Although the textbook that we will be using for this session will focus on traditional budgeting, activity-based budgeting (ABB) using ABC costing techniques is an important budgeting tool used by many organizations.
Activity-based Budgeting (ABB)
Although the textbook that we will be using for this session will focus on traditional budgeting, activity-based budgeting (ABB) using ABC costing techniques is an important budgeting tool used by many organizations. Each week, lessons present some information related to ABB. Although you had ABC costing in ACCT505, some of you may feel a little rusty on this topic.
To help you gain the necessary skills to complete the Week 1 assignment, it is suggested that you view this problem demo video before attempting to complete the homework assignment. Hopefully, you will find this learning technique to be a “change of pace.”
Transcript
Scenario: ABC Costing
The new president of the Blake Company was stumped. Why had profits gone down? He had directed the sales department to push the product with the highest contribution margin, and the sales department had come through with flying colors. The percent of flops sold had increased from 25% of units sold to 37.5% of units sold. So what happened?
Flops
Chops
Sales Price per Unit
$200
$600
Direct Materials per Unit
$100
$300
Direct Labor Cost per Hour
$30
$50
Direct Labor Hours per Unit
2 hours per unit
6 hours per unit
Number of Units Produced
30,000
20,000
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Answer the following questions.
Calculate the Blake Company’s estimated direct labor hours to produce flops and chops.
Calculate the predetermined variable overhead rate that will be used in the coming year using a traditional costing system based upon direct labor hours.
Using a traditional costing system based upon direct labor hours, compute the using product costs for flops and chops as well as contribution margin per unit.
It has been suggested to the president to consider the use of an ABC costing system to allocate manufacturing overhead. Engineering studies have revealed the following information about estimated manufacturing activities for the coming year.
Activity Cost Pool
Estimated Overhead Cost
Expected Activity Level
Setups
$860,000
200 setups
Scrap
$400,000
500 units
Testing
$300,000
5,000 tests
Machine Related
$2,400,000
100,000 machine related
Total
$4,000,000
Calculate the separate predetermined overhead rates for each of the activities listed above.
The following data are available about the activity levels needed to produce the projected 30,000 units of flops
Activity Cost Pool
Estimated Activity Level for Flops
Setups
50 setups
Scrap
200 units
Testing
2,000 tests
Machine Related
12,500 machine related
Calculate the expected variable overhead to be applied to flops.
The following data are available about the activity levels needed to produce the projected 20,000 units of chops
Activity Cost Pool
Estimated Activity Level for Gadgets
Setups
150 setups
Scrap
300 units
Testing
3,000 tests
Machine Related
87,500 machine related
Calculate the expected variable overhead to be applied to chops.
Calculate the total overhead (total for company) that is expected to be applied to flops and chops.
Calculate the projected unit costs and unit contribution margins for flops and chops using ABC costing.
What conclusions can you draw about the use of traditional costing versus ABC costing for the Blake Company? What recommendations do you have for the president?
Submit your Excel spreadsheet with its formulas to the Week 1 Homework page.
ACCT556 Budgeting
Week 2 HOMEWORK
Problem Demonstration
Make sure to watch both problem demonstrations this week.
Sales Forecasting
Forecasting sales can be a difficult topic for many people involved in the budgeting process. The problem demonstration provided for you this week will focus on quantitative forecasting methods. Hopefully, this step-by-step presentation of various techniques will help you develop your own skills.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Sales Forecasting (Links to an external site.)
Transcript
Overhead Variance Analysis
Variance analysis is often a difficult topic for accounting students. However, by breaking the variance topic into small segments, the material becomes more manageable. Try to focus on what is being isolated when calculating each variance: price, rate, usage, mix, etc. This will help you understand these useful concepts.
To help you gain the necessary skills to complete this week’s problems, you have been provided with a problem demonstration involving the overhead variance analysis.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Overhead Variance Analysis (Links to an external site.)
Transcript
Practice Problems Activity
To further help with this week’s homework assignment, here is a document with practice problems (Links to an external site.) and chart for the sample problems (Links to an external site.).
Scenario: Sales Forecasting
The Gregory Corporation has gathered information regarding past sales of plastic silverware.
Year
Sales
20X2
$450,000
20X3
$385,000
20X4
$495,000
20X5
$720,000
20X6
$680,000
20X7
$590,000
20X8
$620,000
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Answer the following questions.
Predict the sales for 20X9 using the moving average method.
You noticed a sudden jump in sales for 20X5. After inquiring about this jump, you were notified by your manager about a one-time sale for $250,000 in that year that is not likely to be repeated. What revision, if any, would you make in the sales information used for projection?
If you revised your historical sales to be used to project 20X9 sales, please recalculate your projection using the moving average method.
Which projection (Question 1 or Question 3) do you feel is more representative of the Gregory Corporation’s historical sales? Why?
Please complete the remaining questions using the revised historical data.
Predict the 20X9 sales using exponential smoothing.
Predict the 20X9 using a trend line technique using (GROWTH function in Excel).
Predict the sales for 20X9 using a graphing technique.
It has been suggested that sales for the company may be connected to disposable income. Using the information below regarding historical disposable income, predict the sales for 20X9 using regression analysis if a reliable prediction for disposable income for 20X9 is $45,720.
Year
Sales
20X2
$36,200
20X3
$37,140
20X4
$38,120
20X5
$38,450
20X6
$41,190
20X7
$43,220
20X8
$42,850
Which method do you think provides the most realistic sales projections for 20X9? Why?
Submit your Excel spreadsheet with its formulas to the Week 2 Homework page.
ACCT556 Budgeting
Week 3 HOMEWORK
Problem Demonstration
Production Budgets
Production budgets are the heart and soul of budgeting for a manufacturing firm. How much should the company produce? What level of raw materials should be purchased? How much labor will be needed? What training level is necessary for that labor? What capacity is needed?
These are some of the questions that will be addressed as the production budgets are developed.
To help you gain the necessary skills to complete the weekly problems, you will be provided with problem demonstrations for various budget types. This week, we will focus on methods used to prepare the production budgets.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!!
Production Budgets (Links to an external site.)
Transcript
Scenario: Production, Purchase, and Labor Budgets
The Mullins Company finished their sales projections for the coming year. The company produces one product. Part of next year’s sales projections are as follows.
Projected Sales in Units
July
150,000
August
170,000
September
164,000
October
180,000
November
205,000
The budget committee has also completed the following information on inventories.
Raw Materials
Ending Balance, June, 25,000 lbs
Desired ending levels (monthly 5% of next month’s production needs)
Work-In-Progress
None
Finished Goods Inventory
Ending Balance, June, 14,000 units
Desired ending levels: 15% of next month’s sales
The Engineering Department has developed the following standards upon which the production budgets will be developed.
Item
Standard
Material usage
4 pounds per unit
Material price per pound
$1.80 per pound
Labor usage
0.4 hours per unit
Labor rate
$35 per hour
Machine hours
3 machine hours per unit
The Mullins Company uses a modified allocation method for allocating overhead costs. The rates that will be used in the coming year are as follows.
Overhead Item
Allocation Rate
Utilities
$0.60 per machine hour
Inspection
$11 per unit produced
Factory supplies
$3 per unit produced
Depreciation
$40,000 per month
Supervision
$15,000 per month
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Prepare the following production budgets for July, August, and September for the Mullins Company.
Production Budget
Materials Purchases Budget
Direct Labor Budget
Overhead Budget
Manufactured Budget (for the quarter, quarter totals only)
Submit your Excel spreadsheet with its formulas to the Week 3 Homework page.
ACCT556 Budgeting
Week 4 HOMEWORK
Problem Demonstration
Net Present Value and Internal Rate of Return
This presentation reviews two concepts, net present value (NPV) and internal rate of return (IRR). It will demonstrate how to use these concepts to determine the time value of money and whether or not to accept a project.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!!
Net Present Value and Internal Rate of Return (Links to an external site.)
Transcript
Scenario: Capital Budget Problems
Read each problem below and then answer the following questions.
Problem 1
The Gabriel Co. is considering a 7-year project that would require a cash outlay of $140,000 for machinery and an additional $30,000 for working capital that would be released at the end of the project. The equipment would be depreciated evenly over the 7 years and have a salvage value of $ 7,000 at the end of 7 years. The project would generate before tax annual cash inflows of $41,500. The tax rate is 20% and the company’s discount rate is 12%.
Homework Questions for Problem 1
What is the annual accounting income?
What is the annual after-tax cash flow?
What is the payback based upon the initial cash outflows?
What is the discounted payback based upon the initial cash outflows?
What is the simple rate of return based upon the initial cash outflows?
What is the net present value?
What is the internal rate of return?
Would you recommend this project or not? Why?
Problem 2
Joey’s Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking Joey’s Favorite Bread. The oven and equipment would cost $150,000 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value.
The following additional information is available.
Joey estimates that the purchase of the oven and equipment would allow the pizza parlor and restaurant to bake and sell 90,000 loaves of crazy bread each year. The sells for $1.85 per loaf.
The cost of the ingredients in a loaf of bread is 45% of the selling price. Joey estimates that other costs each year associated with the bread would be as follows: salaries, $22,000; utilities, $10,000; and insurance, $4,000.
The pizza parlor will use the straight-line depreciation on all assets, deducting salvage value from original cost.
Homework Questions for Problem 2
Prepare a contribution format income statement showing the net operating income each year from production and sale of Joey’s Favorite Bread.
Compute the simple rate of return for the new oven and equipment. If a simple rate of return above 12% is acceptable to Joey, will he purchase the oven and equipment?
Compute the payback period on the oven and equipment. If Joey purchases any equipment with less than a 6-year payback, will he purchase this equipment?
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas. Also, you may use Word for submitting your answers to questions this week.
Submit your Word document to the Week 4 Homework page.
ACCT556 Budgeting
Week 5 HOMEWORK
Problem Demonstration
Pro Forma Income Statement and Balance Sheet Cash is king! Although this is often an overused statement, it is definitely true that a business cannot function effectively without strong cash inflows. The cash budget helps managers spot problem areas involving cash flow throughout the year. It also allows these managers to develop proactive solutions.
To help you gain the necessary skills to complete this week’s problem, you have been provided with a problem demonstration dealing with the cash budget.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Transcript
Scenario: Cash Budget
The McClain Corp. is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $ 75,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Because McClain Corp has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company to prepare a cash budget for the third quarter.
The following data has been gathered by the staff.
On July 1, 20X9, the beginning of the third quarter, the company will have a cash balance of $ 51,000.
Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account).
Month
Amount in Dollars ($)
May (actual)
410,000
June (actual)
380,000
July (budgeted)
440,000
August (budgeted)
470,000
September (budgeted)
420,000
Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following the sale, and 2% in the second month following the sale. The remainder is uncollectible.
Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below
July
August
September
Purchases (Merchandise)
$180,000
$175,000
$165,000
Salaries
$85,000
$85,000
$75,000
Advertising
$100,000
$110,000
$120,000
Rent Payments
$35,000
$35,000
$35,000
Depreciation
$45,000
$45,000
$45,000
Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $165,000.
The company will purchase equipment for the month of July, which is expected to cost $20,000, and it will be paid during the month of July.
In preparing the cash budget, assume that the $75,000 loan will be made in July and repaid in September. Interest on the loan will be $3,500.
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Prepare a schedule of expected cash receipts (collections) for July, August, and September and for the quarter in total.
Prepare a cash budget, by month and in total, for third quarter (July through September).
If the company needs a minimum cash balance of $25,000 to start each month, can the loan be repaid as planned? Please explain.
Submit your Excel spreadsheet with its formulas to the Week 5 Homework page.
ACCT556 Budgeting
Week 6 HOMEWORK
Problem Demonstration
Make sure to watch both problem demonstrations this week.
Pro Forma Income Statement
The pro forma income statement uses the sales budget, as well as all of the operating budgets, to develop the numbers that are needed to complete this important statement.
To help you gain the necessary skills to complete this week’s problem, you have been provided with a problem demonstration related to the preparation of the Pro Forma Income Statement.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Pro Forma Income Statements (Links to an external site.)
Transcript
Pro Forma Balance Sheet
The pro forma balance sheet is probably the most difficult budget statement to complete. If you break the development of this statement down into small parts, it is not quite as overwhelming a task as it first appears to be.
To help you gain the necessary skills to complete this week’s problems, you have been provided with a problem demonstration involving the development of a pro forma balance sheet.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Pro Forma Balance Sheet (Links to an external site.)
Transcript
Scenario: Pro Forma Statements
The Dawson Company has just completed a number of budgets for the coming year. The cost of goods manufactured schedule, the pro forma income statement, and the balance sheet still have to be completed.
The following information is available as 12/31/X8.
Prior Year Balance Sheet
Assets
Cash
$45,000
Accounts Receivable
$55,000
Materials Inventory
$40,000
Work-in-Process Inventory
$30,000
Finished Goods Inventory
$36,000
Prepaid Expenses
$20,000
Plant and Equipment
$500,000
Accumulated Depreciation
($140,000)
Other Assets
$22,000
Total Assets
$608,000
Liabilities and Equity
Accounts Payable
$103,000
Other Current Liabilities
$42,000
Income Taxes Payable
$25,000
Long-Term Debt
$300,000
Total Liabilities
$470,000
Common Stock
$100,000
Retained Earnings
$38,000
Total Equity
$138,000
Total Liabilities and Equity
$608,000
Information From Recent Budgets for the Coming Year
Projected sales are $2,080,000 (13,000 units).
Projected direct materials purchases are $525,000.
Projected direct materials usage is $510,000.
Projected direct labor expense is $420,000.
Projected overhead is $390,000.
Projected selling expenses are $130,000.
Projected administrative expenses are $310,000.
Projected cash collections are $1,805,000.
Projected payments for materials (accounts payable) are $550,000.
Projected payments for other operating expenses (other current liabilities) are $1,155,000.
Projected depreciation expense is $60,000 and is already included in manufacturing overhead.
Additional Information That Is Available
The expected tax rate is 20%.
The company is planning a stock issue of $50,000.
Income taxes are paid 3 months after year-end.
The company anticipates purchasing a new patent for $20,000 during the year.
Work-in-Process Inventory is expected to decrease by $2,500.
Finished Goods Inventory is expected to increase by $9,000.
Due to insurance rate increases, it is expected that prepaid expenses will increase by $5,000.
Investment Information
A purchase of additional equipment for $80,000 is expected on January 2, 20X9.
The purchase will be made using $50,000 cash and long-term debt will be increased by $30,000.
Long-Term Debt Information
All long-term debt will have a 9% annual rate.
A payment of $50,000 including both principal and interest will be made on December 31, 20X9.
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas. Also, you may use Word for submitting your answers to questions this week.
Prepare a cost of goods manufactured schedule, a pro forma income statement, and pro forma balance sheet.
ACCT556 Budgeting
Week 7 HOMEWORK
Problem Demonstration
Does the City Project Meet the Pareto Efficiency Criterion?
Stanley Ryan, Your Supervisor
Read the following scenario and then answer the Problem Demonstration Questions below.
The allocation of resources relates to both business and government. State, local, and federal governments could use the Pareto efficiency criterion to measure the effectiveness of the government’s reallocation of resources. A reallocation of resources is a potential Pareto improvement project if, and only if, the gains could potentially exceed the losses.
You and Stanley Ryan, your supervisor and accountant in your consulting firm, need to prepare a Pareto efficiency criterion for a city project. Use the available resources below to decide whether or not the project will produce desirable gains.
The City Public Works Project will cost $900,000 and will benefit five different sections of the city. The City Benefit and Cost Share per Section is listed in the table below.
Section
City Benefit ($)
Cost Share ($)
1
100,000
75,000
2
200,000
250,000
3
300,000
350,000
4
100,000
50,000
5
200,000
100,000
If the total projected benefits exceed the total project cost, then the project is economically feasible.
The project would meet the Pareto efficiency improvement criterion if the cost benefit for each section of the city exceeds the cost share. For example, Section 1 is met because the benefit of the section is greater than the cost share of $75,000. However, in Section 2, the City Project would not meet the Pareto criterion because the Cost Share exceeds the City Benefit. Thus, the City Project would be approved in a city-wide referendum by a majority vote, although only for Sections 1, 4, and 5, because Sections 2 and 3 do not meet the Pareto criterion.
Problem Demonstration Questions
Answer the following questions by typing your answer underneath the questions, and then click on View Answer. With a total benefit of $900,000 for the city, and a total project cost of $825,000.
Is this project economically feasible for the city?
View Answer
Does the project meet the Pareto efficiency improvement criterion?
View Answer
Would this project be approved by a majority at a city referendum?
View Answer
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