MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 22
BUSINESS PLANNING
I.

Questions
1. Strategy, plans, and budgets are interrelated and affect one another.
Strategy describes how an organization matches its own capabilities with
the opportunities in the marketplace to accomplish its overall objectives.
Strategy analysis underlies both long-run and short-run planning. In
turn, these plans lead to the formulation of budgets. Budgets provide
feedback to managers about the likely effects of their strategic plans.
Managers use this feedback to revise their strategic plans.
2. Budgeted performance is better than past performance for judging
managers. Why? Mainly because the inefficiencies included in past
results can be detected and eliminated in budgeting. Also, new
opportunities in the future, which did not exist in the past, may be
ignored if past performance is used.
3. A company that shares its own internal budget information with other
companies can gain multiple benefits. One benefit is better coordination
with suppliers, which can reduce the likelihood of supply shortages.
Better coordination with customers can result in increased sales as
demand by customers is less likely to exceed supply. Better coordination
across the whole supply chain can also help a company reduce
inventories and thus reduce the costs of holding inventories.
4. The sales forecast is typically the cornerstone for budgeting, because
production (and, hence, costs) and inventory levels generally depend on
the forecasted level of sales.
5. Sensitivity analysis adds an extra dimension to budgeting. It enables
managers to examine how budgeted amounts change with changes in the
underlying assumptions. This assists managers to monitor those
assumptions that are most critical to a company attaining its budget or
make timely adjustments to plans when appropriate.

6. Factors reducing the effectiveness of budgeting of companies include:

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Chapter 22 Business Planning

1.
2.
3.
4.

Lack of a well-defined strategy,

Lack of a clear linkage of strategy to operational plans,
Lack of individual accountability for results, and
Lack of meaningful performance measures.

II. Problems
Problem 1 (Budgeted Income Statement)
Globalcom Company
Budgeted Income Statement for 2006
(in thousands)
Net sales
P6,996
Equipment (P6,000 x 1.06 x 1.10)
1,908
Maintenance contracts (P1,800 x 1.06)
Total net sales
Cost of goods sold (P4,600 x 1.03 x 1.06)
Gross margin
Operating costs:
Marketing costs (P600 + P250)
850
Distribution costs (P150 x 1.06)
159
Customer maintenance costs (P1,000 + P130) 1,130
Administrative costs
900
Total operating costs
Operating income

P8,904
5,022
3,882

3,039
P
843

Problem 2 (Comprehensive Operating Budget)

Requirement 1
Schedule 1: Revenue Budget
For the Year Ended December 31, 2006
Skateboards
Total
Requirement 2

Units
1,000

Selling Price
P450

Total Revenues
P450,000

Schedule 2: Production Budget (in Units)

for the Year Ended December 31, 2006
Skateboards
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Business Planning Chapter 22

Budgeted unit sales (Schedule 1)

Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced

1,000
200
1,200
100
1,100

Requirement 3
Schedule 3A: Direct Materials Usage Budget
For the Year Ended December 31, 2006
Wood
Physical Budget
To be used in production
(Wood: 1,100 x 5.00 b.f.
Fiberglass: 1,100 x 6.00 yards)

Fiberglass

Total

5,500
6,600

Cost Budget
Available from beginning inventory
(Wood: 2,000 b.f. x P28.00
Fiberglass: 1,000 b.f. x 4.80)
To be used from purchases this period
(Wood: (5,500 2,000) x P30.00
Fiberglass: (6,600 1,000) x P5.00)
Total cost of direct materials to be used

5,500

6,600

56,000
4,800
105,000
P161,000

28,000
P32,800

P193,800

Schedule 3B: Direct Materials Purchases Budget

For the Year Ended December 31, 2006
Wood
Physical Budget
Production usage (from Schedule 3A)
Add target ending inventory
Total requirements
Deduct beginning inventory
Purchases
Cost Budget
(Wood: 5,000 x P30.00
Fiberglass: 7,600 x P5.00)

5,500
1,500
7,000
2,000
5,000
P150,000
P150,000

Requirement 4
Schedule 4: Direct Manufacturing Labor Budget
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Fiberglass

Total

6,600
2,000
8,600
1,000
7,600
P38,000
P38,000

P188,000

Chapter 22 Business Planning

For the Year Ended December 31, 2006

Labor Category
Manufacturing labor

Cost Driver
Units
1,100

DML Hours per

Driver Unit
5.00

Total
Hours
5,500

Wage
Rate
P25.00

Total
P137,500

Requirement 5
Schedule 5: Manufacturing Overhead Budget
For the Year Ended December 31, 2006
At Budgeted Levels of 5,500
Direct Manufacturing Labor-Hours
Variable manufacturing overhead
costs (P7.00 x 5,500)
Fixed manufacturing overhead costs
Total manufacturing overhead costs

P 38,500
66,000
P104,500

Requirement 6
Budgeted manufacturing overhead rate:

P104,500
5,500

= P19.00 per hour

Requirement 7
Budgeted manufacturing overhead cost per output unit:
P104,500
=
1,100
= P95.00 per output unit

Requirement 8
Schedule 6A: Computation of Unit Costs of Manufacturing Finished
Goods in 2006
Cost per Unit
of Inputa
Inputsb
Total
Direct materials
Wood
P30.00
5.00
P150.00
Fiberglass
5.00
6.00
30.00
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Business Planning Chapter 22

Direct manufacturing labor

Total manufacturing overhead
a
b

25.00

5.00

125.00
95.00
P400.00

cost is per board foot, yard or per hour

inputs is the amount of input per board

Requirement 9
Schedule 6B: Ending Inventory Budget
December 31, 2006
Units
Direct materials
Wood
1,500
Fiberglass
2,000
Finished goods
Skateboards
200
Total Ending Inventory

Cost per Unit

Total

P 30.00
5.00

P 45,000
10,000

400.00

80,000
P135,000

Requirement 10
Schedule 7: Cost of Goods Sold Budget
for the year Ended December 31, 2006
From
Schedule
Beginning finished goods
inventory, January 1,
2006
Direct materials used
Direct manufacturing labor
Manufacturing overhead
Cost of goods manufactured
Cost of goods available for
sale
Deduct ending finished
goods inventory,
December 31, 2006
Cost of goods sold

Given
3A
4
5

Total
P 37,480
P193,800
137,500
104,500
435,800
473,280

6B

Requirement 11
Budgeted Income Statement for Pacific
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80,000
P393,280

Chapter 22 Business Planning

for the Year Ended December 31, 2006

Revenues
Schedule 1
Costs
Cost of goods sold
Schedule 7
Gross margin
Operating costs
Marketing costs
(P250 x 30)
Other costs
Operating income
III. Multiple Choice Questions
1.
2.
3.
4.
5.

A
B
C
D
D

6.
7.
8.
9.
10.

A
B
D
A
C

11.
12.
13.
14.
15.

22-6

D
D
B
C
A

P450,000
393,280
56,720
P 7,500
30,000

37,500
P 19,220