Question

1. Morningside Technologies Inc. uses flexible budgets that are based on the following data:

   Sales commissions	6% of sales
   Advertising expense	15% of sales
   Miscellaneous administrative expense	$1,450 per month plus 3% of sales
   Office salaries expense	$14,000 per month
   Customer support expenses	$2,050 plus 4% of sales
   Research and development expense	4,500 per month

2. Prepare a flexible selling and administrative expenses budget for April for sales volumes of $90,000, $115,000, and $135,000. Enter all amounts as positive numbers.

   Morningside Technologies Inc.
   Flexible Selling and Administrative Expenses Budget
   For the Month Ending April 30
   Total sales	$90,000	$115,000	$135,000
   Variable cost:
   Sales commissions	$	$	$
   Advertising expense
   Miscellaneous administrative expense
   Customer support expenses
   Total variable cost	$	$	$
   Fixed cost:
   Miscellaneous administrative expense	$	$	$
   Office salaries expense
   Customer support expenses
   Research and development expense
   Total fixed cost	$	$	$
   Total selling and administrative expenses	$	$	$

3. Personal Budget

   At the beginning of the school year, Katherine Malloy decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget:

   Cash balance, September 1 (from a summer job)	$6,730
   Purchase season football tickets in September	90
   Additional entertainment for each month	230
   Pay fall semester tuition in September	3,600
   Pay rent at the beginning of each month	320
   Pay for food each month	180
   Pay apartment deposit on September 2 (to be returned December 15)	500
   Part-time job earnings each month (net of taxes)	830

   a. Prepare a cash budget for September, October, November, and December. Enter all amounts as positive values except an overall cash decrease which should be indicated with a minus sign.

   KATHERINE MALLOY
   Cash Budget
   For the Four Months Ending December 31
   	September	October	November	December
   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	$	$	$	$
   Overall cash increase (decrease)	$	$	$	$
   Cash balance at beginning of month
   Cash balance at end of month	$	$	$	$

   b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets?
   c. Malloy can see that her present plan   sufficient cash. If Malloy did not budget but went ahead with the original plan, she would be $   at the end of December, with no time left to adjust.

4. Static Budget versus Flexible Budget

   The production supervisor of the Machining Department for Niland Company agreed to the following monthly static budget for the upcoming year:

   Niland Company Machining Department Monthly Production Budget
   Wages	$396,000
   Utilities	34,000
   Depreciation	57,000
   Total	$487,000

   The actual amount spent and the actual units produced in the first three months in the Machining Department were as follows:

   	Amount Spent		Units Produced
   January	$460,000		121,000
   February	441,000		110,000
   March	422,000		99,000

   The Machining Department supervisor has been very pleased with this performance because actual expenditures for January–March have been less than the monthly static budget of $487,000. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows:

   Wages per hour	$15.00
   Utility cost per direct labor hour	$1.30
   Direct labor hours per unit	0.20
   Planned monthly unit production	132,000

   a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume that depreciation is a fixed cost. Enter all amounts as positive numbers. If required, use per unit amounts carried out to two decimal places.

   Niland Company-Machining Department
   Flexible Production Budget
   For the Three Months Ending March 31
   	January	February	March
   Units of production
   Wages	$	$	$
   Utilities
   Depreciation
   Total	$	$	$

   b. Compare the flexible budget with the actual expenditures for the first three months.

   	January	February	March
   Total flexible budget	$	$	$
   Actual cost
   Excess of actual cost over budget	$	$	$

   What does this comparison suggest?

   The Machining Department has performed better than originally thought.
   The department is spending more than would be expected.

5. Flexible Budget for Assembly Department

   Cabinaire Inc. is one of the largest manufacturers of office furniture in the United States. In Grand Rapids, Michigan, it assembles filing cabinets in an Assembly Department. Assume the following information for the Assembly Department:

   Direct labor per filing cabinet	30 minutes
   Supervisor salaries	$147,000 per month
   Depreciation	$20,000 per month
   Direct labor rate	$15 per hour

   Prepare a flexible budget for 14,000, 18,000, and 21,000 filing cabinets for the month of August in the Assembly Department, similar to Exhibit 5. Assuming that inventories are not significant. Enter all amounts as positive numbers.

   CABINAIRE INC-ASSEMBLY DEPARTMENT
   Flexible Production Budget
   For the Month Ending August 31 (assumed data)
   Units of production	14,000	18,000	21,000
   Variable cost:
   Direct labor	$	$	$
   Total variable cost	$	$	$
   Fixed cost:
   Supervisor salaries	$	$	$
   Depreciation
   Total fixed cost	$	$	$
   Total department cost	$	$	$

Answer 1

1) Selling and administrative expenses budget for April is shown as follows:- (Amounts in $)

Morningside Technologies Inc.
Flexible Selling and Administrative Expenses Budget
For the Month Ending April 30
Total sales (a)	90,000	115,000	135,000
Variable cost:
Sales commissions (b = 6%*a)	5,400	6,900	8,100
Advertising expense (c = 15%*a)	13,500	17,250	20,250
Miscellaneous administrative expense (d = 3%*a)	2,700	3,450	4,050
Customer support expenses (e = 4%*a)	3,600	4,600	5,400
Total variable cost (f = b+c+d+e)	25,200	32,200	37,800
Fixed cost:
Miscellaneous administrative expense (i)	1,450	1,450	1,450
Office salaries expense (ii)	14,000	14,000	14,000
Customer support expenses (iii)	2,050	2,050	2,050
Research and development expense (iv)	4,500	4,500	4,500
Total fixed cost (g = i+ii+iii+iv)	22,000	22,000	22,000
Total selling and administrative expenses (f+g)	47,200	54,200	59,800

2) a) Cash Budget is shown as follows:- (Amounts in $)

KATHERINE MALLOY
Cash Budget
For the Four Months Ending December 31
	September	October	November	December
Estimated cash receipts from:
Part-time job	830	830	830	830
Deposit	0	0	0	500
Total cash receipts (A)	830	830	830	1,330
Estimated cash payments for:
Season football tickets	90	0	0	0
Additional entertainment	230	230	230	230
Tuition	3,600	0	0	0
Rent	320	320	320	320
Food	180	180	180	180
Deposit	500	0	0	0
Total cash payments (B)	4,920	730	730	730
Overall cash increase (decrease) (A-B)	(4,090)	100	100	600
Cash balance at beginning of month	6,730	2,640	2,740	2,840
Cash balance at end of month	2,640	2,740	2,840	3,440

b) The static budget is the budget which do not change with the change in activity level, whereas the flexible budget change with the change in activity level. In the given case, the four months budget is a static budget as it do not change with the activity level.

c) The fall semester tuition fee is $3,600 but the budgeted cash balance at the end of December is $3,440 which is less than the required tuition fee of 3,600 by $160 (3,600-3,440). Therefore, Malloy can see that her present plan will not provide sufficient cash. If Malloy did not budget but went ahead with the original plan, she would be $160 short at the end of December, with no time left to adjust.