CHAPTER 22
BUDGETING
DISCUSSION QUESTIONS
1. The three major objectives of budgeting are (1) to establish specific goals for future
operations, (2) to execute plans to achieve the goals, and (3) to periodically compare
actual results with the goals.
2. If goals set by the budgets are viewed as unrealistic or unachievable, employees and
managers may become discouraged and may not be committed to the achievement of the
goals, resulting in the budget becoming less effective as a planning and control tool.
3. A budget that is set too loosely may fail to motivate managers and other employees to perform
efficiently. In addition, a loose budget may cause a “spend it or lose it” mentality, where excess
budget resources are spent in order to protect the budget from future reductions.
4. Conflicting goals can cause employees or department managers to act in their own self-
interests to the detriment of the organization’s objectives.
5. A static budget is most appropriate in situations where costs are not variable to an underlying
activity level. As a result, it is reasonable to plan spending on the basis of a fixed quantity of
resources for the year. This will occur in some administrative functions, such as human
resources, accounting, or public relations.
6. Computers not only speed up the budgeting process, but they also reduce the cost of budget
preparation when large quantities of data need to be processed. In addition, by using
computerized simulation models, management can determine the impact of various operating
alternatives on the master budget.
7. The production requirements must be carefully coordinated with the sales budget to ensure
that production and sales are kept in balance during the period. Ideally, manufacturing
operations should be maintained at 100% of capacity, with no idle time or overtime, and
there should be neither excessive inventories nor inventories insufficient to fill sales orders.
8. Purchases of direct materials should be closely coordinated with the production budget so
that inventory levels can be maintained within reasonable limits.
9. a. The cash budget contributes to effective cash planning. This involves advance planning
so that a cash shortage does not arise and excess cash is not permitted to remain “idle.”
b. The excess cash can be invested in readily marketable income-producing securities or
used to reduce loans.
10. The plans for financing the capital expenditures budget may affect the cash budget.
22-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 21–1A
Variable cost:
Direct labor (7,300 hours × $19.00* per hour) .......................................................... $138,700
Fixed cost:
Property tax .................................................................................................................. 10,000
Total department costs .....................................................................................................$148,700
* $123,500 ÷ 6,500 hours
PE 21–1B
Variable cost:
Direct labor (600 hours × $14.50* per hour)………………………………………… $ 8,700
Fixed cost:
Equipment depreciation .............................................................................................. 2,300
Total department costs ..................................................................................................... $11,000
* $9,280 ÷ 640 hours
PE 22–2A
Expected units to be sold………………………………………………………………… 190,000
Plus desired ending inventory, December 31, 2014………………………………… 20,300
Total…………………………………………………………………………………………… 210,300
Less estimated beginning inventory, January 1, 2014……………………………… 18,400
Total units to be produced………………………………………………………………… 191,900
PE 22–2B
Expected units to be sold………………………………………………………………… 75,000
Plus desired ending inventory, December 31, 2014………………………………… 2,700
Total…………………………………………………………………………………………… 77,700
Less estimated beginning inventory, January 1, 2014……………………………… 3,500
Total units to be produced………………………………………………………………… 74,200
22-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 22–3A
Square yards required for production:
Diaries (191,900 × 7 sq. yd.)………………………………………………… 1,343,300
Plus desired ending inventory, December 31, 2014………………………… 32,900
Total………………………………………………………………………………… 1,376,200
Less estimated beginning inventory, January 1, 2014……………………… 29,100
Total square yards to be purchased…………………………………………… 1,347,100
Unit price (per sq. yd.)…………………………………………………………… $0.80
Total direct materials to be purchased……………………………………… $1,077,680
PE 22–3B
Pounds of wax required for production:
Candles [(74,200 × 8 oz.) ÷ 16 oz.]………………………………………… 37,100
Plus desired ending inventory, December 31, 2014………………………… 2,100
Total………………………………………………………………………………… 39,200
Less estimated beginning inventory, January 1, 2014……………………… 2,500
Total pounds to be purchased………………………………………………… 36,700
Unit price (per lb.)………………………………………………………………… $4.10
Total direct materials to be purchased………………………………………… $150,470
PE 22–4A
Hours required for assembly:
Diaries (191,900 × 9 min.)…………………………………………………… 1,727,100 min.
Convert minutes to hours…………………………………………………… ÷ 60 min.
Assembly hours……………………………………………………………… 28,785 hrs.
Hourly rate…………………………………………………………………….…… × $16.00
Total direct labor cost…………………………………………………………… $460,560
PE 22–4B
Hours required for assembly:
Candles (74,200 × 12 min.)………………………………………………… 890,400 min.
Convert minutes to hours…………………………………………………… ÷ 60 min.
Molding hours………………………………………………………………… 14,840 hrs.
Hourly rate…………………………………………………………………….…… × $14.00
Total direct labor cost…………………………………………………………… $207,760
22-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 22–5A
Finished goods inventory, January 1, 2014 $ 28,000
Work in process inventory, January 1, 2014 $ 17,000
Direct materials:
Direct materials inventory, January 1, 2014
(29,100 × $0.80) $ 23,280
Direct materials purchases (from PE 22–3A) 1,077,680
Cost of direct materials available for use $1,100,960
Less direct materials inventory,
December 31, 2014 (32,900 × $0.80) 26,320
Cost of direct materials placed in
production $1,074,640
Direct labor (from PE 22–4A) 460,560
Factory overhead 205,800
Total manufacturing costs 1,741,000
Total work in process during period $1,758,000
Less work in process inventory, December 31, 2014 19,500
Cost of goods manufactured 1,738,500
Cost of finished goods available for sale $1,766,500
Less finished goods inventory, December 31, 2014 23,700
Cost of goods sold $1,742,800
22-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
BUDGETING
DISCUSSION QUESTIONS
1. The three major objectives of budgeting are (1) to establish specific goals for future
operations, (2) to execute plans to achieve the goals, and (3) to periodically compare
actual results with the goals.
2. If goals set by the budgets are viewed as unrealistic or unachievable, employees and
managers may become discouraged and may not be committed to the achievement of the
goals, resulting in the budget becoming less effective as a planning and control tool.
3. A budget that is set too loosely may fail to motivate managers and other employees to perform
efficiently. In addition, a loose budget may cause a “spend it or lose it” mentality, where excess
budget resources are spent in order to protect the budget from future reductions.
4. Conflicting goals can cause employees or department managers to act in their own self-
interests to the detriment of the organization’s objectives.
5. A static budget is most appropriate in situations where costs are not variable to an underlying
activity level. As a result, it is reasonable to plan spending on the basis of a fixed quantity of
resources for the year. This will occur in some administrative functions, such as human
resources, accounting, or public relations.
6. Computers not only speed up the budgeting process, but they also reduce the cost of budget
preparation when large quantities of data need to be processed. In addition, by using
computerized simulation models, management can determine the impact of various operating
alternatives on the master budget.
7. The production requirements must be carefully coordinated with the sales budget to ensure
that production and sales are kept in balance during the period. Ideally, manufacturing
operations should be maintained at 100% of capacity, with no idle time or overtime, and
there should be neither excessive inventories nor inventories insufficient to fill sales orders.
8. Purchases of direct materials should be closely coordinated with the production budget so
that inventory levels can be maintained within reasonable limits.
9. a. The cash budget contributes to effective cash planning. This involves advance planning
so that a cash shortage does not arise and excess cash is not permitted to remain “idle.”
b. The excess cash can be invested in readily marketable income-producing securities or
used to reduce loans.
10. The plans for financing the capital expenditures budget may affect the cash budget.
22-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 21–1A
Variable cost:
Direct labor (7,300 hours × $19.00* per hour) .......................................................... $138,700
Fixed cost:
Property tax .................................................................................................................. 10,000
Total department costs .....................................................................................................$148,700
* $123,500 ÷ 6,500 hours
PE 21–1B
Variable cost:
Direct labor (600 hours × $14.50* per hour)………………………………………… $ 8,700
Fixed cost:
Equipment depreciation .............................................................................................. 2,300
Total department costs ..................................................................................................... $11,000
* $9,280 ÷ 640 hours
PE 22–2A
Expected units to be sold………………………………………………………………… 190,000
Plus desired ending inventory, December 31, 2014………………………………… 20,300
Total…………………………………………………………………………………………… 210,300
Less estimated beginning inventory, January 1, 2014……………………………… 18,400
Total units to be produced………………………………………………………………… 191,900
PE 22–2B
Expected units to be sold………………………………………………………………… 75,000
Plus desired ending inventory, December 31, 2014………………………………… 2,700
Total…………………………………………………………………………………………… 77,700
Less estimated beginning inventory, January 1, 2014……………………………… 3,500
Total units to be produced………………………………………………………………… 74,200
22-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 22–3A
Square yards required for production:
Diaries (191,900 × 7 sq. yd.)………………………………………………… 1,343,300
Plus desired ending inventory, December 31, 2014………………………… 32,900
Total………………………………………………………………………………… 1,376,200
Less estimated beginning inventory, January 1, 2014……………………… 29,100
Total square yards to be purchased…………………………………………… 1,347,100
Unit price (per sq. yd.)…………………………………………………………… $0.80
Total direct materials to be purchased……………………………………… $1,077,680
PE 22–3B
Pounds of wax required for production:
Candles [(74,200 × 8 oz.) ÷ 16 oz.]………………………………………… 37,100
Plus desired ending inventory, December 31, 2014………………………… 2,100
Total………………………………………………………………………………… 39,200
Less estimated beginning inventory, January 1, 2014……………………… 2,500
Total pounds to be purchased………………………………………………… 36,700
Unit price (per lb.)………………………………………………………………… $4.10
Total direct materials to be purchased………………………………………… $150,470
PE 22–4A
Hours required for assembly:
Diaries (191,900 × 9 min.)…………………………………………………… 1,727,100 min.
Convert minutes to hours…………………………………………………… ÷ 60 min.
Assembly hours……………………………………………………………… 28,785 hrs.
Hourly rate…………………………………………………………………….…… × $16.00
Total direct labor cost…………………………………………………………… $460,560
PE 22–4B
Hours required for assembly:
Candles (74,200 × 12 min.)………………………………………………… 890,400 min.
Convert minutes to hours…………………………………………………… ÷ 60 min.
Molding hours………………………………………………………………… 14,840 hrs.
Hourly rate…………………………………………………………………….…… × $14.00
Total direct labor cost…………………………………………………………… $207,760
22-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 22 Budgeting
PE 22–5A
Finished goods inventory, January 1, 2014 $ 28,000
Work in process inventory, January 1, 2014 $ 17,000
Direct materials:
Direct materials inventory, January 1, 2014
(29,100 × $0.80) $ 23,280
Direct materials purchases (from PE 22–3A) 1,077,680
Cost of direct materials available for use $1,100,960
Less direct materials inventory,
December 31, 2014 (32,900 × $0.80) 26,320
Cost of direct materials placed in
production $1,074,640
Direct labor (from PE 22–4A) 460,560
Factory overhead 205,800
Total manufacturing costs 1,741,000
Total work in process during period $1,758,000
Less work in process inventory, December 31, 2014 19,500
Cost of goods manufactured 1,738,500
Cost of finished goods available for sale $1,766,500
Less finished goods inventory, December 31, 2014 23,700
Cost of goods sold $1,742,800
22-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
