Concept explainers
Problem 7-16A Behavioral impact of budgeting
Amherst Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net income. The following is Atlantic Division’s current year’s performance:
Current Year | |
Sales revenue | $1,000,000 |
Cost of goods sold | 625,000 |
Gross profit | 375,000 |
Selling & admin. expenses | 225,000 |
Net income | $ 150,000 |
The president has just received next year’s budget proposal from the vice president in charge of Atlantic Division. The proposal budgets a 5 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. Atlantic has enjoyed revenue growth of around 10 percent for each of the past five years. The president had consistently approved the division’s budget proposals based on 5 percent growth in the past. This time, the president wants to show that he is not a fool. “I will impose a 15 percent revenue increase to teach them a lesson!” the president says to himself smugly.
Assume that cost of goods sold and selling and administrative expenses remain stable in proportion to sales.
Required
- a. Prepare the
budgeted income statement based on Atlantic Division’s proposal of a 5 percent increase. - b. If growth is actually 10 percent as usual, how much bonus would Atlantic Division’s executive officers receive if the president had approved the division’s proposal?
- c. Prepare the budgeted income statement based on the 15 percent increase the president imposed.
- d. If the actual results turn out to be a 10 percent increase as usual, how much bonus would Atlantic Division’s executive officers receive since the president imposed a 15 percent increase?
- e. Propose a better budgeting procedure for Amherst Corporation.
Want to see the full answer?
Check out a sample textbook solutionChapter 14 Solutions
Survey Of Accounting
- Question 4: Dhofar Company manufactures two products M1 and Z1. Its sales department has three divisions: Salalah, Raysut and Mirbat. Initial estimates for the sales budgets for the year ending 31 December 2021 which are based on the assessments of the divisional executives are as follows; Product M1 : Salalah 45,000 units: Raysut 110,000 units and Mirbat: 25,000 units Product Z1: Salalah 70,000 units: Raysut 82,000 units and Mirbat:0 Sales Prices: M1: 3 OMR and Z1= 4 OMR in all areas. Arrangements are made for the extensive advertising of product M1 and Z1 and it is estimated that Salalah division sales will increase by 30,000 units. Arrangements are also made to advertise and distribute product z1 in the Mirbat area in the second half of 2021 when sales are expected to be 100,000 units. Since the estimated sales of the Raysut division target, it is agreed to increase both the estimates by 15 %. esented an unsatisfactory Prepare a sales budget for the year to 31 December 2021.arrow_forwardQuestion 4:Dhofar Company manufactures two products M1 and Z1. Its sales department has three divisions: Salalah, Raysut and Mirbat. Initial estimates for the sales budgets for the year ending 31 December 2021 which are based on the assessments of the divisional executives are as follows; Product M1:Salalah 45,000 units: Raysut 110,000 units and Mirbat: 25,000 units Product Z1: Salalah 70,000 units: Raysut 82,000 units and Mirbat:0 Sales Prices: M1: 30MR and Z1= 4 OMR in all areas. Arrangements are made for the extensive advertising of product M1 and Z1 and it is estimated that Salalahdivision sales will increase by 30,000 units. Arrangements are also made to advertise and distribute product z1 in the Mirbatarea in the second half of 2021 when sales are expected to be 100,000 units. Since the estimated sales of the Raysut division represented an unsatisfactory target, it is agreed to increase both the estimates by 15 %. Prepare a sales budget for the year to 31 December 2021. (United…arrow_forwardQUESTION 4 You have been recently promoted to the divisional manager of Hadi Ltd (“the Company”), a company with 25 branches around the country. As a profit center, your division performance, is assessed by the head office on a monthly basis. The head office expects the controllable profit of your division to be at least 35% of sales. The following figures are related to your division for the month of June 2021: Direct materials £50,000 Direct labour £40,000 Variable overheads £30,000 Sales £200,000 Depreciation £14,000 Fixed overheads excluding depreciation £25,000 Head office cost allocation…arrow_forward
- Professional Fees Earned Budget for a Service Company Rollins and Cohen, CPAS, offer three types of services to clients: auditing, tax, and small business accounting. Based on experience and projected growth, the following billable hours have been estimated for the year ending December 31, 20Y7: Billable Hours Audit Department: Staff 45,000 Partners 6,800 Tax Department: Staff 34,200 Partners 4,300 Small Business Accounting Department: Staff 6,300 Partners 900 The average billing rate for staff is $120 per hour, and the average billing rate for partners is $240 per hour. Prepare a professional fees earned budget for Rollins and Cohen, CPAS, for the year ending December 31, 20Y7. ROLLINS AND COHEN, CPAS Professional Fees Earned Budget For the Year Ending December 31, 20Y7 Billable Hourly Total Hours Rate Revenue Audit Department: Staff Partners Total $4 Tax Department: Staff Partners Total Small Business Accounting Department: Staff Partners Total $ Total professional fees earned $arrow_forwardRelevant data from the Poster Company’s operating budgets are: Quarter 1 Quarter 2 Sales $208,480 $211,540 Direct material purchases 115,300 120,832 Direct labor 75,205 73,298 Manufacturing overhead 25,300 25,400 Selling and administrative expenses 33,400 33,500 Depreciation included in selling and administrative 1,500 900 Collections from customers 215,392 240,154 Cash payments for purchases 114,290 119,254 Additional data:Capital assets were sold in January for $10,000 and $4,400 in May.Dividends of $4,600 were paid in February. The beginning cash balance was $60,360 and a required minimum cash balance is $59,000. Use this information to prepare a cash budget for the first two quarters of the year: If an amount box does not require an entry, leave it blank. The Poster CompanyCash BudgetFor the First Two Quarters Quarter 1 Quarter 2 $Beginning Cash Balance $Beginning Cash Balance Add: Cash Receipts Collections from Customers…arrow_forwardQuestion 3 Relevant data from Picta Company’s operating budgets are presented below. The company’s financial year ends on 30 June. Quarter 1 Quarter 2 Sales $248,470 $251,539 Direct material purchases 120,295 128,832 Direct labor 76,553 74,289 Manufacturing overhead 26,000 24,400 Selling and administration expenses 33,500 33,500 Depreciation included in selling and administration expenses 2,000 2,500 Collection from customers 230,524 220,116 Cash payments for purchases 114,345 118,346 Additional data: Equipment was sold in July for $8,000 and $4,500 in November. Dividends of $5,500 were paid in August. The beginning cash balance was $80,395 and a required minimum cash balance per quarter is $60,000. The company has a 15% open line of credit for $70 000 with their bank.…arrow_forward
- Professional Fees Earned Budget Sadie & Chipper, CPAS, offer three types of services to clients: auditing, tax, and small business accounting. Based on experience and projected growth, the following billable hours have been estimated for the year ending March 31, 20Y6: Billable Hours Audit Department: Staff 25,000 Partners 5,000 Tax Department: Staff 37,500 Partners 8,000 Small Business Accounting Department: Staff 10,000 Partners 2,000 The average billing rate for staff is $180 per hour, and the average billing rate for partners is $400 per hour. Prepare a professional fees earned budget for Sadie & Chipper, CPAS, for the year ending March 31, 20Y6. SADIE & CHIPPER, CPAS Professional Fees Earned Budget For the Year Ending March 31, 20Y6 Billable Hours Hourly Rate Total Revenue Audit Department:arrow_forwardThe Culver Division operates as a profit center. It reports the following for the year ending December 31, 2022. Sales Variable costs Controllable fixed costs Noncontrollable fixed costs Budgeted $2,320,000 V 928,000 458,000 290,000 $ Actual tA $2,192,400 881,600 Prepare a responsibility report for the Culver Division at December 31, 2022. 458,000 290,000 Budget $ tA $ CULVER DIVISION Responsibility Report Actual $ LA Difi Fa Unfa Neithel nor Urarrow_forwardRelevant data from the Poster Company’s operating budgets are: Quarter 1 Quarter 2 Sales $208,470 $211,538 Direct material purchases 115,295 120,833 Direct labor 75,210 73,299 Manufacturing overhead 25,400 25,200 Selling and administrative expenses 33,500 33,600 Depreciation included in selling and administrative 1,500 1,100 Collections from customers 215,393 240,154 Cash payments for purchases 114,290 119,253 Additional data:Capital assets were sold in January for $9,000 and $4,400 in May.Dividends of $4,500 were paid in February. The beginning cash balance was $60,360 and a required minimum cash balance is $58,000. Use this information to prepare a cash budget for the first two quarters of the year: If an amount box does not require an entry, leave it blank. The Poster Company Cash Budget For the First Two Quarters Quarter 1 Quarter 2 $fill in the blank 2 $fill in the blank 3 Add: Cash Receipts fill in the blank 5 fill in the blank…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubSurvey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning