Exam 8: Profit Planning and Activity-Based Budgeting

The University of Ottawa(OU) is preparing its master budget for the upcoming academic year. Currently, 22,000 students are enrolled on campus; however, the admissions office is forecasting a 2% growth in the student body despite a tuition increase to $75 per credit hour. The following additional information has been gathered from an examination of university records and conversations with university officials: ▪ OU is planning to award 200 tuition-free scholarships. ▪ The average class has 50 students, and the typical student takes 10 credit hours each semester. ▪ Each class is two credit hours. ▪ Each faculty member teaches four classes during the academic year. Required: A. Compute the budgeted tuition revenue for the upcoming academic year. B. Determine the number of faculty members needed to cover classes. C. In preparing the university's master budget, should the administration begin with a forecast of students or a forecast of faculty members? Briefly explain.

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Question 1

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A. Total student body: 22,000 + (22,000 x 2%) = 22,440;
B. Each student generates 20 "enrollments" per year (10 credit hours x 2 semesters ÷ 2 credit hours per class). Thus, 448,800 "enrollments" (22,440 students x 20) must be covered.
C. The university should begin with a forecast of the number of students. While the number of faculty may be a key driver for a variety of expenditures, the number of faculty is highly dependent on the number of students. Students (and tuition revenue) are akin to sales-the starting point in the budgeting process.
Tuition-paying students: 22440 - 200 = 22,240.
Forecasted tuition revenue: 22,240 students x 20 credit hours x 75 = $33,660,000
Classes to be taught: 448,800 ÷ 50 students per class = 8,976 classes;
Faculty needed: 8,976 classes ÷ 4 classes per professor = 2,244 faculty

Clingy Company has budgeted the following unit sales for the first five months of 2012: January 14,000 February 12,000 March 11,000 April 16,000 May 13,000 Each unit requires 2 metres of fabric which is estimated to cost $3.50 per metre. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. Clingy Company also have a policy of maintaining a raw materials inventory at the end of each month equal to 10% of the metres needed for the following month's production. There were 1,200 metres of fabric on hand at March 1. Required: A. Prepare a production budget for Clingy Company for March. B. Prepare a direct materials budget for Clingy Company for March

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Question 2

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a.
$\begin{array}{l}\begin{array} { l r } \text { Expected unit sales } & 11,000 \\\text { Desired ending finished goods units } ( 20 \% \times 16,000 ) & \underline { 3,200 } \\\text { Total required units } & 14,200 \\\text { Less: Beginning finished goods units } ( 20 \% \times 11,000 ) & \underline { 12,200 } \\\text { Required production units } & \underline { \underline { 12,000 } }\end{array}\end{array}$ b.
$\begin{array}{l}\begin{array} { l r } \text { Units to be produced } & 12,000 \\\text { Direct materials per unit } & \underline{\times \quad 2} \\\text { Total metres needed for production } & 24,000 \\\text { Desired ending direct materials in metres* } & \underline{ 3,080 } \\\text { Total materials required } & { 27,080 }\\\text { Less: Beginning direct materials in metres } & \underline { 1,200 } \\\text { Direct materials purchases } & \underline { 25,880 } \\\text { Cost per metre } & \underline { \$ 3.50 } \\\text { Total cost of direct materials purchases }& \underline { \$ 90,580 }\end{array}\end{array}$ *10% x 2 metres x [16,000 April sales + (20% x 13,000 May sales) - (20% x 16,000 April sales)]

Miller Manufacturing has a cash balance of $8,000 on August 1 of the current year. The company's controller forecast the following cash receipts and cash disbursements for the upcoming two months of activity: Cash Receipts Cash Payments August \ 45,000 \5 7,000 September 66,000 56,000 Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary, additional financing can be obtained in $1,000 multiples at a 12% interest rate. All borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs at the end of the month. Interest is paid at the time of repaying loan principal and is computed on the portion of debt repaid. Required: A. Determine the ending cash balance in August both before and after any necessary financing or debt retirement. B. Repeat part "A" for September.

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Question 3

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A.
$\begin{array}{l}\begin{array}{lll} \text {Beginning cash balance}\\ \text {Add: Cash receipts}\\ \text {Subtotal}\\ \text {Less: Cash payments}\\ \text {Cash balance before financing/retirement}\\ \text { Financing}\\ \text {Borrowing to maintain minimum }\\ \text {Ending cash balance}\\\end{array}\begin{array}{lll}\$ 8,000 \\\underline{45,000}\\{\$ 53,000} \\\underline{(57,000)}\\{\$(4,000)}\\\\\underline{12,000}\\\underline{\$ 8,000}\\\end{array}\end{array}$

B.
$\begin{array}{l}\begin{array}{lll}\text {Beginning cash balance}\\\text {Add: Cash receipts}\\\text {Subtotal}\\\text {Less: Cash payments}\\\text {Cash balance before financing/retirement}\\\text {Financing:}\\\text {Principal repayment}\\\text {Interest payment }(\$ 12,000 \times 12 \% \times 2 / 12) \\\text {Ending cash balance}\\\end{array}\begin{array}{lll}\$ 8,000 \\\underline{\$ 66,000} \\\$ 74,000 \\\underline{56,000} \\\$ 18,000 \\\\(9,000) \\\underline{(240)}\\\underline{8,760}\end{array}\end{array}$

Generally speaking, budgets are not used to:

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Question 4

The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called:

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Question 5

Scream Corporation plans to sell 51,000 units of its single product in March. The company has 5,000 units in its March 1 finished-goods inventory and anticipates having 1,000 completed units in inventory on March 31. On the basis of this information, how many units does Scream plan to produce during March?

(Multiple Choice)

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Question 6

An organization's budgets will not often be prepared to cover:

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Question 7

A manufacturing firm would begin preparation of its master budget by constructing a:

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Question 8

The Grainger Company's budgeted income statement reflects the following amounts: Sales Purchases Expenses January \ 120,000 \ 78,000 \ 24,000 February 110,000 66,000 24,200 March 125,000 81,250 27,000 April 130,000 84,500 28,600 Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in the second month following sale. One percent of sales is uncollectible and expensed at the end of the year. Grainger pays for all purchases in the month following purchase and takes advantage of a 3% discount. The following balances are as of January 1: Cash $88,000; Accounts Receivable $58,000; Accounts Payable $72,000. Of the accounts receivable balance, $35,000 will be collected in January and the remaining amount will be collected in February. The monthly expense figures include $5,000 of depreciation. All expenses are paid in the month incurred. Grainger's expected cash balance at the end of January is:

(Multiple Choice)

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Question 9

Which of the following statements about financial planning models (FPMs) is false?

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Question 10

North Line Company manufactures a product requiring 0.5 ounces of platinum per unit. The cost of platinum is approximately $360 per ounce; the company maintains an ending platinum inventory equal to 10% of the following month's production usage. The following data were taken from the most recent quarterly production budget: July August September Planned production in units 1,000 1,100 980 The cost of platinum to be purchased to support August production is:

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Question 11

Discuss the importance of budgeting and identify five purposes of budgeting systems.

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Question 12

List several factors that an organization might consider when developing a sales forecast.

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Question 13

Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel. Which of the following statements is false?

(Multiple Choice)

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Question 14

When an organization involves its employees in the budgeting process in a meaningful way, the organization is said to be using an approach most commonly known as:

(Multiple Choice)

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Question 15

A budget serves as a benchmark against which:

(Multiple Choice)

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Question 16

Wilson Corporation budgets its equipment needs on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a:

(Multiple Choice)

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Question 17

Merrimaid plans to sell 1,100 units of a particular product during July, and expects sales to increase at the rate of 5% per month during the remainder of the year. The June 30 and September 30 ending inventories are anticipated to be 100 units and 50 units, respectively. On the basis of this information, how many units should Merrimaid purchase for the quarter ended September 30? Round to the nearest whole dollar.

(Multiple Choice)

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Question 18

The Grainger Company's budgeted income statement reflects the following amounts: Sales Purchases Expenses January \ 120,000 \ 78,000 \ 24,000 February 110,000 66,000 24,200 March 125,000 81,250 27,000 April 130,000 84,500 28,600 Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in the second month following sale. One percent of sales is uncollectible and expensed at the end of the year. Grainger pays for all purchases in the month following purchase and takes advantage of a 3% discount. The following balances are as of January 1: Cash $88,000; Accounts Receivable $58,000; Accounts Payable $72,000. Of the accounts receivable balance, $35,000 will be collected in January and the remaining amount will be collected in February. The monthly expense figures include $5,000 of depreciation. All expenses are paid in the month incurred. Grainger's budgeted cash receipts in February are:

(Multiple Choice)

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Question 19

Fast Track Company, which sells electronics in retail outlets and on the Internet, uses activity-based budgeting in the preparation of its selling, general, and administrative expense budget. Which of the following costs would the company likely classify as a unit-level expense on its budget?

(Multiple Choice)

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Question 20

Generally speaking, budgets are not used to:

The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called:

An organization's budgets will not often be prepared to cover:

A manufacturing firm would begin preparation of its master budget by constructing a:

Which of the following statements about financial planning models (FPMs) is false?

Discuss the importance of budgeting and identify five purposes of budgeting systems.

List several factors that an organization might consider when developing a sales forecast.

Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel. Which of the following statements is false?

When an organization involves its employees in the budgeting process in a meaningful way, the organization is said to be using an approach most commonly known as:

A budget serves as a benchmark against which:

Wilson Corporation budgets its equipment needs on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a:

Fast Track Company, which sells electronics in retail outlets and on the Internet, uses activity-based budgeting in the preparation of its selling, general, and administrative expense budget. Which of the following costs would the company likely classify as a unit-level expense on its budget?

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Capital Expenditure Decisions

Allocation of Support Activity Costs and Joint Costs

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