1,040) × $9.00 _______ 224,640
Total cost of direct materials to be used $791,520 $232,960 $1,024,480

Schedule 3B: Direct Materials Purchases Budget for January 2018

Wood Fiberglass Total
Physical Units Budget
Production usage (from Schedule 3A) 23,400 26,000
Add target ending inventory 1,540 2,040
Total requirements 24,940 28,040
Deduct beginning inventory 2,040 1,040
Purchases 22,900 27,000
Cost Budget
Wood: 22,900 × $34.00 $778,600
Fiberglass: 27,000 × $9.00 ________ $243,000
Purchases $778,600 $243,000 $1,021,600
4. Schedule 4: Direct Manufacturing Labour Budget for January 2018

Cost Driver DML Hours per Total Wage

Labour Category Units Driver Unit Hours Rate Total
Manufacturing labour 2,600 5.00 13,000 $29.00 $377,000

5. Schedule 5: Manufacturing Overhead Budget for January 2018

At Budgeted Level of 13,000
Direct Manufacturing Labour-Hours
Variable manufacturing overhead costs
($7.00 × 13,000) $ 91,000
Fixed manufacturing overhead costs 81,000
Total manufacturing overhead costs $172,000

$172,000
6. Budgeted manufacturing overhead rate: = $13.23 per hour
13,000
$172,000
7. Budgeted manufacturing overhead cost per output unit: = $66 per output unit
2,600
(rounded)

8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in January 2018

Cost per
Unit of
Inputa Inputsb Total
Direct materials
Wood $34.00 9.00 $306.00
Fiberglass 9.00 10.00 90.00
Direct manufacturing labour 29.00 5.00 145.00
Total manufacturing overhead 66.00
$607.00
a
Cost is per board foot, yard, or per hour
b
Inputs is the amount of each input per board

9. Schedule 6B: Ending Inventories Budget, January 31, 2018

Cost per
Units Unit Total
Direct materials
Wood 1,540 $ 34.00 $ 52,360
Fiberglass 2,040 9.00 18,360
Finished goods
Snowboards 200 607.00 121,400
Total Ending Inventory $192,120
10. Schedule 7: Cost of Goods Sold Budget for January 2018
From
Schedule Total
Beginning finished goods inventory
January 1, 2018, $374.80 × 500 Given $ 187,400
Direct materials used 3A $1,024,480
Direct manufacturing labour 4 377,000
Manufacturing overhead 5 172,000
Cost of goods manufactured 1,573,480
Cost of goods available for sale 1,760,880
Deduct ending finished goods
inventory, January 31, 2018 6B 121,400
Cost of goods sold $1,639,480

11. Budgeted Income Statement for Skulas for January 2018

Revenues Schedule 1 $1,885,000
Cost of goods sold Schedule 7 1,639,480
Gross margin 245,520
Operating costs
Variable marketing costs ($250 × 38) $ 9,500
Fixed nonmanufacturing costs 35,000 44,500
Operating income $ 201,020

12. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
The CEO would want to ask the production manager if production could be more closely
tailored to demand? Could the efficiency and productivity of direct materials and direct
manufacturing labour be increased? Could direct materials inventory be reduced?
The CEO should set stretch targets that are challenging but achievable because creating
some performance anxiety motivates employees to exert extra effort and attain better
performance. A major rationale for stretch targets is the psychological motivation that comes
from loss aversion—people feel the pain of loss more than the joy of success. Setting challenging
targets motivates employees to reach these targets because failing to achieve a target is seen as
failing. At no point should the pressure for performance push employees to engage in illegal or
unethical practices. So, while setting stretch targets, the CEO must place great emphasis on
adhering to codes of conduct and following appropriate norms and values. The CEO should also
not set targets that are very difficult or impossible to achieve. Such targets demotivate employees
because they give up on trying to achieve them.

13. Preparing a budget helps Skulas manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.
 6-34 (30 min.) Cash budgeting, budgeted balance sheet. (Appendix)
1.

Cash Collections from Receivables

From sales in:
December (60%  $1,650,000) $ 990,000
January (40%  $1,885,000) 754,000
Total $1,744,000

Cash Disbursements for Material Purchases

For purchases in:

December (50% × $820,000) $410,000
January (50% × $1,021,600a) 510,800
Total $920,800
a
6-34, Schedule 3B

Cash Disbursements for Fixed Overhead Costs

Fixed manufacturing overhead ($81,000b – $64,000) $17,000
Fixed nonmanufacturing overhead ($35,000c – $10,000) 25,000
Total $42,000
b
6-34, Schedule 5
c
6-34, Budgeted Income Statement

Cash Budget for January 2018

Beginning cash balance $ 124,000

Add receipts: Collection of receivables 1,744,000

Total cash available $1,868,000

Deduct disbursements:
Material purchases $ 920,800
Direct manufacturing labour 377,000
Variable manufacturing overhead 91,000
Fixed manufacturing overhead 17,000
Variable marketing costs 9,500
Fixed nonmanufacturing costs 25,000
Cash dividends 160,000
Total disbursements 1,600,300
Ending cash balance $ 267,700
2. Yes. Skulas has a budgeted cash balance of $267,700 on January 31, 2018, after paying the
dividend of $160,000 at the end of January.

3. Skulas’ managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Skulas could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Skulas’ managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Skulas’ managers need
to prepare a cash budget in addition to an operating income budget.

4. Budgeted Balance Sheet for Skulas as of January 31, 2018

Cash $ 267,700
Accounts receivable (60% × $1,885,000) 1,131,000
Inventory 6-34 Schedule 6B 192,120
Property, plant, and equipment (net) 1,175,600
Total assets $2,766,420

Accounts Payable $ 510,800

Long-term liabilities 182,000
Stockholders’ equity 2,073,620
Total liabilities and stockholders’ equity $2,766,420