CHAPTER 6

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-20 (30 min.) Revenues and production budget.

1.
Selling Units Total
Price Sold Revenues
12-ounce bottles $0.25 4,800,000a $1,200,000
4-gallon units 1.50 1,200,000b 1,800,000
$3,000,000
a
400,000 × 12 months = 4,800,000
b
100,000 × 12 months = 1,200,000

2. Budgeted unit sales (12-ounce bottles) 4,800,000

Add target ending finished goods inventory 600,000
Total requirements 5,400,000
Deduct beginning finished goods inventory 900,000
Units to be produced 4,500,000

Beginning = Budgeted + Target Budgeted

3. inventory sales ending inventory  production
= 1,200,000 + 200,000  1,300,000
= 100,000 4-gallon units

6-21 (45 min.) Direct material usage, unit costs, and gross margins (continuation of
6-20).

1. Direct Materials Usage Budget

12-ounce 4-gallon
Units Units
Physical Units Budget
To be used in production:
12-ounce units 4,500,000
4-gallon units 1,300,000

Cost Budget
Available from beginning inventory:
12-ounce units $ 30,000a
4-gallon units $ 0
To be used from purchases of this period:
12-ounce: $0.06 × (4,500,000  500,000) 240,000
4-gallon: $0.30 × (1,300,000  0) 390,000
Direct materials to be used $270,000 $390,000
a
$0.06  500,000 = $30,000
 2.
12-ounce 4-gallon
Bottles Units
1. Output units produced 4,500,000 1,300,000
2. Number of ounces 54,000,000a 665,600,000b
3. Equivalent 8-ounce units (line 2  8) 6,750,000 83,200,000
4. Direct manuf. labor cost per 8 ounces $0.01 $0.01
5. Total direct manuf. labor cost (line 3  line 4) $67,500 $832,000
a
4,500,000  12 ounces per unit = 54,000,000
b
1,300,000  128 ounces per gallon  4 gallons per unit = 665,600,000

Total direct manuf. labor cost is:

12-ounce bottles $ 67,500
4-gallon units 832,000
$899,500

3.
12-ounce Bottle 4-gallon Container
Cost Cost
per Unit per Unit
of Input Inputs Total of Input Inputs Total
Direct materials
12-ounce bottles $0.06 1.0 $0.060
4-gallon containers $0.30 1.0 $0.30
Direct manuf. labor (per 8 ounce) 0.01 1.5 0.015 0.01 64.0 0.64
Manuf. overhead 0.15 1.0 0.150 0.15 1.0 0.15
Unit manuf. cost $0.225 $1.09

4.
12-ounce 4-gallon
Bottles Container
Selling price $0.250 $1.500
Unit manuf. cost 0.225 1.090
Gross margin $0.025 $0.410
Gross margin percentage 10% 27.3%

5. The chosen cost allocation base is units of production, with different products (12-
ounce bottles and 4-gallon containers) being given the same weight.
A key issue here is whether there is a cause-and-effect relationship between units
produced and manufacturing overhead. Alternative allocation bases include direct
material costs, direct manufacturing labor costs, direct manufacturing labor hours, and
time on the production line.
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 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 Output-unit-
$21  16; 172; 94 level 336 3,612 1,974 5,922
Customer support Output-unit-
$0.18  4,600; 34,200; 10,750 level 828 6,156 1,935 8,919
Total budgeted indirect costs $3,408 $17,012 $6,727 $27,147

Percentage of total indirect costs

(subject to rounding) 13% 63% 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:

Cost Soft Fresh Packaged

Activity Hierarchy Drinks Produce Food Total
Ordering Batch-level 27% 46% 27% 100%
Delivery Batch-level 13 67 20 100
Shelf-stocking Output-unit-level 6 61 33 100
Customer support Output-unit-level 9 69 22 100

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.
6-25 (20–30 min.) Kaizen approach to activity-based budgeting (continuation of
6-24).

1.
Budgeted Cost-Driver Rates
Activity Cost Hierarchy January February March
Ordering Batch-level $90.00 $89.82000 $89.64
Delivery Batch-level 82.00 81.83600 81.67
Shelf-stocking Output-unit-level 21.00 20.95800 20.92
Customer support Output-unit-level 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:

Cost Soft Fresh Packaged

Activity Hierarchy Drinks Produce Food Total
Ordering
$89.64  14; 24; 14 Batch-level $1,255 $2,151 $1,255 $ 4,661
Delivery
$81.67  12; 62; 19 Batch-level 980 5,064 1,552 7,596
Shelf-stocking
$20.92  16; 172; 94 Output-unit-level 335 3,598 1,966 5,899
Customer support
$0.179  4,600;
34,200; 10,750 Output-unit-level 823 6,122 1,924 8,869
Total $3,393 $16,935 $6,697 $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.

Shelf- Customer
Ordering Delivery Stocking Support
Question 6-24 $4,680 $7,626 $5,922 $8,919
Question 6-25 (Kaizen) 4,661 7,596 5,899 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.
6-27 (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) $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 (uncollectible-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, 2006, 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, 60%  $3,000 $ 1,800
Projected unit purchases x 104
Total MZB-33 purchases, $1,800  104 $187,200

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.