A Memo to Jim Dixon, The President of Trusler Company

Chapter 9

E9.1 (LO 1), C. Trusler Company has always done some planning for the future, but the company has never prepared a formal budget. Now that the company is growing larger, it is considering preparing a budget.

Instructions

Write a memo to Jim Dixon, the president of Trusler Company, in which you define budgeting, identify the budgets that comprise the master budget, identify the primary benefits of budgeting, and discuss the essentials of effective budgeting.

P9.1 (LO 2, 3), AP Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2022.

Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag.

Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound.

Desired inventory levels:

Type of Inventory January 1 April 1 July 1

Snare (bags) 8,000 15,000 18,000

Gumm (pounds) 9,000 10,000 13,000

Tarr (pounds) 14,000 20,000 25,000

Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour.

Selling and administrative expenses are expected to be 15% of sales plus $175,000 per quarter.

Interest expense is $100,000 for the 2 quarters.

Income taxes are expected to be 20% of income before income taxes.

Your assistant has prepared two budgets: (1) the manufacturing overhead budget shows expected costs to be 125% of direct labor cost, and (2) the direct materials budget for Tarr shows the cost of Tarr purchases to be $297,000 in quarter 1 and $439,500 in quarter 2.

Instructions

Net income $1,007,040

Cost per bag $33.20

Prepare the budgeted multiple-step income statement for the first 6 months and all required operating

budgets by quarters. (Note: Use variable and fixed in the selling and administrative expense budget.) Do not prepare the manufacturing overhead budget or the direct materials budget for Tarr.

Prepare sales, production, direct materials, direct labor, and income statement budgets.

P9.4 (LO 4), AP Colter Company prepares monthly cash budgets. Relevant data from operating budgets for 2022 are as follows.

January February

Sales $360,000 $400,000

Direct materials purchases 120,000 125,000

Direct labor 90,000 100,000

Manufacturing overhead 70,000 75,000

Selling and administrative expenses 79,000 85,000

All sales are on account. Collections are expected to be 50% in the month of sale, 30% in the first month following the sale, and 20% in the second month following the sale. Sixty percent (60%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other items above are paid in the month incurred except for selling and administrative expenses, which include $1,000 of depreciation per month.

Other data:

Credit sales: November 2021, $250,000; December 2021, $320,000.

Purchases of direct materials: December 2021, $100,000.

Other receipts: January—collection of December 31, 2021, notes receivable $15,000; February—proceeds from sale of securities $6,000.

Other disbursements: February—payment of $6,000 cash dividend.

The company’s cash balance on January 1, 2022, is expected to be $60,000. The company wants to maintain a minimum cash balance of $50,000.

Instructions

Prepare schedules for (1) expected collections from customers and (2) expected payments for direct materials purchases for January and February.

a. January: collections $326,000; payments $112,000

2. Prepare a cash budget for January and February in columnar form.

b. Ending cash balance: January $51,000 February $50,000

Prepare purchases and income statement budgets for a merchandiser.

Chapter 10

E10.16 (LO 3, 4), AP The Sports Equipment Division of Harrington Company is operated as a profit center. Sales for the division were budgeted for 2022 at $900,000. The only variable costs budgeted for the division were cost of goods sold ($440,000) and selling and administrative ($60,000). Fixed costs were budgeted at $100,000 for cost of goods sold, $90,000 for selling and administrative, and $70,000 for noncontrollable fixed costs. Actual results for these items were:

Sales $880,000

Cost of goods sold

Variable 408,000

Fixed 105,000

Selling and administrative

Variable 61,000

Fixed 66,000

Noncontrollable fixed 90,000

Instructions

Prepare a responsibility report for the Sports Equipment Division for 2022.

Assume the division is an investment center, and average operating assets were $1,000,000. The noncontrollable fixed costs are controllable at the investment center level. Compute ROI using the actual amounts.

Compute ROI for current year and for possible future changes.

P10.3 (LO 1, 2), AN Ratchet Company uses budgets in controlling costs. The August 2022 budget report for the company’s Assembling Department is as follows.

Ratchet Company Budget Report Assembling Department

For the Month Ended August 31, 2022

Difference

Manufacturing Costs Budget Actual Favorable F

Unfavorable U

Variable costs

Direct materials $48,000 $47,000 $1,000 F

Direct labor 54,000 51,200 2,800 F

Indirect materials 24,000 24,200 200 U

Indirect labor 18,000 17,500 500 F

Utilities 15,000 14,900 100 F

Maintenance 12,000 12,400 400 U

Total variable 171,000 167,200 3,800 F

Fixed costs

Rent 12,000 12,000 –0–

Supervision 17,000 17,000 –0–

Depreciation 6,000 6,000 –0–

Total fixed 35,000 35,000 –0–

Total costs $206,000 $202,200 $3,800 F

The monthly budget amounts in the report were based on an expected production of 60,000 units per month or 720,000 units per year. The Assembling Department manager is pleased with the report and expects a raise, or at least praise for a job well done. The company president, however, is unhappy with the results for August because only 58,000 units were produced.

Instructions

State the total monthly budgeted cost equation.

2. Prepare a budget report for August using flexible budget data. Why does this report provide a better basis for evaluating performance than the report based on static budget data?

b. Total budgeted cost $200,300

3. In September, 64,000 units were produced. Prepare the budget report using flexible budget data, assuming (1) each variable cost was 10% higher than its actual cost in August, and (2) fixed costs were the same in September as in August.

c. Total cost: Budget $217,400 Actual $218,920

Prepare responsibility report for a profit center.

P10.6 (LO 3), AN Durham Company uses a responsibility reporting system. It has divisions in Denver, Seattle, and San Diego. Each division has three production departments: Cutting, Shaping, and Finishing. The responsibility for each department rests with a manager who reports to the division production manager. Each division manager reports to the vice president of production. There are also vice presidents for marketing and finance. All vice presidents report to the president.

In January 2022, controllable actual and budget manufacturing overhead cost data for the departments and divisions were as shown here.

Manufacturing Overhead Actual Budget

Individual costs—Cutting Department—Seattle

Indirect labor $73,000 $70,000

Indirect materials 47,900 46,000

Maintenance 20,500 18,000

Utilities 20,100 17,000

Supervision 22,000 20,000

$183,500 $171,000

Total costs

Shaping Department—Seattle $158,000 $148,000

Finishing Department—Seattle 210,000 205,000

Denver division 678,000 673,000

San Diego division 722,000 715,000

Additional overhead costs were incurred as follows: Seattle division production manager—actual costs $52,500, budget $51,000; vice president of production—actual costs $65,000, budget $64,000; president—actual costs $76,400, budget $74,200. These expenses are not allocated.

The vice presidents who report to the president, other than the vice president of production, had the following expenses.

Vice President Actual Budget

Marketing $133,600 $130,000

Finance 109,000 104,000

Instructions

Using the format in Illustration 10.19, prepare the following responsibility reports.

Manufacturing overhead—Cutting Department manager—Seattle division.

a. $12,500 U

Manufacturing overhead—Seattle division manager.

b. $29,000 U

3. Manufacturing overhead—vice president of production.

c. $42,000 U

4. Manufacturing overhead and expenses—president.

d. $52,800 U

Compare ROI and residual income.