CHAPTER 21 BUDGETING CLASS DISCUSSION QUESTIONS The three major objectives of budgeting are (1) to establish specific goals for future operations, (2) to direct and coordinate plans to achieve the goals, and (3) to periodically compare actual results with the goals Managers are given authority and responsibility for responsibility center performance They are then accountable for the performance of the responsibility center If goals set by the budgets are viewed as unrealistic or unachievable, management 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 Involving all levels of management and all departments in preparing and submitting budget estimates heightens awareness of each department’s importance to company goals and to the control of operations It also encourages cooperation both within and among departments Budgeting more resources for travel than requested by department personnel is an example of budgetary slack 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 to act in their own self-interests to the detriment of the organization’s objectives Zero-based budgeting is used when an organization wishes to take a “clean slate” view of operations It is often used when the organization wants to cut costs by reevaluating the need for and usefulness of all operations 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 10 11 12 13 14 15 16 157 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 first step in preparing a master budget is estimating the sales levels of each product by regions or territories 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 Direct materials purchases budget, direct labor cost budget, and factory overhead cost budget 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 The schedule of collections from sales is used to determine the amount of cash collected from current and prior period sales, based on collection history The schedule is used to help determine the estimated cash receipts portion of the cash budget 17 The plans for financing the capital expenditures budget may affect the cash budget 158 EXERCISES Ex 21–1 a HAKIM DAVIS Cash Budget For the Four Months Ending December 31, 2006 September Estimated cash receipts from: Part-time job Deposit Total cash receipts 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 October November December $ 1,000 $1,000 $1,000 $ 1,000 $1,000 $1,000 $ 1,000 500 $ 1,500 $ 250 $ 250 $ 400 320 400 320 $ 970 $ 30 $ 970 $ 30 $ $ 2,100 $2,130 2,130 $2,160 2,160 $ 2,690 $ 180 250 3,250 400 320 500 $ 4,900 $(3,900) 6,000 $ 2,100 250 400 320 970 530 b The four-month budgets not change with any identified activity level; thus, they are static budgets c While Davis’s budget might first appear satisfactory, Davis must earn enough cash in order to pay for the spring semester tuition His present budget shows that he will be $560 short of the tuition amount ($3,250 – $2,690) Thus, Davis 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 so that the rental cost is cut in half The additional $200 per month would yield $800 by the end of December, which would be sufficient to cover the $560 spring tuition shortfall and provide a little extra Other considerations include increasing his part-time job hours and reducing his monthly entertainment and food allowance, or making up the income difference with additional hours during Christmas break The budget gives Davis time to adjust his plans to future events In this case, Davis can see that his present plan will not provide sufficient cash, thus giving him four months to adjust If Davis did not budget but went ahead with the original plan, he would be $560 short at the end of December with no time left to adjust 158 Ex 21–2 CENTRAL INDUSTRIAL SUPPLY Flexible Selling and Administrative Expenses Budget For the Month Ending May 31, 2006 Total sales $100,000 $115,000 $130,000 Variable cost: Sales commissions Advertising expense $ $ 5,750 17,250 $ 6,500 19,500 3,000 2,000 4,000 $ 29,000 3,450 2,300 4,600 $ 33,350 3,900 2,600 5,200 $ 37,700 $ $ $ 2,000 10,000 1,500 $ 13,500 $ 51,200 Miscellaneous selling expense Office supplies expense Miscellaneous administrative expense Total variable cost Fixed cost: Miscellaneous selling expense Office salaries expense Miscellaneous administrative expense Total fixed cost Total selling and administrative expenses 159 5,000 15,000 2,000 10,000 1,500 $ 13,500 $ 42,500 2,000 10,000 1,500 $ 13,500 $ 46,850 Ex 21–3 a TOWERS COMPANY—MOLDING DEPARTMENT Flexible Production Budget For the Three Months Ending March 31, 2006 January February March Units of production 55,000 50,000 45,000 Wages Utilities Depreciation Total $594,000 99,000 70,000 $763,000 $540,000 90,000 70,000 $700,000 $486,000 81,000 70,000 $637,000 Units of production Hours per unit Total hours of production Wages per hour Total wages January March 55,000 × 0.60 33,000 × $18.00 $594,000 50,000 × 0.60 30,000 × $18.00 $540,000 45,000 × 0.60 27,000 × $18.00 $486,000 Total hours of production Utility cost per hour Total utilities 33,000 × $3.00 $ 99,000 30,000 × $3.00 $ 90,000 27,000 × $3.00 $ 81,000 Supporting calculations: 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 Total flexible budget Actual cost Excess of actual cost over budget January $763,000 775,000 $ (12,000) February $700,000 720,000 $ (20,000) March $637,000 665,000 $ (28,000) The excess of actual cost over the flexible budget suggests that the Molding Department has not performed as well as originally thought Indeed, the department is spending more than would be expected, and it's getting worse, given the level of production for the first three months 160 Ex 21–3 Continued This solution is applicable only if the P.A.S.S Software that accompanies the text is used TOWERS COMPANY Budget Report For the Period Ended January 31, 2006 Budget Actual Difference from Budget % $825,000 $810,000 $(15,000) (1.82) Operating expenses: January wages $594,000 $565,000 January utilities 99,000 135,000 January depreciation 70,000 75,000 Total operating expenses$763,000$775,000 $ Net income (loss) $ 62,000 $ 35,000 $(29,000) 36,000 5,000 12,000 $(27,000) (4.88) 36.36 7.14 1.57 (43.55) Operating revenue TOWERS COMPANY Budget Report For the Period Ended February 28, 2006 Difference from Budget Budget Actual $850,000 $820,000 $(30,000) (3.53) Operating expenses: February wages $540,000 $489,000 February utilities 90,000 156,000 February depreciation 70,000 75,000 Total operating expenses$700,000$720,000 $ Net income (loss) $150,000 $100,000 $(51,000) 66,000 5,000 20,000 $(50,000) (9.44) 73.33 7.14 2.86 (33.33) Operating revenue 161 % Ex 21–3 Concluded TOWERS COMPANY Budget Report For the Period Ended March 31, 2006 Difference from Budget Budget Actual $800,000 $750,000 $(50,000) (6.25) Operating expenses: March wages $486,000 $495,000 March utilities 81,000 95,000 March depreciation 70,000 75,000 Total operating expenses$637,000$665,000 $ Net income (loss) $163,000 $ 85,000 $ 9,000 14,000 5,000 28,000 $(78,000) 1.85 17.28 7.14 4.40 (47.85) Operating revenue % Ex 21–4 STEELCASE CORPORATION Fabrication Department May 2006 (assumed data) Units of production Variable cost: Direct labor Direct materials Total variable cost Fixed cost: Supervisor salaries Depreciation Total fixed cost Total department cost 15,000 $ $ $ $ 17,500 20,000 84,0001 900,0004 984,000 $ 98,0002 1,050,0005 $ 1,148,000 $ 125,000 30,000 155,000 $ $ $ 1,139,000 15,000 × 24/60 × $14 17,500 × 24/60 × $14 20,000 × 24/60 × $14 15,000 × 40 × $1.50 17,500 × 40 × $1.50 20,000 × 40 × $1.50 162 $ 125,000 30,000 155,000 $ 1,303,000 112,0003 1,200,0006 $ 1,312,000 $ 125,000 30,000 155,000 $ 1,467,000 Ex 21–5 a HARMONY AUDIO COMPANY Sales Budget For the Month Ending September 30, 2007 Unit Sales Volume Unit Selling Price Model DL: East Region West Region Total 4,200 3,150 7,350 $125 125 $ 525,000 393,750 $ 918,750 Model XL: East Region West Region Total 3,000 2,200 5,200 $180 180 $ 540,000 396,000 $ 936,000 Product and Area Total revenue from sales Total Sales $ 1,854,750 b HARMONY AUDIO COMPANY Production Budget For the Month Ending September 30, 2007 Expected units to be sold Plus desired inventory, September 30, 2007 Total Less estimated inventory, September 1, 2007 Total units to be produced 163 Model DL 7,350 410 7,760 350 7,410 Units Model XL 5,200 100 5,300 120 5,180 Ex 21–6 JEFFRIES AND VALDEZ, CPAs Professional Fees Budget For the Year Ending December 31, 2006 Audit Department: Staff Partners Total Tax Department: Staff Partners Total Computer Consulting Department: Staff Partners Total Total professional fees Billable Hours Hourly Rate Total Revenue 32,500 4,800 37,300 $110 $250 $ 3,575,000 1,200,000 $ 4,775,000 28,700 3,950 32,650 $110 $250 $ 3,157,000 987,500 $ 4,144,500 24,600 5,700 30,300 $110 $250 $ 2,706,000 1,425,000 $ 4,131,000 $ 13,050,500 Ex 21–7 JEFFRIES AND VALDEZ, CPAs Professional Labor Cost Budget For the Year Ending December 31, 2006 Audit Department Tax Department Computer Consulting Department Total Average compensation per hour Total labor cost 164 Billable Hours Required Staff Partners 32,500 4,800 28,700 3,950 24,600 5,700 85,800 14,450 × $50.00 × $150.00 $4,290,000 $ 2,167,500 Ex 21–8 TASTE OF ITALY FROZEN PIZZA INC Direct Materials Purchases Budget For the Month Ending August 31, 2006 Dough Units required for production: 12" pizza 16" pizza Plus desired inventory, August 31, 2006 Total Less estimated inventory, August 1, 2006 Total units to be purchased Unit price Total direct materials to be purchased Tomato Cheese 18,2001 36,9004 9,1002 19,6805 12,7403 27,0606 450 55,550 240 29,020 350 40,150 600 54,950 × $1.40 180 28,840 × $2.20 480 39,670 × $2.60 $ 76,930 $ 63,448 $103,142 18,200 × lb 18,200 × 0.50 lb 18,200 × 0.70 lb 24,600 × 1.50 lbs 24,600 × 0.80 lb 24,600 × 1.10 lbs 165 Total $243,520 Prob 21–3B Continued PRECIOUS MEMORIES FILM COMPANY Cost of Goods Sold Budget For the Month Ending October 31, 2006 Finished goods inventory, October 1, 2006 $ 300,0001 Work in process, October 1, 2006 $ 28,500 Direct materials: Direct materials inventory, October 1, 2006 $ 25,8602 Direct materials purchases 1,356,814 Cost of direct materials available for use $ 1,382,674 Less direct materials inventory, October 31, 2006 26,4203 Cost of direct materials placed in production $ 1,356,254 Direct labor 543,510 Factory overhead 809,400 Total manufacturing costs 2,709,164 Total work in process during period $2,737,664 Less work in process, October 31, 2006 34,200 Cost of goods manufactured 2,703,464 Cost of finished goods available for sale $ 3,003,464 Less finished goods inventory, October 31, 2006 293,5004 Cost of goods sold $ 2,709,964 Instant Image (4,800 × $35) Pro Image (2,400 × $55) Finished goods inventory, October 1, 2006 $ 168,000 132,000 $ 300,000 Celluloid (2,700 × $1.80) Silver (3,000 × $7.00) Direct materials inventory, October 1, 2006 $ Celluloid (3,400 × $1.80) Silver (2,900 × $7.00) Direct materials inventory, October 31, 2006 $ Instant Image (5,400 × $35) Pro Image (1,900 × $55) Finished goods inventory, October 31, 2006 $ 189,000 104,500 $ 293,500 198 4,860 21,000 $ 25,860 6,120 20,300 $ 26,420 Prob 21–3B Concluded PRECIOUS MEMORIES FILM COMPANY Selling and Administrative Expenses Budget For the Month Ending October 31, 2006 Selling expenses: Sales salaries expense Advertising expense Telephone expense—selling Travel expense—selling Total selling expenses Administrative expenses: Office salaries expense Depreciation expense—office equipment Telephone expense—administrative Office supplies expense Miscellaneous administrative expense Total administrative expenses Total operating expenses $685,000 146,500 5,000 38,500 $ 875,000 $224,800 5,300 1,900 3,000 4,200 239,200 $ 1,114,200 PRECIOUS MEMORIES FILM COMPANY Budgeted Income Statement For the Month Ending October 31, 2006 Revenue from sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other income: Interest revenue Other expenses: Interest expense Income before income tax Income tax expense Net income 199 $5,341,500 2,709,964 $2,631,536 $875,000 239,200 1,114,200 $ 1,517,336 $ 18,900 12,300 6,600 $ 1,523,936 609,574 $ 914,362 Prob 21–4B FROZEN DELIGHT ICE CREAM COMPANY Cash Budget For the Three Months Ending October 31, 2006 Estimated cash receipts from: Cash sales Collection of accounts receivablea Dividends Total cash receipts Estimated cash payments for: Manufacturing costsb Selling and administrative expenses Capital expenditures Other purposes: Note payable (including interest) Income tax Dividends Total cash payments Cash increase or (decrease) (162,400) Cash balance at beginning of month Cash balance at end of month Minimum cash balance Excess or (deficiency) Computations: a Collections of accounts receivable: June sales July sales August sales September sales Total $500,000 × 60% = $300,000 $500,000 × 40% = $200,000 $610,000 × 90% × 60% = $329,400 $610,000 × 90% × 40% = $219,600 $700 × 90% × 60% = $378,000 200 August September October $ 61,000 480,000 1,500 $542,500 $ 70,000 529,400 $ $599,400 $ 680,100 $292,000 180,000 $314,000 210,000 $ 360,000 225,000 140,000 82,500 597,600 102,500 42,000 $472,000 $ 70,500 $566,000 $ 33,400 15,000 $ 842,500 $ 55,000 $125,500 45,000 $ 80,500 125,500 $158,900 45,000 $113,900 158,900 $ (3,500) 45,000 $ (48,500) August September $180,000 300,0001 $200,0002 329,4003 $480,000 $529,400 $ 219,6004 378,0005 $ 597,600 Prob 21–4B Concluded Computation (concluded) b Payments for manufacturing costs: August September Payment of accounts payable, beginning of month balance $ 60,000 $ 58,000** Payment of current month's cost 232,000* 256,000 Total $292,000 $314,000 *($320,000 – $30,000) × 80% = $232,000 **($320,000 – $30,000) × 20% = $58,000 October $ 64,000 296,000 $360,000 The budget indicates that the minimum cash balance will not be maintained in October This is due to the capital expenditures and note repayment 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 August and September, the cash balance will exceed the minimum desired balance, and the excess could be considered for temporary investment 201 Prob 21–5B SIGNATURE PEN COMPANY Budgeted Income Statement For the Year Ending December 31, 2007 Sales Cost of goods sold: Direct materials Direct labor Factory overhead Cost of goods sold Gross profit Operating expenses: Selling expenses: Sales salaries and commissions $130,0005 Advertising 60,000 Miscellaneous selling expense 28,3006 Total selling expenses Administrative expenses: Office and officers salaries $ 95,1007 Supplies 14,0008 Miscellaneous administrative expense 19,0009 Total administrative expenses Total operating expenses Income before income tax Income tax expense Net income 200,000 units × $4.50 200,000 units × $0.90 200,000 units × $0.35 (200,000 units × $0.25) + $42,000 + $8,000 (200,000 units × $0.40) + $50,000 (200,000 units × $0.12) + $4,300 (200,000 units × $0.15) + $65,100 (200,000 units × $0.05) + $4,000 (200,000 units × $0.08) + $3,000 202 $900,0001 $180,0002 70,0003 100,0004 350,000 $550,000 $218,300 128,100 346,400 $203,600 85,000 $118,600 Prob 21–5B Continued SIGNATURE PEN COMPANY Budgeted Balance Sheet December 31, 2007 Assets Current assets: Cash Accounts receivable Inventories: Finished goods Work in process Materials Prepaid expenses Total current assets Property, plant, and equipment: Plant and equipment Less accumulated depreciation Total assets $147,6001 104,700 $74,800 25,600 46,700 147,100 2,400 $ 401,800 $390,0002 177,2003 Liabilities Current liabilities: Accounts payable Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 212,800 $ 614,600 $ 59,000 $200,000 355,6004 555,600 $614,600 Cash balance, December 31, 2007: Balance, January 1, 2007 Cash from operations: Net income Depreciation of plant and equipment Less: Dividends to be paid 2007 Plant and equipment to be acquired in 2007 Balance, December 31, 2007 $340,000 + $50,000 = $390,000 $135,000 + $42,000 = $177,200 203 $ 85,000 $118,600 42,000 $ 48,000 50,000 160,600 (98,000) $147,600 Prob 21–5B Concluded Retained earnings balance, December 31, 2007: Balance, January 1, 2007 Plus net income for 2007 Less dividends to be declared in 2007 Balance, December 31, 2007 204 $285,000 118,600 $403,600 48,000 $355,600 SPECIAL ACTIVITIES Activity 21–1 Isaiah should reject Callie’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 Allowing Callie to slide expenditures into chosen periods will open a Pandora’s box that will be difficult to close in the future Isaiah should reassure Callie 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 Activity 21–2 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 patientdays 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 the “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 205 Activity 21–3 a The budget information indicates that the actual expenditures by the Operations Department exceeded what was planned by $7,000 The bank manager may ask the operations manager why the travel and training expenditures exceeded the plan by a total of $15,000 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 $7,000 excess expenditure over budget raises several questions If the department did twice as much work as planned, then the $7,000 is a bargain If, on the other hand, the department did much less work than planned, then the $7,000 understates how poorly the department used resources Again, how much work the department actually did is unknown, so these questions cannot be answered 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 206 Activity 21–4 Dominos 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 budget 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 and thus, vehicle depreciation and maintenance costs are not part of Dominos’ 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 207 Activity 21–5 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 yearend 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 208 Activity 21–6 The budget suggests that Ted’s planned cash inflows will be insufficient to meet anticipated school-related and living costs Ted needs to begin making plans now in order to avoid a difficult situation as the school year progresses Some decisions can be made now that might avoid a potential hardship The budget information is useful for planning Planning will allow Ted to make more informed decisions about incurring expenses, part-time job hours required, acceptable summer pay, rental constraints, and scholarship needs To summarize, the budget is a planning tool that highlights potential problem areas and indicates possible courses of action to avoid the shortfall a The issue of certainty is an important one Each line on the budget has a dollar amount However, some dollars are more certain than others The following table summarizes the relative certainty of each of the items: Certain Part-time salary Summer job salary Tuition Books Rent Food Utilities Entertainment Moderate Uncertain X X X X X X X X Unfortunately, all the payments are certain, or moderately certain, while the receipts are uncertain The income from the summer and part-time jobs is dependent on getting jobs and being able to hold the jobs during school The expenses, however, are relatively certain The school-related costs and the costs of food and shelter must be paid This means that the budget may be a “best case scenario.” If the salaries not happen as anticipated, then the whole plan will need to be readjusted 209 Activity 21–6 b Concluded Controllable (discretionary) items are ones that Ted has some control over and that he could change Noncontrollable items are those that Ted has little control over These payments will be incurred regardless of actions on his part The following table summarizes the controllable nature of the expenses: Controllable Tuition Books Rent Food Utilities Entertainment Partially Controllable Not Controllable X X X X X X Tuition is not controllable, once it is decided that school is part of the plan Adjustments should focus on the partially controllable and controllable items in the budget Reference to 2(b) gives clues as to where the leverage points are The book budget could be reduced by buying used books or reselling books back to the bookstore Rent could be adjusted downward The budgeted rent is approximately $290 per month This is not high, but there may be possibilities with respect to campus housing or finding a roommate to share the rent that may allow this figure to be reduced The food budget is assumed to be required, but it is partially controllable by selecting lower-cost items Ted must eat Utilities are budgeted at $67 per month Utilities can be reduced by judicious use of power, fewer long distance phone calls, basic or no cable TV, splitting utilities with a roommate, etc The entertainment budget is the most controllable The weekly budget calls for approximately $75 in entertainment This is a pretty healthy amount A good area for savings is in the entertainment area of the budget The budget fails to account for the possibility of unforeseen expenditures during the year The budget should have some slack to guard against surprise payments Some common sources of surprises would be medical expenses and repair costs Naturally, there are good surprises also, e.g., a gift from parents or a scholarship A second omission in the budget is a failure to account for “asset” purchases This budget is only for maintenance There is no budget for clothes, transportation, loan payments, savings, or other cash outflows associated with the longer-term concerns of life 210 Activity 21–7 Most states have home pages and budget information available online The budget information will usually be fairly easy to identify If the students are unable to find budget information for their own state, the solution to the activity for Ohio for 2002 and 2003 is as follows (The students should be using more recent information; so this is only a guide.) Total GRF—Estimated Revenues for FYS Figure B–1 Total GRF—Estimated Revenues for FYs 2002 and 2003 Federal Welfare Reimbursement 19.7% Sales and Use Taxes 28.7% Corporate Franchise Taxes 4.8% Public Utility/Kw-Hour Taxes 2.6% Other Taxes 3.7% Other Revenues 1.9% Individual Income Taxes 38.5% This pie chart shows the proportional contribution that each revenue source makes toward the state’s General Revenue Fund (GRF) All revenues coming into the state treasury that are not specifically authorized by law to be placed in a separate fund are deposited in the GRF 211 Activity 21–7 Concluded Total GRF—Recommended Appropriations for FYs 2002 and 2003 Higher & Other Education 12.2% Medicaid 32.5% Other Health & Human Services 9.7% Primary & Secondary Education 26.8% Public Safety and Protection 7.9% General Government & Tax Relief 7.0% Executive, Legislative & Judicial 1.5% Environment & Natural Resources 0.7% Transportation & Development 1.7% This pie chart shows the share of the state's General Revenue Fund (GRF) that is used for each major function of state government The GRF is the state's largest single fund and it finances about one-half of all state government activities Ohio’s budget has slightly more planned expenditures than revenues, but is materially in balance 212 ... 169 Ex 21 13 a Levi Strauss & Co Production Budget March 2006 (assumed data) Dockers® 501 Jeans® 21, 600 250 (300) 21, 550 43,400 100 (140) 43,360 Expected units to be sold Plus: March 31 desired... direct labor cost $ 15,465.45 $ 19,030.77 $ 9,850.36 $8,438.30 * (21, 550/10 pairs) × (21, 550/10 pairs) × (21, 550/10 pairs) × (21, 550/10 pairs) × 15 20 min = = = = 32,325 minutes 43,100 minutes... 90% = $382,500 174 March April May $ 40,000 $ 48,000 $ 42,500 216 ,000 108,000 36,000 259,200 129,600 229,500 $256,000 $415,200 $437,600 Ex 21 18 Star Office Supplies Inc Schedule of Collections