# Cornerstones of Cost Management Study Set 4

## Quiz 8 :Budgeting for Planning and Control

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All budgets depend on the sales budget. Is this true? Explain.
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Yes, all budgets depend on the sales budget. A sale (income) is the main activity of the any business. The sale is made on its demand condition. The sale is related with all activities, based on that other budget will be prepared.

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Overhead Budget Johnston Company cleans and applies powder coat paint to metal items on a job-order basis. Johnston has budgeted the following amounts for various overhead categories in the coming year. In the coming year, Johnston expects to powder coat 120,000 units. Each unit takes 1.3 direct labor hours. Johnston has found that supplies and gas (used to run the drying ovens-all units pass through the drying ovens after powder coat paint is applied) tend to vary with the number of units produced. All other overhead categories are considered to be fixed. (Round all overhead rates to the nearest cent.) Required: 1. Calculate the number of direct labor hours Johnston must budget for the coming year. Calculate the variable overhead rate. Calculate the total fixed overhead for the coming year. 2. Prepare an overhead budget for Johnston for the coming year. Show the total variable overhead, total fixed overhead, and total overhead. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent). 3. What if Johnston had expected to make 118,000 units next year? Assume that the variable overhead per unit does not change and the total fixed overhead amounts do not change. Calculate the new budgeted direct labor hours and prepare a new overhead budget. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent).
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The information of Johnston Company's budgeted amounts on various overheads is given.
The direct labor hours is calculated as:
Now, the variable overhead rate is calculated as
The budgeted fixed overhead rate is calculated as follows:
Hence, the total fixed overhead for the coming year is
2.The overhead budget for Johnston for the coming year is as follows:
The overhead budget for Johnston for the coming year if it is expected to make 118,000 units is as follows:
* Budgeted direct labor hour is

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Direct Labor Budget for Service The School of Accounting (SOA) at State University is planning its annual fundraising campaign for accounting alumni. This year, the SOA is planning a call-a-thon and will ask Beta Alpha Psi members to volunteer to make phone calls to a list of 5,000 alumni. The Dean's office has agreed to let Beta Alpha Psi use their offices from 6 p.m. to 9 p.m. each weekday so that they will have access to phones. Each volunteer will be provided with a phone and a script with an introduction and suggested responses to various questions that had been asked in the past. Carol Johnson, Beta Alpha Psi faculty advisor, estimates the following: 1. Of the 5,000 phone numbers, roughly 10 percent will be wrong numbers (because alumni change addresses and phone numbers without updating State University). In that case, the student is instructed to apologize to the answering party, hang up, and move on to the next phone number. Each of these calls takes about three minutes. 2. Another 15 percent will be correct numbers, but no one is home and the answering machine picks up. In that case, the student is instructed to simply hang up and move on to the next phone number. Each of these calls takes about two minutes. 3. Each time an alumnus answers the phone, the student is instructed to introduce him or herself and read the scripted introduction. The student is encouraged to engage the alumnus in conversation and reminiscences about State U and bring the alum up to date on the wonderful things that are happening in the SOA. Some calls are longer, some shorter, but the average call length is 10 minutes. Required: 1. Prepare a direct labor budget, in hours, for the fundraising call-a-thon. If 15 students volunteer, how many evenings will the phone-a-thon take? (Round to two significant digits.) 2. What if the phone-a-thon can be moved to the State University Foundation phone bank? That facility has an automated calling system that will automatically dial the phone numbers and route all answered calls directly to students. As a result, no time is spent dialing and listening to answering machines. The time savings due to having the numbers automatically dialed and routed mean that the average length of a wrong number call drops to one minute and the average length of an alumni call drops to eight minutes. Prepare a direct labor budget, in hours, for the fundraising call-a-thon at the State University Foundation. If 15 students volunteer, how many evenings will the phone-a-thon take? (Round to two significant digits.)
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1. Calculation of direct labor hours:
First of all, we need to calculate the number of phone calls that each student has to make
Among 5,000 phone calls, 10% of the calls i.e. 500 calls are wrong numbers and 15% of the calls i.e. 750 calls are the one where the calls diverts to answering machines. The remaining 3,750 calls are valid ones.
Number of phone calls =
i.e. for wrong numbers the number of calls would be
, which is equal to 33 calls for each student.
Number of phone calls for answering machine would be
This is equal to 50 calls for each student.
Number of phone calls for valid numbers would be
This is equal to 250 calls for each student.
2. The below table shows the number of evenings required when the automatic system adopted.
No time is required for dialing answering machines and the time consumed for the remaining has reduced as shown below. Effectively we spend no time on dialing wrong numbers and the number of evenings required for dialing valid numbers is reduced.

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What is the master budget? An operating budget? A financial budget?
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Cost of Goods Sold Budget Refer to Cornerstone Exercise 8.6. Required: 1. Calculate the total budgeted cost of units produced for Play-Disc for the coming year. Show the cost of direct materials, direct labor, and overhead. 2. Prepare a cost of goods sold budget for Play-Disc for the year. 3. What if the beginning inventory of finished goods was $75,200 (for 16,000 units)? How would that affect the cost of goods sold budget? (Assume Play-Disc uses the FIFO method.) Essay Answer: Tags Choose question tag What is an accounts receivable aging schedule? Why is it important? Essay Answer: Tags Choose question tag What impact does the learning curve have on budgeting? What specific budgets might be affected? (Hint: Refer to Chapter 3 for material on the learning curve.) Essay Answer: Tags Choose question tag Marketing Expense Budget Timothy Donaghy has developed a unique formula for growing hair. His proprietary lotion, used regularly for 45 days, will grow hair in bald spots (with varying degrees of success). Timothy calls his lotion Hair-Again and is selling it via the telephone and Internet. His major form of marketing is through 15-minute infomercials and Internet advertising. Timothy sells each 16- ounce bottle of Hair-Again for$15 and pays a commission of 3 percent of sales to telephone operators who field the 1-800 phone calls from potential customers. Fixed marketing expenses for each quarter of the coming year include: In addition, early next year Timothy intends to film and show infomercials on television. He expects the cost to be $10,000 in quarters 1 and 2, and that the cost will rise to$25,000 in each of quarters 3 and 4. Timothy expects the following unit sales of Hair-Again: Required: 1. Construct a marketing expense budget for Hair-Again for the coming year. Show total amounts by quarter and in total for the year. 2. What if the cost of internet ads rises to $15,000 in Quarters 2 through 4? How would that affect variable marketing expense? Fixed marketing expense? Total marketing expense? Essay Answer: Tags Choose question tag Sales Budget FlashKick Company manufactures and sells soccer balls for teams of children in elementary and high school. FlashKick's best-selling lines are the practice ball line (durable soccer balls for training and practice) and the match ball line (high-performance soccer balls used in games). In the first four months of next year, FlashKick expects to sell the following: Required: 1. Construct a sales budget for FlashKick for the first three months of the coming year. Show total sales for each product line by month and in total for the first quarter. 2. What if FlashKick added a third line-tournament quality soccer balls that were expected to take 40 percent of the units sold of the match balls and would have a selling price of$45 each in January and February, and $48 each in March? Prepare a sales budget for Flash- Kick for the first three months of the coming year. Show total sales for each product line by month and in total for the first quarter. Essay Answer: Tags Choose question tag Discuss some of the reasons for budgeting. Essay Answer: Tags Choose question tag Budgeted Income Statement Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects sales of$15.9 million and cost of goods sold of $8.75 million. Advertising is a key part of Coral Seas' business strategy, and total marketing expense for the year is budgeted at$2.8 million. Total administrative expenses are expected to be $675,000. Coral Seas has no interest expense. Income taxes are paid at the rate of 40 percent of operating income. Required: 1. Construct a budgeted income statement for Coral Seas Jewelry Company for the coming year. 2. What if Coral Seas had interest payments of$500,000 during the year? What effect would that have on operating income? On income before taxes? On net income?
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Administrative Expense Budget Green Earth Landscaping Company provides monthly and weekly landscaping and maintenance services to residential customers in the tri-city area. Green Earth has no variable administrative expense. Fixed administrative expenses for June, July, and August include: Required: 1. Construct an administrative expense budget for Green Earth Landscaping Company for the three summer months. Show total amounts by month and in total for the three-month period. 2. What if Green Earth Landscaping Company's insurance rates increased at the beginning of July to $2,600 per month? How would that affect monthly administrative expense? Essay Answer: Tags Choose question tag Ending Finished Goods Inventory Budget Play-Disc makes Frisbee-type plastic discs. Each 12-inch diameter plastic disc has the following manufacturing costs: For the coming year, Play-Disc expects to make 300,000 plastic discs, and to sell 285,000 of them. Budgeted beginning inventory in units is 16,000 with unit cost of$4.75. (There are no beginning or ending inventories of work in process.) Required: 1. Prepare an ending finished goods inventory budget for Play-Disc for the coming year. 2. What if sales increased to 290,000 discs? How would that affect the ending finished goods inventory budget? Calculate the value of budgeted ending finished goods inventory.
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Direct Materials Purchases Budget Refer to Cornerstone Exercise 8.2 for the production budgets for practice balls and match balls. Every practice ball requires 0.7 square yard of polyvinyl chloride panels, one bladder with valve (to fill with air), and 3 ounces of glue. FlashKick's policy is that 20 percent of the following month's production needs for raw materials be ending inventory. Beginning inventory in January for all raw materials met this requirement. Required: 1. Construct a direct materials purchases budget for each type of raw materials for the practice ball line for January and February of the coming year. 2. What if FlashKick decreased the ending inventory percentage to 15 percent of the next month's production needs? What impact would that have on the direct materials purchases budgets prepared in Requirement 1?
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Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast and a sales budget?
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Define control. How are budgets used to control?
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Suppose that the vice president of sales is a particularly pessimistic individual. If you were in charge of developing the master budget, how, if at all, would you be influenced by this knowledge?
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Production Budget Refer to Cornerstone Exercise 8.1, through Requirement 1. FlashKick requires ending inventory of product to equal 20 percent of the next month's unit sales. Beginning inventory in January was 3,100 practice soccer balls and 400 match soccer balls. Required: 1. Construct a production budget for each of the two product lines for FlashKick Company for the first three months of the coming year. 2. What if FlashKick wanted a production budget for the two product lines for the month of April? What additional information would you need to prepare this budget?
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