Develop a 2013 budget for Ace Manufacturing Company. Deliver the budget in spreadsheet format.Please include justifications for your budgetary decisions. The justifications should be written
somewhere on the spreadsheet. Below is a very rough outline of the company. Use this as the basis for
your assumptions about the company and the resulting 2012 budget. You may add detail as you require
to complete the budget. For example yearly sales, unit sales, sales mix, employee salaries, costs of the
land and building to maintain, product development costs, testing costs, costs to suppliers, shipping and
freight costs for incoming material and outgoing products.
Company background:
Ace develops and manufacturers garden carts for the home user. Ace has 3 products in production and
one in development. Ace development, manufacturing and administration is all located in one building
that is 40,000 sq. ft. in size.
Product A has 80% material cost and 20% labor and overhead. Product B is 75-25 and Product C 70-30.
Ace Mfg. sells to Ace Hardware Stores nationwide and sells directly to consumers by way of being an
Amazon supplier.
Ace employs 10 people total. President / VP of Operations, administrative assistant / office manager, VP
Finance & Controller, 1 R&D engineer, 1 manufacturing engineer, 2 production employees, 1 purchasing
/ material handling employee, 1 technical marketing / customer support and 2 salesman.
Product D is being developed in the lab with an introduction expected in June 2012. January through
June consumes material for prototypes, project material for analysis and testing resources.
Give your response to each situation.
1) You are working for Bridger Photonics in Bozeman, Mt. While in Tokyo, Japan at a supplier of
stepper motors you are given a gift of 3 silk ties that the company also manufactures (the
company is an expert at motors and spinning devices. The manufacture of silk products requires
spinning motion machines. The company leveraged their knowledge of motors into a horizontal
market). The silk ties would be valued at $150 retail. The manufacturing cost of the ties was
$5/tie. What do you do when you arrive back home in Bozeman?
2) Chris is out to dinner with a friend who works for a small publicly held company in San Diego.
His friend mentions to Chris that they are going to get bought by Google within a year if they
complete a project they are working on. Chris’s friend is working on that key project and he told
Chris that the project is looking really good and he thinks not only will it complete, but complete
on time and under budget. Chris is currently looking to invest $10,000 that his grandmother left
him in her will. The next day Chris buys $10,000 worth of his friends’ stock.
3) Mary is working in a large company in the Bay Area. One day at work, Mary observes a
colleague Sandra talking to another colleague who is a manager in the accounting department.
Mary observes the manager rubbing Sandra’s arm and Sandra backing away from the person.
What should Mary do?
4) Ted and his family is visiting his brother in Whitefish, Mt. They are planning to go skiing. Ted’s
brother offers to give him his season pass (Ted and his brother look very similar) so he doesn’t
have to pay for a ski pass. Ted’s brother justified it saying, “I’ve paid for the year to ski and I’m
not going up to the mountain tomorrow, you might as well use it.” What should Ted do?
5) Bill had hail damage last summer and has recently completed the form to get more money.
When Bill received the check from the insurance company, instead of $1,000 which he was
expecting, the check was made out for $10,000. Bill cashed the check and put the money into
his savings account. He decided to keep the money in his savings account for at least a year
until he was sure the insurance company didn’t find the mistake. Then he would go buy that
NRS raft with full fishing frame and trailer that he had been wanting but couldn’t afford. Bill
figured the insurance company had plenty of money and he’d been paying insurance premiums
for over 20 years and had never made one claim until this recent claim.
Questions:
Part I. Multiple Choice
1. Employees view budgeting more positively when goals are established for them by senior
management.
a. True
b. False
2. The budget procedure that requires all levels of management to start from zero in estimating
sales, production, and other operating data is called zero-based budgeting.
a. True
b. False
3. The master budget of a small manufacturer would normally include all necessary component
budgets except the capital expenditures budget.
a. True
b. False
4. The first budget to be prepared is usually the sales budget.
a. True
b. False
5. If Division Inc. expects to sell 300,000 units in 2016, desires ending inventory of 22,000 units,
and has 24,000 units on hand as of the beginning of the year, the budgeted volume of production
for 2016 is 298,000 units.
a. True
b. False
6. A budget that provides the starting point for the preparation of a direct labor cost budget is the:
a. selling and administrative expenses budget.
b. capital expenditures budget.
c. production budget.
d. factory overhead budget.
7. Benjamin Corporation began its operations on September 1 of the current year. Budgeted sales
for the first three months of business are $250,000, $300,000, and $420,000, respectively, for
September, October, and November. The company expects to sell 20% of its merchandise for
cash. Of sales on account, 70% are expected to be collected in the month of the sale, 25% in the
month following the sale, and the remainder in the following month.
The cash collections from accounts receivable in October are:
a. $270,000.
b. $272,500.
c. $210,000.
d. $218,000.
8. Which of the following is true of a capital expenditures budget?
a. It summarizes plans for acquiring fixed assets.
b. It indicates all the estimated cash receipts and cash payments for a period of time.
c. It records all short-term expenses for a period.
d. It lists all the transactions related to capital stock.
9. Which of the following is true of the balanced scorecard?
a. It ignores the financial performance of the company.
b. It can reveal the underlying nonfinancial drivers of financial performance.
c. It aims to improve the nonfinancial performance of the business.
d. It focuses primarily on the short-term performance of the business.
10. Materials used by Boone Company in producing Division C’s product are currently purchased
from outside suppliers at a cost of $20 per unit. However, the same materials are available from
Division A. Division A has unused capacity and can produce the materials needed by Division C
at a variable cost of $17 per unit. A transfer price of $19 per unit is negotiated and 60,000 units of
material are transferred, with no reduction in Division A’s current sales.
How much would Boone’s total operating income increase?
a. $180,000
b. $240,000
c. $120,000
d. $300,000
11. Division Y has generated sales revenue of $260,000 and achieved operating income of
$18,500 using $20,000 of invested assets. If management desires a minimum rate of return of
10%, the profit margin would be:
a. 19.5%.
b. 14.4%.
c. 10.2%.
d. 7.1%.
12. The profit margin is calculated as the ratio of operating income to:
a. invested assets.
b. investment turnover.
c. sales.
d. residual income.
13. If the profit margin for a division is 8% and the investment turnover is 1.20, the rate of return on
investment computed would be 6.7%.
a. True
b. False
14. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000,
the investment turnover would be 1.2.
a. True
b. False
15. The manager of a profit center has the responsibility for making decisions that affect the center’s
_____.
a. costs, revenues, and investment in fixed assets.
b. investment in fixed assets, but not costs.
c. costs and revenues, but not investment in fixed assets.
d. revenues and investment in fixed assets, but not costs.
16. Operating income of the Commercial Aviation Division is $3,300,000. If operating income before
service department charges is $3,900,000:
a. operating expenses are $600,000.
b. total service department charges are $600,000.
c. noncontrollable charges are $7,200,000.
d. direct manufacturing charges are $3,900,000.
17. The process by which management plans, evaluates, and controls long- term investment decisions
involving fixed assets is called cost-volume-profit analysis.
a. True
b. False
18. The methods of evaluating capital investment proposals can be grouped into two general
categories: (1) methods that ignore present values and (2) methods that use present values.
a. True
b. False
19. . The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no
residual value, is expected to yield total net income of $200,000 for 5 years. The expected
average rate of return on investment computed is 20%.
a. True
b. False
20. For years one through five, a proposed expenditure of $400,000 for a fixed asset with a 5-year life
has expected net income of $50,000, $40,000, $20,000, $20,000, and $20,000, respectively, and
net cash flows of $130,000, $120,000, $100,000, $100,000, and $100,000, respectively. The cash
payback period is 3.5 years.
a. True
b. False
21. The anticipated purchase of a fixed asset for $400,000 with a useful life of 5 years and no residual
value is expected to yield total income of $150,000 (recognition is given to the effect of straightline depreciation on the investment). The expected average rate of return is 15%.
a. True
b. False
22. When evaluating a proposal by use of the net present value method, if there is an excess of the
present value of future cash inflows over the amount to be invested, the rate of return on the
proposal exceeds the rate used in the analysis.
a. True
b. False
23. Qualitative considerations in capital investment decisions are most appropriate for strategic
investments or those that are designed to affect a company’s long-term ability to generate profits.
a. True
b. False
24. In general, present value methods of analyzing capital investments are more desirable than
methods ignoring present values because:
a. the calculations in methods that ignore present value are more complex than those in methods
using present value.
b. the present value methods consider that a dollar today is worth more than a dollar in the future
due to the potential earning power of that dollar.
c. the calculations in methods that consider present value are less complex than those methods
ignoring present value.
d. the present value methods consider that a dollar in the future is worth more than a dollar today
due to the potential earning power of that dollar.
1.
(5 points) Efficient Corporation uses a standard cost system. The following information was
provided for the period that just ended (justify your answer by showing your calculations):
Actual price per gallon
Actual gallons of material used
Actual hourly labor rate
Actual hours of production
Standard price per gallon
Standard gallons per completed unit
Standard hourly labor rate
Standard time per completed unit
Units completed during the period
$11.75
5,000
$17.00
24,300
$12.00
1/2
$12.00
3 hrs.
9,000
The direct materials cost variance is:
a. $1,125 favorable.
b. $4,750 unfavorable.
c. $6,000 unfavorable.
d. $7,125 unfavorable.
2. (5 points) Efficient Corporation uses a standard cost system. The following information was
provided for the period that just ended (justify your answer by showing your calculations):
Actual price per gallon
Actual gallons of material used
Actual hourly labor rate
Actual hours of production
Standard price per gallon
Standard gallons per completed unit
Standard hourly labor rate
Standard time per completed unit
Units completed during the period
The total direct labor variance is:
a. $216,000 favorable.
b. $32,400 favorable.
$11.75
5,000
$17.00
24,300
$12.00
1/2
$12.00
3 hrs.
9,000
c. $89,100 unfavorable.
d. $121,500 unfavorable.
3. (6 points) The following financial information was summarized from the accounting records of
Globe Corporation for the current year ended December 31 (justify your answer by showing your
calculations):
Cost of goods sold
Direct operating expenses
Net sales
Interest expense
General overhead
Income tax
Northern
Division
$310,000
250,000
600,000
Southern
Division
$175,000
115,000
410,000
Corporate
Total
$12,000
101,000
26,700
The gross profit for the Southern Division is:
a. $150,000.
b. $295,000.
c. $235,000.
d. $120,000.
The net income for Globe Corporation is:
a. $59,000.
b. $160,000.
c. $19,400.
d. $47,000.
4. (5 points) June Co. is evaluating a project requiring a capital expenditure of $620,000. The
project has an estimated life of four years and no salvage value. The estimated net income and net
cash flow from the project are as follows (justify your answer by showing your calculations):
Year
1
2
3
Net Income
Net Cash Flow
$ 45,000
$200,000
85,000
240,000
5,000
160,000
4
15,000
170,000
$150,000
$770,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of
12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine: (a) the average rate of return on investment, giving effect to depreciation on the investment,
and (b) the net present value.
5. (9 points) Mars Corp. is choosing between two different capital investment proposals. Machine A
has a useful life of 4 years, and Machine B has a useful life of 6 years. Each proposal requires an
initial investment of $200,000, and the company desires a rate of return of 10%. Although
Machine B has a useful life of 6 years, it could be sold at the end of 4 years for $35,000 (justify
your answer by showing your calculations).
Year
1
2
3
4
5
6
Present Value
of $1 at 10%
0.909
0.826
0.751
0.683
0.621
0.513
Machine A will generate net cash flow of $70,000 in each of the four years. Machine B will generate
$80,000 in year 1, $70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of
its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?
a. Mars should invest in Machine A because the net present value of Machine A after 4 years is
higher than the net present value of Machine B after 4 years.
b. Mars should invest in Machine B because the net present value of Machine A after 4 years is
lower and the net present value of Machine B after 6 years.
c. Mars should invest in Machine B because the net present value of Machine A after 4 years is
lower than the net present value of Machine B after 4 years.
d. Mars should invest in Machine A because the net present value of Machine A after 4 years is
higher than the net present value of Machine B after 6 years.
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