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# Budgeting/variance/capital budgeting

14.18 Sales, Production, purchases, and cash budgets Rolen, Inc., is in the process of preparing the fourth quarter budget for 2010, and the following data have been assembled:

The company sells a single product at a price of \$25 per unit. The estimated sales volume for the next six months is as follows:

September .................. 13,000 units
October .................. 12,000 units
November .................. 14,000 units
December .................. 20,000 units
January .................. 9,000 units
February .................. 10,000 units

? All sales are on account. The company's collection experience has been that 30% of a moth's sales are collected in the month of sale, 68% are collected in the month following the sale, and 2% are uncollectible. It is expected that the next realizable value of accounts receivable (i.e., accounts receivable less allowance for uncollectible amounts) will be \$211,000 on September 30, 2010.
? Management's policy is to maintain ending finished goods inventory each month at a level equal to 30% of the next month's budgeted sales. The finished goods inventory on September 30, 2010, is expected to be 3,600 units.
? To make one unit of finished product, 5 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 40% of the next month's estimated usage. The raw materials inventory is expected to be 25,200 pounds on September 30, 2010.
? The cost per pound of raw materials is \$2, and 70% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be \$37,980 on September 30, 2010.

Required:

a. Prepare a sales budget in units, and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2010.
b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2010.
c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2010.
d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter 2010.
e. Prepare a schedule of cash payment for materials, by month and in total, for the fourth quarter of 2010.

15.14 Calculate variable cost variances-explain result The standards for one case liquid weed killer are:

Direct Materials .................. 3lbs. @ \$6.00/lb.
Direct labor .................. 1.8 hrs. @ \$12.00/hr.
(based on machine hours) .................. 0.6 hr.@ \$3.50/hr.

During the week ended August 6, the following activity took place:
2,390 machine hours worked.
11,400 lbs. of raw material were purchased for inventory at a total cost of \$70,680.
3,800 cases of finished product were produced.
11,290 lbs. of raw material were used.
6,720 labor hours were worked at an average rate of \$12.25 per hour.
\$8,126 actual variable overhead costs were incurred.

Required:

Calculate each of the following variance and provide plausible explanations for the results:
a. Price variance for raw materials purchased.
b. Raw materials usage variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.

16.30 Accounting rate of return, payable, and NPV Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a \$50,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of \$10,000. The machine was expected to increase net income (and cash flows) before depreciation expense by \$15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a payback period of three years or less.

Required:

a. Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain your answer.
b. Calculate the payback period for this investment. Based on this analysis, would the investment be made? Explain your answer.
c. Calculate the net present value of this investment using a cost of capital of 16%. Based on this analysis, would the investment be made? Explain your answer.
d. What recommendation would you make to the management of Busy Beaver Corp. about evaluating capital expenditure proposals? Support your recommendation with the appropriate rationale.

#### Solution Summary

The solution explains some questions relating to budgets, variances and capital budgeting decisions

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