Chapter 9
Profit Planning
Solutions to Questions
9-1 A budget is a detailed quantitative is then held responsible for differences
plan for the acquisition and use of between budgeted and actual results.
financial and other resources over a given
time period. Budgetary control involves 9-4 A master budget represents a
using budgets to increase the likelihood summary of all of management’s plans
that all parts of an organization are and goals for the future, and outlines the
working together to achieve the goals set way in which these plans are to be
down in the planning stage. accomplished. The master budget is
composed of a number of smaller, specific
9-2 budgets encompassing sales, production,
1. Budgets communicate raw materials, direct labor, manufacturing
management’s plans throughout the overhead, selling and administrative
organization. expenses, and inventories. The master
2. Budgets force managers to think budget usually also contains a budgeted
about and plan for the future. In the income statement, budgeted balance
absence of the necessity to prepare a sheet, and cash budget.
budget, many managers would spend all
of their time dealing with day-to-day 9-5 The level of sales impacts virtually
emergencies. every other aspect of the firm’s activities.
3. The budgeting process provides a It determines the production budget, cash
means of allocating resources to those collections, cash disbursements, and
parts of the organization where they can selling and administrative budget that in
be used most effectively. turn determine the cash budget and
4. The budgeting process can uncover budgeted income statement and balance
potential bottlenecks before they occur. sheet.
5. Budgets coordinate the activities of
the entire organization by integrating the 9-6 No. Planning and control are
plans of its various parts. Budgeting helps different, although related, concepts.
to ensure that everyone in the Planning involves developing goals and
organization is pulling in the same developing budgets to achieve those
direction. goals. Control, by contrast, involves the
6. Budgets define goals and objectives means by which management attempts to
that can serve as benchmarks for ensure that the goals set down at the
evaluating subsequent performance. planning stage are attained.
9-3 Responsibility accounting is a 9-7 The flow of budgeting information
system in which a manager is held moves in two directions—upward and
responsible for those items of revenues downward. The initial flow should be from
and costs—and only those items—that the the bottom of the organization upward.
manager can control to a significant Each person having responsibility over
extent. Each line item in the budget is revenues or costs should prepare the
made the responsibility of a manager who budget data against which his or her
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 9 443
,subsequent performance will be operations. (3) Motivation is generally
measured. As the budget data are higher when individuals participate in
communicated upward, higher-level setting their own goals than when the
managers should review the budgets for goals are imposed from above. Self-
consistency with the overall goals of the imposed budgets create commitment. (4)
organization and the plans of other units A manager who is not able to meet a
in the organization. Any issues should be budget that has been imposed from above
resolved in discussions between the can always say that the budget was
individuals who prepared the budgets and unrealistic and impossible to meet. With a
their managers. self-imposed budget, this excuse is not
All levels of an organization should available.
participate in the budgeting process—not Self-imposed budgets do carry with
just top management or the accounting them the risk of budgetary slack. The
department. Generally, the lower levels budgets prepared by lower-level managers
will be more familiar with detailed, day-to- should be carefully reviewed to prevent
day operating data, and for this reason will too much slack.
have primary responsibility for developing
the specifics in the budget. Top levels of 9-9 The direct labor budget and other
management should have a better budgets can be used to forecast workforce
perspective concerning the company’s staffing needs. Careful planning can help a
strategy. company avoid erratic hiring and laying off
of employees.
9-8 A self-imposed budget is one in
which persons with responsibility over cost 9-10 The principal purpose of the cash
control prepare their own budgets. This is budget is NOT to see how much cash the
in contrast to a budget that is imposed company will have in the bank at the end
from above. The major advantages of a of the year. Although this is one of the
self-imposed budget are: (1) Individuals at purposes of the cash budget, the principal
all levels of the organization are purpose is to provide information on
recognized as members of the team probable cash needs during the budget
whose views and judgments are valued. period, so that bank loans and other
(2) Budget estimates prepared by front- sources of financing can be anticipated
line managers are often more accurate and arranged well in advance.
and reliable than estimates prepared by
top managers who have less intimate
knowledge of markets and day-to-day
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
444 Managerial Accounting, 13th Edition
,Exercise 9-1 (20 minutes)
1. April May June Total
February sales: $ 23,00
$230,000 × 10%..... $ 23,000 0
March sales:
$260,000 × 70%,
10%........................ 182,000 $ 26,000 208,000
April sales: $300,000
× 20%, 70%, 10%... 60,000 210,000 $ 30,000 300,000
May sales: $500,000
× 20%, 70%........... 100,000 350,000 450,000
June sales: $200,000 40,00
× 20%.................... 40,000 0
$265,00 $420,00 $1,021,00
Total cash collections 0 $336,000 0 0
Observe that even though sales peak in May, cash collections
peak in June. This occurs because the bulk of the company’s
customers pay in the month following sale. The lag in
collections that this creates is even more pronounced in some
companies. Indeed, it is not unusual for a company to have the
least cash available in the months when sales are greatest.
2. Accounts receivable at June 30:
From May sales: $500,000 × 10%................. $ 50,000
From June sales: $200,000 × (70% + 10%)... 160,000
$210,00
Total accounts receivable at June 30............. 0
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 9 445
, Exercise 9-2 (10 minutes)
Quarte
April May June r
215,00
Budgeted sales in units....... 50,000 75,000 90,000 0
Add desired ending
inventory*........................ 7,500 9,000 8,000
8,000
223,00
Total needs.......................... 57,500 84,000 98,000 0
Less beginning inventory.... 5,000 7,500 9,000 5,000
218,00
Required production............ 52,500 76,500 89,000 0
*10% of the following month’s sales in units.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
446 Managerial Accounting, 13th Edition
Profit Planning
Solutions to Questions
9-1 A budget is a detailed quantitative is then held responsible for differences
plan for the acquisition and use of between budgeted and actual results.
financial and other resources over a given
time period. Budgetary control involves 9-4 A master budget represents a
using budgets to increase the likelihood summary of all of management’s plans
that all parts of an organization are and goals for the future, and outlines the
working together to achieve the goals set way in which these plans are to be
down in the planning stage. accomplished. The master budget is
composed of a number of smaller, specific
9-2 budgets encompassing sales, production,
1. Budgets communicate raw materials, direct labor, manufacturing
management’s plans throughout the overhead, selling and administrative
organization. expenses, and inventories. The master
2. Budgets force managers to think budget usually also contains a budgeted
about and plan for the future. In the income statement, budgeted balance
absence of the necessity to prepare a sheet, and cash budget.
budget, many managers would spend all
of their time dealing with day-to-day 9-5 The level of sales impacts virtually
emergencies. every other aspect of the firm’s activities.
3. The budgeting process provides a It determines the production budget, cash
means of allocating resources to those collections, cash disbursements, and
parts of the organization where they can selling and administrative budget that in
be used most effectively. turn determine the cash budget and
4. The budgeting process can uncover budgeted income statement and balance
potential bottlenecks before they occur. sheet.
5. Budgets coordinate the activities of
the entire organization by integrating the 9-6 No. Planning and control are
plans of its various parts. Budgeting helps different, although related, concepts.
to ensure that everyone in the Planning involves developing goals and
organization is pulling in the same developing budgets to achieve those
direction. goals. Control, by contrast, involves the
6. Budgets define goals and objectives means by which management attempts to
that can serve as benchmarks for ensure that the goals set down at the
evaluating subsequent performance. planning stage are attained.
9-3 Responsibility accounting is a 9-7 The flow of budgeting information
system in which a manager is held moves in two directions—upward and
responsible for those items of revenues downward. The initial flow should be from
and costs—and only those items—that the the bottom of the organization upward.
manager can control to a significant Each person having responsibility over
extent. Each line item in the budget is revenues or costs should prepare the
made the responsibility of a manager who budget data against which his or her
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 9 443
,subsequent performance will be operations. (3) Motivation is generally
measured. As the budget data are higher when individuals participate in
communicated upward, higher-level setting their own goals than when the
managers should review the budgets for goals are imposed from above. Self-
consistency with the overall goals of the imposed budgets create commitment. (4)
organization and the plans of other units A manager who is not able to meet a
in the organization. Any issues should be budget that has been imposed from above
resolved in discussions between the can always say that the budget was
individuals who prepared the budgets and unrealistic and impossible to meet. With a
their managers. self-imposed budget, this excuse is not
All levels of an organization should available.
participate in the budgeting process—not Self-imposed budgets do carry with
just top management or the accounting them the risk of budgetary slack. The
department. Generally, the lower levels budgets prepared by lower-level managers
will be more familiar with detailed, day-to- should be carefully reviewed to prevent
day operating data, and for this reason will too much slack.
have primary responsibility for developing
the specifics in the budget. Top levels of 9-9 The direct labor budget and other
management should have a better budgets can be used to forecast workforce
perspective concerning the company’s staffing needs. Careful planning can help a
strategy. company avoid erratic hiring and laying off
of employees.
9-8 A self-imposed budget is one in
which persons with responsibility over cost 9-10 The principal purpose of the cash
control prepare their own budgets. This is budget is NOT to see how much cash the
in contrast to a budget that is imposed company will have in the bank at the end
from above. The major advantages of a of the year. Although this is one of the
self-imposed budget are: (1) Individuals at purposes of the cash budget, the principal
all levels of the organization are purpose is to provide information on
recognized as members of the team probable cash needs during the budget
whose views and judgments are valued. period, so that bank loans and other
(2) Budget estimates prepared by front- sources of financing can be anticipated
line managers are often more accurate and arranged well in advance.
and reliable than estimates prepared by
top managers who have less intimate
knowledge of markets and day-to-day
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
444 Managerial Accounting, 13th Edition
,Exercise 9-1 (20 minutes)
1. April May June Total
February sales: $ 23,00
$230,000 × 10%..... $ 23,000 0
March sales:
$260,000 × 70%,
10%........................ 182,000 $ 26,000 208,000
April sales: $300,000
× 20%, 70%, 10%... 60,000 210,000 $ 30,000 300,000
May sales: $500,000
× 20%, 70%........... 100,000 350,000 450,000
June sales: $200,000 40,00
× 20%.................... 40,000 0
$265,00 $420,00 $1,021,00
Total cash collections 0 $336,000 0 0
Observe that even though sales peak in May, cash collections
peak in June. This occurs because the bulk of the company’s
customers pay in the month following sale. The lag in
collections that this creates is even more pronounced in some
companies. Indeed, it is not unusual for a company to have the
least cash available in the months when sales are greatest.
2. Accounts receivable at June 30:
From May sales: $500,000 × 10%................. $ 50,000
From June sales: $200,000 × (70% + 10%)... 160,000
$210,00
Total accounts receivable at June 30............. 0
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 9 445
, Exercise 9-2 (10 minutes)
Quarte
April May June r
215,00
Budgeted sales in units....... 50,000 75,000 90,000 0
Add desired ending
inventory*........................ 7,500 9,000 8,000
8,000
223,00
Total needs.......................... 57,500 84,000 98,000 0
Less beginning inventory.... 5,000 7,500 9,000 5,000
218,00
Required production............ 52,500 76,500 89,000 0
*10% of the following month’s sales in units.
© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
446 Managerial Accounting, 13th Edition
