CHAPTER 22 BUDGETING DISCUSSION QUESTIONS 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 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 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 Conflicting goals can cause employees or department managers to act in their own selfinterests to the detriment of the organization’s objectives 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 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 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 Purchases of direct materials should be closely coordinated with the production budget so that inventory levels can be maintained within reasonable limits 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……………………………………………………………………………… Total department costs…………………………………………………………………… 10,000 $148,700 * $123,500 ÷ 6,500 hours PE 21–1B Variable cost: Direct labor (600 hours × $14.50* per hour)………………………………………… $ 8,700 Fixed cost: 2,300 Equipment depreciation………………………………………………………………… $11,000 Total department costs…………………………………………………………………… * $9,280 ÷ 640 hours PE 22–2A Expected units to be sold………………………………………………………………… Plus desired ending inventory, December 31, 2014………………………………… Total…………………………………………………………………………………………… Less estimated beginning inventory, January 1, 2014……………………………… Total units to be produced………………………………………………………………… 190,000 20,300 210,300 18,400 191,900 PE 22–2B Expected units to be sold………………………………………………………………… Plus desired ending inventory, December 31, 2014………………………………… Total…………………………………………………………………………………………… Less estimated beginning inventory, January 1, 2014……………………………… Total units to be produced………………………………………………………………… 75,000 2,700 77,700 3,500 74,200 PE 22–3A Square yards required for production: Diaries (191,900 × sq yd.)………………………………………………… Plus desired ending inventory, December 31, 2014………………………… Total………………………………………………………………………………… Less estimated beginning inventory, January 1, 2014……………………… Total square yards to be purchased…………………………………………… Unit price (per sq yd.)…………………………………………………………… Total direct materials to be purchased……………………………………… 1,343,300 32,900 1,376,200 29,100 1,347,100 $0.80 $1,077,680 PE 22–3B Pounds of wax required for production: Candles [(74,200 ì oz.) ữ 16 oz.]………………………………………… Plus desired ending inventory, December 31, 2014………………………… Total………………………………………………………………………………… Less estimated beginning inventory, January 1, 2014……………………… Total pounds to be purchased………………………………………………… Unit price (per lb.)………………………………………………………………… Total direct materials to be purchased………………………………………… 37,100 2,100 39,200 2,500 36,700 $4.10 $150,470 PE 22–4A Hours required for assembly: Diaries (191,900 × min.)…………………………………………………… Convert minutes to hours…………………………………………………… Assembly hours……………………………………………………………… Hourly rate…………………………………………………………………….…… Total direct labor cost 1,727,100 60 ữ 28,785 hrs ì $16.00 $460,560 PE 22–4B Hours required for assembly: Candles (74,200 × 12 min.)………………………………………………… Convert minutes to hours…………………………………………………… Molding hours………………………………………………………………… Hourly rate…………………………………………………………………….…… Total direct labor cost…………………………………………………………… 890,400 60 ÷ 14,840 hrs × $14.00 $207,760 PE 22–5A Finished goods inventory, January 1, 2014 Work in process inventory, January 1, 2014 Direct materials: Direct materials inventory, January 1, 2014 (29,100 × $0.80) Direct materials purchases (from PE 22–3A) Cost of direct materials available for use $ $ $ 28,000 17,000 23,280 1,077,680 $1,100,960 Less direct materials inventory, December 31, 2014 (32,900 × $0.80) Cost of direct materials placed in production Direct labor (from PE 22–4A) Factory overhead Total manufacturing costs Total work in process during period Less work in process inventory, December 31, 2014 Cost of goods manufactured 26,320 $1,074,640 460,560 205,800 1,741,000 $1,758,000 19,500 1,738,500 Cost of finished goods available for sale Less finished goods inventory, December 31, 2014 $1,766,500 Cost of goods sold $1,742,800 23,700 PE 22–5B Finished goods inventory, January 1, 2014 $ Work in process inventory, January 1, 2014 $ 9,800 3,600 Direct materials: Direct materials inventory, January 1, 2014 (2,500 × $4.10) Direct materials purchases (from PE 22–3B) Cost of direct materials available for use Less direct materials inventory, December 31, 2014 (2,100 × $4.10) Cost of direct materials placed in production Direct labor (from PE 22–4B) Factory overhead Total manufacturing costs Total work in process during period Less work in process inventory, December 31, 2014 $ 10,250 150,470 $160,720 8,610 $152,110 207,760 109,600 469,470 $473,070 3,500 Cost of goods manufactured 469,570 Cost of finished goods available for sale Less finished goods inventory, December 31, 2014 $479,370 12,900 Cost of goods sold $466,470 PE 22–6A July Collections from June sales (70% × $320,000)………………………………………… $224,000 105,000 Collections from July sales (30% × $350,000)………………………………………… Total receipts from sales on account…………………………………………………… $329,000 PE 22–6B Payments for March purchases (90% × $11,900)…………………………………… Payments for April purchases (10% × $12,700)………………………………………… Total payments for purchases on account……………………………………………… April $10,710 1,270 $11,980 EXERCISES Ex 22–1 a JEN LASSITER Cash Budget For the Four Months Ending December 31, 2014 September October November December Estimated cash receipts from: Part-time job Deposit $ 1,450 $1,450 $1,450 Total cash receipts $ 1,450 $1,450 $1,450 $1,450 500 $1,950 $ 300 $ 300 $ 300 300 180 300 180 300 180 $ 780 $ 780 $ 780 $(4,480) $ 670 $ 670 $1,170 5,970 $ 1,490 1,490 $2,160 2,160 $2,830 2,830 $4,000 Estimated cash payments for: Season football tickets Additional entertainment Tuition Rent Food Deposit Total cash payments Cash increase (decrease) Cash balance at beginning of month Cash balance at end of month $ 150 300 4,500 300 180 500 $ 5,930 b The four-month budgets not change with any identified activity level; thus, they are static budgets c While Lassiter’s budget might first appear satisfactory, Lassiter must earn enough cash in order to pay for the spring semester tuition Her present budget shows that she will be $500 short of the tuition amount ($4,500 – $4,000) by the time she needs to pay her spring tuition Thus, Lassiter will likely need to adjust the plan before the fall term even begins Some possibilities would be to rent a lower cost apartment or to get a roommate Other considerations include increasing her part-time job hours and reducing her monthly entertainment and food allowance, or making up the income difference with additional hours during Christmas break Lassiter might also see about scholarship opportunities to reduce the tuition payment The budget gives Lassiter time to adjust her plans to future events In this case, Lassiter can see that her present plan will not provide sufficient cash, thus giving her four months to adjust If Lassiter did not budget but went ahead with the original plan, she would be $500 short at the end of December, with no time left to adjust Ex 22–2 CYBERWARE Flexible Selling and Administrative Expenses Budget For the Month Ending March 31, 2014 Total sales Variable cost: Sales commissions (12% of sales) Advertising expense (22% of sales) Miscellaneous selling expense (15% of sales) Office supplies expense (4% of sales) Miscellaneous administrative expense (2% of sales) Total variable cost Fixed cost: Miscellaneous selling expense Office salaries expense Miscellaneous administrative expense Total fixed cost Total selling and administrative expenses $80,000 $100,000 $120,000 $ 9,600 17,600 12,000 3,200 1,600 $44,000 $ 12,000 22,000 15,000 4,000 2,000 $ 55,000 $ 14,400 26,400 18,000 4,800 2,400 $ 66,000 $ 4,200 16,000 2,500 $22,700 $66,700 $ $ 4,200 16,000 2,500 $ 22,700 $ 77,700 4,200 16,000 2,500 $ 22,700 $ 88,700 22-7 © 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 Ex 22–3 GILMAN COMPANY—MACHINING DEPARTMENT Flexible Production Budget For the Three Months Ending March 31, 2014 a January Units of production Wages Utilities Depreciation Total Supporting calculations: Units of production Hours per unit Total wages Total hours of production Utility costs per hour Total utilities March 90,000 100,000 110,000 $337,500 40,500 60,000 $438,000 $375,000 45,000 60,000 $480,000 $412,500 49,500 60,000 $522,000 × Total hours of production Wages per hour February 90,000 0.25 × 100,000 0.25 × 110,000 0.25 22,500 × $15.00 $337,500 25,000 × $15.00 $375,000 27,500 × $15.00 $412,500 22,500 × $1.80 $40,500 25,000 × $1.80 $45,000 27,500 × $1.80 $49,500 Depreciation is a fixed cost, so it does not “flex” with changes in production Since it is the only fixed cost, the variable and fixed costs are not classified in the budget b January Total flexible budget…………………………………… $438,000 450,000 Actual cost……………………………………………… Excess of actual cost over budget…………………… $ (12,000) February March $480,000 492,000 $522,000 540,000 $ (12,000) $ (18,000) The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought The department is spending more than would be expected The flexible budget is a superior budgeting approach in this situation, since wages and utility costs vary with production Thus, the budget for these costs should adjust (flex) to the actual level of production Actual costs can rightfully be compared to the flexible budget, because both numbers are based on actual volumes 22-8 © 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 Ex 22–4 STEELCASE INC.—FABRICATION DEPARTMENT Flexible Production Budget August 2014 (assumed data) Units of production 12,000 Variable cost: Direct labor Direct materials Total variable cost Fixed cost: Supervisor salaries Depreciation Total fixed cost Total department cost 15,000 18,000 $ 84,000 264,000 $348,000 $105,000 330,000 $435,000 $126,000 396,000 $522,000 $180,000 28,000 $208,000 $556,000 $180,000 28,000 $208,000 $643,000 $180,000 28,000 $208,000 $730,000 12,000 × 20/60 × $21 15,000 × 20/60 × $21 18,000 × 20/60 × $21 12,000 × 55 lbs × $0.40 15,000 × 55 lbs × $0.40 18,000 × 55 lbs × $0.40 Ex 22–5 ACCUWEIGHT INC Production Budget For the Month Ending July 31, 2015 Units Small Scale Large Scale Expected units to be sold Plus desired inventory, July 31, 2015 73,000 1,300 121,000 2,300 Total Less estimated inventory, July 1, 2015 74,300 (2,000) 72,300 123,300 (3,000) 120,300 Total units to be produced Ex 22–6 SOUNDLAB INC Sales Budget For the Month Ending November 30, 2014 a Product and Area Unit Sales Volume Model DL: East Region West Region Total Model XL: East Region West Region Total Total revenue from sales b Unit Selling Price Total Sales 2,450 2,170 4,620 $170 170 $ 416,500 368,900 960 880 1,840 $280 280 $ 785,400 $ 268,800 246,400 $ 515,200 $1,300,600 SOUNDLAB INC Production Budget For the Month Ending November 30, 2014 Units Model DL Model XL Expected units to be sold Plus desired inventory, November 30, 2014 4,620 315 1,840 55 Total Less estimated inventory, November 1, 2014 4,935 (270) 4,665 1,895 (85) 1,810 Total units to be produced Prob 22–3B (Continued) GOLD MEDAL ATHLETIC CO Direct Materials Purchases Budget For the Month Ending March 31, 2014 Plastic Units required for production: Batting helmet Football helmet Plus desired units of inventory, March 31, 2014 Total Less estimated units of inventory, March 1, 2014 Total units to be purchased Unit price Total direct materials to be purchased 1,210 × 1.20 lbs = 1,452 lbs 1,210 × 0.50 lb = 605 lbs 6,480 × 3.50 lbs = 22,680 lbs 6,480 × 1.50 lbs = 9,720 lbs Foam Lining 1,452 22,680 Total 605 9,720 50 24,182 65 10,390 90 80 24,092 × $6.00 $144,552 10,310 × $4.00 $41,240 $185,792 Prob 22–3B (Continued) GOLD MEDAL ATHLETIC CO Direct Labor Cost Budget For the Month Ending March 31, 2014 Molding Department Assembly Department Total Hours required for production: Batting helmet 242 Football helmet 3,240 Total Hourly rate 3,482 $20 × $69,640 Total direct labor cost 605 11,664 12,269 $14 × $171,766 $241,406 1,210 × 0.20 hr = 242 hrs 1,210 × 0.50 hr = 605 hrs 6,480 × 0.50 hr = 3,240 hrs 6,480 × 1.80 hrs = 11,664 hrs GOLD MEDAL ATHLETIC CO Factory Overhead Cost Budget For the Month Ending March 31, 2014 Indirect factory wages Depreciation of plant and equipment $ 86,000 12,000 Power and light 4,000 Insurance and property tax 2,300 Total $104,300 Prob 22–3B (Continued) GOLD MEDAL ATHLETIC COMPANY Cost of Goods Sold Budget For the Month Ending March 31, 2014 Finished goods inventory, March 1, 2014 $ 19,480 Work in process inventory, March 1, 2014 $ 15,300 Direct materials: Direct materials inventory, March 1, 2014 Direct materials purchases $ Cost of direct materials available for use Less direct materials inventory, $186,652 March 31, 2014 860 185,792 560 Cost of direct materials placed in production $186,092 Direct labor Factory overhead 241,406 104,300 Total manufacturing costs 531,798 $547,098 14,800 Total work in process during period Less work in process, March 31, 2014 Cost of goods manufactured 532,298 $551,778 Cost of finished goods available for sale Less finished goods inventory, March 31, 2014 Cost of goods sold 4 18,410 $533,368 Batting helmet (40 × $25.00)……………………………………………………… Football helmet (240 × $77.00)…………………………………………………… Finished goods inventory, March 1, 2014……………………………………… $ 1,000 18,480 Plastic (90 × $6.00)………………………………………………………………… Foam lining (80 × $4.00)…………………………………………………………… Direct materials inventory, March 1, 2014…………………………………… $ 540 320 $ 860 Plastic (50 × $6.00)………………………………………………………………… Foam lining (65 × $4.00)…………………………………………………………… Direct materials inventory, March 31, 2014…………………………………… $ 300 260 $ 560 Batting helmet (50 × $25.00)……………………………………………………… Football helmet (220 × $78.00)…………………………………………………… Finished goods inventory, March 31, 2014…………………………………… $ 1,250 $19,480 17,160 $18,410 Prob 22–3B (Concluded) GOLD MEDAL ATHLETIC CO Selling and Administrative Expenses Budget For the Month Ending March 31, 2014 Selling expenses: Sales salaries expense $184,300 Advertising expense Telephone expense—selling Travel expense—selling 87,200 5,800 9,000 Total selling expenses $286,300 Administrative expenses: Office salaries expense $ 32,400 Depreciation expense—office equipment 3,800 Telephone expense—administrative 1,200 Office supplies expense Miscellaneous administrative expense 1,100 1,000 Total administrative expenses 39,500 $325,800 Total operating expenses GOLD MEDAL ATHLETIC CO Budgeted Income Statement For the Month Ending March 31, 2014 Revenue from sales $1,088,000 Cost of goods sold 533,368 $ 554,632 Gross profit Operating expenses: Selling expenses Administrative expenses $286,300 39,500 Total operating expenses 325,800 $ 228,832 Income from operations Other income: Interest revenue $ 940 Other expenses: Interest expense Income before income tax Income tax expense (30% rate) Net income 872 68 $ 228,900 68,670 $ 160,230 Prob 22–4B MERCURY SHOES INC Cash Budget For the Three Months Ending June 30, 2014 June July August Estimated cash receipts from: Cash sales Collection of accounts receivable a Total cash receipts $ 16,000 $ 18,500 $ 20,000 138,000 146,400 157,500 $154,000 $164,900 $177,500 $ 56,200 $ 66,800 $ 88,400 40,000 46,000 51,000 120,000 Estimated cash payments for: Manufacturing costs b Selling and administrative expenses Capital expenditures Other purposes: Income tax Dividends 24,000 15,000 $ 96,200 $136,800 $274,400 Cash increase or (decrease) Cash balance at beginning of month $ 57,800 42,000 $ 28,100 99,800 $ (96,900) 127,900 Cash balance at end of month Minimum cash balance $ 99,800 40,000 $127,900 40,000 $ 31,000 40,000 Excess or (deficiency) $ 59,800 $ 87,900 $ (9,000) Total cash payments (Continued) Prob 22–4B (Concluded) Computations: a Collections of accounts receivable: June July April sales…………………………………………… $ 48,000 May sales…………………………………………… 90,000 June sales…………………………………………… August $ 60,000 86,400 99,900 July sales…………………………………………… Total……………………………………………… b $ 57,600 $138,000 $146,400 June July $157,500 $120,000 × 40% = $48,000 $150,000 × 60% = $90,000 $150,000 × 40% = $60,000 $160,000 × 90% × 60% = $86,400 $160,000 × 90% × 40% = $57,600 $185,000 × 90% × 60% = $99,900 Payments for manufacturing costs: August Payment of accounts payable, c beginning of month balance …………… d Payment of current month’s cost ………… Total…………………………………………… c $13,000 $10,800 $14,000 43,200 56,000 74,400 $56,200 $66,800 $88,400 Accounts payable, June balance = $13,000 ($66,000 – $12,000) × 20% = $10,800 ($82,000 – $12,000) × 20% = $14,000 d ($66,000 – $12,000) × 80% = $43,200 ($82,000 – $12,000) × 80% = $56,000 ($105,000 – $12,000) × 80% = $74,400 The budget indicates that the minimum cash balance will not be maintained in August This is due to the capital expenditures requiring significant cash outflows during this month This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes At the end of June and July, the cash balance will exceed the minimum desired balance, and the excess could be considered for temporary investment Prob 22–5B MESA PUBLISHING CO Budgeted Income Statement For the Year Ending December 31, 2015 $456,000 Sales Cost of goods sold: $114,000 31,920 23,640 Direct materials Direct labor Factory overhead Cost of goods sold Gross profit Operating expenses: Selling expenses: 169,560 $286,440 Sales salaries and commissions Advertising Miscellaneous selling expenses Total selling expenses Administrative expenses: Office and officers salaries Supplies Miscellaneous administrative expense Total administrative expenses Total operating expenses Income before income tax Income tax expense Net income 3,800 units × $120 3,800 units × $30 3,800 units × $8.40 (3,800 units × $4.80) + $4,000 + $1,400 (3,800 units × $13.50) + $12,800 (3,800 units × $2.50) + $1,000 (3,800 units × $7.00) + $7,800 (3,800 units × $1.20) + $500 (3,800 units × $2.40) + $400 $64,100 13,200 10,500 $ 87,800 $34,400 5,060 9,520 48,980 136,780 $149,660 35,000 $114,660 Prob 22–5B (Concluded) MESA PUBLISHING CO Budgeted Balance Sheet December 31, 2015 ASSETS Current assets: $106,660 23,800 Cash Accounts receivable Inventories: Finished goods $16,900 4,200 Work in process Materials 6,400 Prepaid expenses 27,500 600 Total current assets Property, plant, and equipment: Plant and equipment $158,560 Less accumulated depreciation Total assets $104,000 36,000 68,000 $226,560 LIABILITIES Current liabilities: Accounts payable $ 14,800 STOCKHOLDERS’ EQUITY Common stock $ 30,000 181,760 Retained earnings Total stockholders’ equity 211,760 $226,560 Total liabilities and stockholders’ equity Cash balance, December 31, 2015: Balance, January 1, 2015……………………………………………………………………… Add: Less: Net income…………………………………………………………………………… Depreciation of plant and equipment……………………………………………… $114,660 4,000 Dividends to be paid in 2015………………………………………………………… $ 16,000 22,000 Plant and equipment to be acquired in 2015…………………………………… Cash balance, December 31, 2015…………………………………………………………… $ 26,000 Cash from operations 118,660 (38,000) $106,660 $82,000 + $22,000 = $104,000 $32,000 + $4,000 = $36,000 Retained earnings balance, December 31, 2015: Balance, January 1, 2015…………………………………………………………………… Plus net income for 2015…………………………………………………………………… Less: Dividends to be paid in 2015 (20,000 shares × $0.20 × qtrs.)……………… Balance, December 31, 2015……………………………………………………………………… $ 83,100 114,660 $197,760 16,000 $181,760 22-51 © 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 CASES & PROJECTS CP 22–1 Cam should reject Megan’s request to charge the convention-related costs against July’s budget This is just one example of many attempts to slide expenses into different budget periods than when actually incurred This is a common issue that controllers face Often, operating managers will attempt to accelerate future expenditures into low-expenditure months or delay present expenditures into future periods in order to avoid going over budget These attempts to “slide” expenditures should not be supported, or else the whole concept of the budget will begin to become an accounting game The integrity of the budget process must be defended by the controller Thus, expenditures should be accrued to the period in which the benefit is received Cam should reassure Megan that management will not take a single month’s results as an indication of either good or poor management Month-to- month variation should be expected Rather, management will take a long-term perspective and evaluate whether the department is staying within budget over a longer period of time Abnormal month-to-month variations from budget can “wash out” over time CP 22–2 a The hospital’s new budget method is clearly an example of a flexible budget The budget changes with changes in underlying activity, such as patient-days Patient-days are the number of patients multiplied by the number of days in the hospital As the number of patient-days changes, it would be reasonable to expect that the hospital’s variable costs should also change In addition, the last quote suggests that the new budget approach is a monthly continuous budget The budget helps the managers plan month-by-month expenditures b The advantage of a flexible budget is to accurately plan variable costs of the hospital with changes in the underlying activity base Using a static budget would create actual deviations from budget that would be difficult to interpret Managers would not be able to determine if the deviations were the result of cost (in)efficiencies or whether they were due to changes in activity level A flexible budget causes the budget to “flex” with changes in underlying activity level so that any remaining actual deviations from budget can more clearly be identified with (in)efficiency or other special causes The continuous budget also provides timely information to managers so that they can adjust actual spending patterns to the budgeted amounts CP 22–3 a The budget information indicates that the actual expenditures by the Operations Department exceeded what was planned by $12,000 The bank manager may ask the operations manager why the travel and training expenditures exceeded the plan by a total of $20,000 It may be that the additional expenditures were necessary, but an explanation is in order b The bank manager does not know if the actual resources consumed by the Operations Department are the right amount of resources for doing the right things In other words, this budget doesn’t say anything about the actual work of the Operations Department and how much cost this work consumes The bank manager doesn’t have a good sense if there is waste in the department or not The $12,000 excess expenditure over budget raises several questions If the department did twice as much work as planned, then the $12,000 is a bargain If, on the other hand, the department did much less work than planned, then the $12,000 understates how poorly the department used resources Again, how much work the department actually did is unknown, so these questions cannot be answered A flexible budget would provide more information about the work of the department Examples of the kind of work conducted by the department might include processing credit card statements, processing checking statements, processing loan repayments, and correcting errors The budget doesn’t indicate why there was more travel and training than expected Maybe the department introduced a new computer system, and all employees needed off-site training in order to use the system This would explain the additional spending on travel and training The training needed to be done, regardless of the budget The lower than expected overtime may be a favorable result However, there may have been less overtime because employees were involved in more training days than expected or performed less work than planned Again, a flexible budget would provide more information for evaluating the department’s performance CP 22–4 Domino’s could use a master budget to plan operations consistent with the sales forecast The sales forecast could be used to develop the production budget for pizzas The sales and production budgets would be identical, since there would be no finished goods inventory for cooked pizzas The sales (production) budget would be used to develop a direct materials purchases budget For example, the pizza ingredients, packaging materials, beverages, and other materials could be planned from the sales budget In addition, the cost of delivery fuel (driver reimbursement for gas) could be planned from the sales budget The sales (production) budget could also be used to develop the direct labor budget for cooks, counter staff, dough making labor, and drivers Much of the overhead is related to the number of restaurants, rather than the number of pizzas sold That is, the number of restaurant locations will drive management salaries, rent, utilities, insurance, and other overhead costs The drivers own the delivery vehicles; thus, vehicle depreciation and maintenance costs are not part of Domino’s overhead budget The budget process could be used to direct and coordinate all the various restaurants In this way, all the managers would be operating under the same set of assumptions The actual performance of the company and the individual stores could be compared with the budget in order to provide all levels of the organization appropriate feedback and control This feedback can be used to adjust operations to any changes that may be occurring Thus, if sales are expanding faster or slower than planned, costs could be brought into line rapidly This would help prevent the company from becoming either short of drivers and food due to sales outpacing projections or overbuilding stores before sales have materialized in sufficient volume to justify the cost CP 22–5 a The amount of actual expenditures was less than budget for the first 10 months of the budget year As the end of the budget year-end neared, the manager spent the remaining excess budget and, as a result, went over the budget for May and June The amount spent for the year was equal to the total amount budgeted, because the average difference between the actual and budget is zero Thus, the managers did not spend more than was originally authorized for the year However, the data indicate that the managers spent the available annual authorization in the last two months to avoid losing the excess to the General Fund This is an example of a “spend it or lose it” mentality The manager is, in a sense, holding back spending during the year to create a small cushion, or reserve If an emergency arises, then the manager has resources available to address it If the emergency doesn’t arise, then the manager uses the amount held back in a flurry of year-end spending, some of which is likely to be wasteful b The budget system encourages this type of wasteful behavior The budget could be redesigned in a number of ways The budget could be designed to flex with underlying activity and adjusted monthly Thus, the manager would always have budgeted resources for changes in underlying activity For example, if the number of prisoners in the jail increased, then the budget would increase proportionately A manager with the flexible budget would be less likely to “reserve” the budget during the year, since an activity change would be automatically reflected in the monthly budget That is, the inherent slack in the static budget could be reduced, knowing that activity changes are automatically accommodated by the flexible budget The budget system might also allow a manager to make a request for additional funds after the budget year has begun In this scenario, the manager would not need to hold back spending for emergencies, because emergencies could be handled with a separate request For example, if the town had a natural disaster, then the police and fire departments could request additional funding to meet the need Lastly, the budget could be designed to encourage thrift For example, the budget could be designed so that the manager could carry forward a portion of the unspent budget of a previous year Such a system would reward departmental thrift by allowing the department to keep a portion of the savings for future needs This would reduce the need for aggressive year-end spending, since a portion of the unspent amount could roll forward to the next year This would cause the manager to spend money when needed, not just to avoid the year-end take back CP 22–6 Most states have home pages and budget information available online The budget information will usually be fairly easy to identify The solution to the activity for Tennessee for fiscal year 2012 is as follows (The students should be using more recent information; so this is only a guide.) Where Your Tax Dollar Comes From (in cents) CP 22–6 (Concluded) Where Your State Dollar Goes (in cents) Tennessee’s budget is in balance That is, state revenues equal state expenditures Most states are legally required to have balanced budgets ... 12,000 22, 000 15,000 4,000 2,000 $ 55,000 $ 14,400 26,400 18,000 4,800 2,400 $ 66,000 $ 4,200 16,000 2,500 $22, 700 $66,700 $ $ 4,200 16,000 2,500 $ 22, 700 $ 77,700 4,200 16,000 2,500 $ 22, 700... $268,000 $ 30,000 22, 000 52,000 $320,000 Note: Advertising expenses, sales commissions, and executive officer salaries are selling and administrative expenses CHAPTER 22 Budgeting Ex 22 16 DELAWARE... required for production…………………… 576,000 ltrs ì $0.05 3,520 0.15 528 $28,800 Spriteđ $224 ,000 100 ữ × 2,240 0.10 224 Ex 22 11 SAFETY GRIP COMPANY Direct Materials Purchases Budget For the Year Ending