CHAPTER 9 Profit Planning and Activity-Based Budgeting

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1 CHAPTER 9 Profit Planning and Activity-Based Budgeting ANSWERS TO REVIEW QUESTIONS 9-1 A budget facilitates communication and coordination by making each manager throughout the organization aware of the plans made by other managers. The budgeting process pulls together the plans of each manager in the organization. 9-2 An example of using the budget to allocate resources in a university is found in the area of research funds and grants. Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process. 9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time. The master budget includes the following parts: sales budget, operational budgets (including a production budget, inventory budgets, a labor budget, an overhead budget, a selling and administrative expense budget, and a cash budget), and budgeted financial statements (including a budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows). 9-4 The flowchart on the following page depicts the components of the master budget for a gasoline service station that also provides automotive maintenance. 9-5 General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air. 9-6 Operational budgets specify how an organization's operations will be carried out to meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of professional personnel of various types required to carry out the hospital's mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash budget showing planned cash receipts and disbursements. Managerial Accounting, 9/e Global Edition 9-1

2 Flowchart for Review Question 9-4 Sales Budget Sales Budget: Gasoline, Related Products, and Services Operational Budgets Ending Inventory Budget: Gasoline Materials Budget: Gasoline and Related Products Labor Budget Overhead Budget Selling and Administrative Expense Budget Cash Budget Budgeted Income Statement Budgeted Financial Statements Budgeted Balance Sheet Budgeted Statement of Cash Flows 9-2 Solutions Manual

3 9-7 Application of activity-based costing to the budgeting process yields activity-based budgeting (ABB). Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities necessary to produce these products and services are determined. Finally the resources needed to perform the specified activities are determined. ABB differs from traditional budgeting in the emphasis that it places on activities and its use of activity-based costing data in the budgeting process. 9-8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise. The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise. 9-9 The city of London could use budgeting for planning purposes in many ways. For example, the city's personnel budget would be important in planning for required employees in the police and fire departments. The city's capital budget would be used in planning for the replacement of the city's vehicles, computers, administrative buildings, and traffic control equipment. The city's cash budget would be important in planning for cash receipts and disbursements. It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash needs at all times The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and deadlines to employees throughout the organization, the budget director often develops and disseminates a budget manual The budget manual says who is responsible for providing various types of information, when the information is required, and what form the information is to take. The budget manual also states who should receive each schedule when the master budget is complete A company's board of directors generally has final approval over the master budget. By exercising its authority to make changes in the budget and grant final approval, the board of directors can wield considerable influence on the overall direction the organization takes. Since the budget is used as a resource-allocation mechanism, the board of directors can emphasize some programs and curtail or eliminate others by allocating funds through the budgeting process. Managerial Accounting, 9/e Global Edition 9-3

4 9-13 A master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. Many other assumptions are used throughout the rest of the budgeting process The difference between the revenue or cost projection that a person provides in the budgeting process and a realistic estimate of the revenue or cost is called budgetary slack. Building budgetary slack into the budget is called padding the budget. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. Cost estimates are often inflated, and revenue estimates are often understated. In this situation, the budget loses its effectiveness as a planning tool An organization can reduce the problem of budgetary slack in several ways. First, it can avoid relying on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that "this is our budget," rather than the feeling that "this is the budget you imposed on us." When employees feel that they were part of the budgeting process, they are more likely to strive to achieve the budget This comment is occasionally heard from people who have started and run their own small business for a long period of time. These individuals have great knowledge in their minds about running their business. They feel that they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by feel. This approach can result in several problems. First, if the person who is running the business is sick or traveling, he or she is not available to make decisions and implement plans that could have been clarified by a budget. Second, the purposes of budgeting are important to the effective running of an organization. Budgets facilitate communication and coordination, are useful in resource allocation, and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits without a budgeting process. 9-4 Solutions Manual

5 9-18 In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal needs, and money for entertainment and miscellaneous expenses Firms with international operations face a variety of additional challenges in preparing their budgets. A multinational firm's budget must reflect the translation of foreign currencies into the official corporate currency. Almost all the world's currencies fluctuate in their relative values, and this fluctuation makes budgeting for those translations difficult. It is difficult to prepare budgets when inflation is high or unpredictable. Some countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and complicates a multinational's budgeting process. The economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies with foreign operations face the task of anticipating such changing conditions in their budgeting processes The five phases in a product's life cycle are as follows: (a) Product planning and concept design (b) Preliminary design (c) Detailed design and testing (d) Production (e) Distribution and customer service It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle will cover all of the costs to be incurred. A large portion of a product's life-cycle costs will be committed well before they are actually incurred The answer will depend on the article the student chooses. Managerial Accounting, 9/e Global Edition 9-5

6 SOLUTIONS TO EXERCISES EXERCISE 9-22 (20 MINUTES) 1. April May June Sales... $80,000 $60,000 $100,000 a Cash receipts: From cash sales... $ 40,000 b $ 30,000 c $ 50,000 From sales on account... 32,000 d 34,000 42,000 e Total cash receipts... $ 72,000 $ 64,000 $ 92,000 a $100,000 = $50,000 /.5 b $40,000 = $80,000.5 c $30,000 = $60,000.5 d $32,000 = (($80,000 x.5).6) + (($40,000 x.5).4) e $42,000 = (($100,000 x.5).6) + (($60,000 x.5).4) 2. Accounts payable, 12/31/x0... $ 300,000 Purchases of goods and services on account during 20x1... 1,200,000 Payments of accounts payable during 20x1... (1,100,000)* Accounts payable, 12/31/x1... $ 400,000 *$1,100,000 = $300, ,200, , Accounts receivable, 12/31/x0... $ 340,000 Sales on account during 20x ,000 Collections of accounts receivable during 20x1... (780,000) Accounts receivable, 12/31/x1... $ 460, Accumulated depreciation, 12/31/x0... $ 810,000 Depreciation expense during 20x ,000 Accumulated depreciation, 12/31/x1... $ 960, Retained earnings, 12/31/x0... $2,050,000 Net income for 20x ,000 Dividends paid in 20x _ Retained earnings, 12/31/x1... $2,450, Solutions Manual

7 EXERCISE 9-23 (30 MINUTES) Answers will vary widely, depending on the governmental unit selected, the public availability of budget information, and the budgetary items on which the student focuses. In the past, students have expressed surprise at the proportion of budgets going to social programs (e.g., health care and retirement), interest payments on government debt, and the military. EXERCISE 9-24 (15 MINUTES) 1. Production (in units) required for the year: Sales for the year ,000 Add: Desired ending finished-goods inventory on December ,000 Deduct: Beginning finished-goods inventory on January ,000 Required production during the year , Purchases of raw material (in units), assuming production of 500,000 finished units: Raw material required for production (500,000 2)... 1,000,000 Add: Desired ending inventory on December ,000 Deduct: Beginning inventory on January ,000 Required raw-material purchases during the year... 1,010,000 EXERCISE 9-25 (25 MINUTES) 1. Cash collections in October: Month of Sale Amount Collected in October July... $60,000 4% $ 2,400 August... 70,000 10% 7,000 September... 80,000 15% 12,000 October... 90,000 70% 63,000 Total... $84,400 Notice that the amount of sales on account in June, $49,000 was not needed to solve the exercise. Managerial Accounting, 9/e Global Edition 9-7

8 EXERCISE 9-25 (CONTINUED) 2. Cash collections in fourth quarter from credit sales in fourth quarter. Amount Collected Month of Sale Credit Sales October November December October... $ 90,000 $ 63,000 $13,500 $ 9,000 November ,000 70,000 15,000 December... 85,000 59,500 Total... $ 63,000 $83,500 $ 83,500 Total collections in fourth quarter from credit sales in fourth quarter... $230, In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet xls EXERCISE 9-26 (20 MINUTES) 1. The total required production is 655,720 units, computed as follows: Budgeted Sales (in units) Planned Ending Inventory (in units) June 160,000 (200,000 80%) July 200,000 (given) August 210,000 (200, ) September 220,500 (210, ) 185,220 (231,525 80%) October 231,525 (220, ) Sales in units: July ,000 August ,000 September ,500 Total for third quarter ,500 Add: Desired ending inventory, September ,220 Subtotal ,720 Deduct: Desired ending inventory, June ,000 Total required production , Solutions Manual

9 EXERCISE 9-26 (CONTINUED) 2. Assumed production during third quarter (in units) ,000 Raw-material requirements per unit of product (in kilograms)... 2 Raw material required for production in third quarter (in kilograms)... 1,200,000 Add: Desired ending raw-material inventory, September 30 (1,200,000 25%) ,000 Subtotal... 1,500,000 Deduct: Ending raw-material inventory, June ,000 Raw material to be purchased during third quarter (in kilograms)... 1,200,000 Cost per kilogram of raw material... $2.30 Total raw-material purchases during third quarter... $2,760,000 EXERCISE 9-27 (20 MINUTES) 1. BIRMINGHAM FILM CORPORATION EXPECTED CASH COLLECTIONS AUGUST Month Sales Percent Expected Collections June... $60,000 9% $ 5,400 July... 78,000 20% 15,600 August... 66,000 70% 46,200 Total... $67, BIRMINGHAM FILM CORPORATION EXPECTED CASH DISBURSEMENTS AUGUST July purchases to be paid in August... $ 54,000 Less: 2% cash discount... 1,080 Net... $ 52,920 Cash disbursements for expenses... 14,400 Total... $ 67,320 Managerial Accounting, 9/e Global Edition 9-9

10 EXERCISE 9-27 (CONTINUED) 3. BIRMINGHAM FILM CORPORATION EXPECTED CASH BALANCE AUGUST 31 Balance, August 1... $ 22,000 Add: Expected collections... 67,200 Less: Expected disbursements... 67,320 Expected balance... $ 21,880 EXERCISE 9-28 (20 MINUTES) Memorandum Date: To: From: Subject: Today Vice-President, Macau Branch, Asian Banking Corp. Consulting Associates Budgetary slack Budgetary slack is the difference between a budget estimate that a person provides and a realistic estimate. The practice of creating budgetary slack is called padding the budget. The primary negative consequence of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. When a budget includes slack, the amounts in the budget no longer portray a realistic view of future operations. The bank's bonus system for the new accounts manager tends to encourage budgetary slack. Since Ms. Chung s bonus is determined by the number of new accounts generated over the budgeted number, the manager has an incentive to understate her projection of the number of new accounts. The description of the new accounts manager's behavior shows evidence of such understatement. A 10 percent increase over the bank's current 12,000 accounts would mean 1,200 new accounts in 20x2. Yet the new accounts manager's projection is only 900 new accounts. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number Solutions Manual

11 EXERCISE 9-29 (20 MINUTES) 1. Total Sales in January 20x2 $100,000 $130,000 $160,000 Cash receipts in January, 20x2 From December sales on account... $ 7,125* $ 7,125 $ 7,125 From January cash sales... 75,000 97, ,000 From January sales on account... 20,000** 26,000 32,000 Total cash receipts... $ 102,125 $130,625 $159,125 *$7,125 = $190, $75,000 = $100, **$20,000 = $100, Operational plans depend on various assumptions. Usually there is uncertainty about these assumptions, such as sales demand or inflation rates. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions. EXERCISE 9-30 (30 MINUTES) 1. Budgeted cash collections for December: Month of Sale Collections in December November... $200,000 38% $ 76,000 December ,000 60% 132,000 Total cash collections... $208, Budgeted income (loss) for December: Sales revenue... $220,000 Less: Cost of goods sold (75% of sales) ,000 Gross margin (25% of sales)... $ 55,000 Less: Operating expenses:... Bad debts expense (2% of sales)... $ 4,400 Depreciation ($216,000/12)... 18,000 Other expenses... 22,600 Total operating expenses... 45,000 Income before taxes... $ 10,000 Managerial Accounting, 9/e Global Edition 9-11

12 EXERCISE 9-30 (CONTINUED) 3. Projected balance in accounts payable on December 31: The December 31 balance in accounts payable will be equal to December's purchases of merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods sold must be 75 percent of sales. Month Sales Cost of Goods Sold Amount Purchased in December December... $220,000 $165,000 $165,000 20% $ 33,000 January , , ,000 80% 120,000 Total December purchases... $153,000 Therefore, the December 31 balance in accounts payable will be $153,000. EXERCISE 9-31 (25 MINUTES) 1. Direct professional labor budget for the month of June: Professional services in June: Office visits per month = 48,000/12 = 4,000 One-hour visits (25% 4,000 1 hr.)... 1,000 hours Half-hour visits (75% 4,000 1/2 hr.)... 1,500 hours Total direct professional labor... 2,500 hours Hourly rate for physicians... $ 60 Total direct professional labor cost... $150, Solutions Manual

13 EXERCISE 9-31 (CONTINUED) 2. Cash collections during June: May June Half-hour visits (4,000 75%)... 3,000 3,000 Billing rate... $40 $40 Total billings for half-hour visits... $120,000 $120,000 One-hour visits (4,000 25%)... 1,000 1,000 Billing rate... $70 $70 Total billings for one-hour visits... $ 70,000 $ 70,000 Total billings during month... $190,000 $190,000 Percentage of month's billings collected during June... 10% 90% Collections during June... $ 19,000 $171,000 Total collections in June ($19,000 + $171,000)... $190, Overhead and administrative expense budget for June: Patient registration and records (4,000 visits $2.00 per visit)... $ 8,000 Other overhead and administrative expenses (2,500 hours $6.00 per hour)... 15,000 Total overhead and administrative expenses... $23, In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet xls Managerial Accounting, 9/e Global Edition 9-13

14 SOLUTIONS TO PROBLEMS PROBLEM 9-32 (40 MINUTES) 1. Production and direct-labor budgets SPIFFY SHADES CORPORATION BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 Month January February March Quarter Sales (units)... 10,000 12,000 8,000 30,000 Add: Ending inventory*... 16,000 12,500 13,500 13,500 Total needs... 26,000 24,500 21,500 43,500 Deduct: Beginning inventory... 16,000 16,000 12,500 16,000 Units to be produced... 10,000 8,500 9,000 27,500 Direct-labor hours per unit Total hours of direct labor time needed... 10,000 8,500 6,750 25,250 Direct-labor costs: Wages ($16.00 per DLH)... $160,000 $136,000 $108,000 $404,000 Pension contributions ($.50 per DLH)... 5,000 4,250 3,375 12,625 Workers' compensation insurance ($.20 per DLH)... 2,000 1,700 1,350 5,050 Employee medical insurance ($.80 per DLH)... 8,000 6,800 5,400 20,200 Employer's social security (at 7%)... 11,200 9,520 7,560 28,280 Total direct-labor cost... $186,200 $158,270 $125,685 $470,155 *100 percent of the first following month's sales plus 50 percent of the second following month's sales. DLH denotes direct-labor hour Solutions Manual

15 PROBLEM 9-32 (CONTINUED) 2. Use of data throughout the master budget: Components of the master budget, other than the production budget and the directlabor budget, that would also use the sales data include the following: Sales budget Cost-of-goods-sold budget Selling and administrative expense budget Components of the master budget, other than the production budget and the directlabor budget, that would also use the production data include the following: Direct-material budget Manufacturing-overhead budget Cost-of-goods-sold budget Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor-hour data include the following: Manufacturing-overhead budget (for determining the overhead application rate) Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor cost data include the following: Manufacturing-overhead budget (for determining the overhead application rate) Cost-of-goods-sold budget Cash budget Budgeted income statement Managerial Accounting, 9/e Global Edition 9-15

16 PROBLEM 9-32 (CONTINUED) 3. Manufacturing overhead budget: SPIFFY SHADES CORPORATION MANUFACTURING OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 Month January February March Quarter Shipping and handling... $ 20,000 $ 24,000 $16,000 $ 60,000 Purchasing, material handling, and inspection... 30,000 25,500 27,000 82,500 Other overhead... 70,000 59,500 47, ,750 Total manufacturing overhead... $120,000 $109,000 $90,250 $319,250 PROBLEM 9-33 (25 MINUTES) 1. Tuition revenue budget: Current student enrollment. 10,000 Add: 5% increase in student body 500 Total student body. 10,500 Less: Tuition-free scholarships. 120 Tuition-paying students 10,380 Classes per student per year.. x 10 Total classes ,800 Tuition rate per class. x $80 Forecasted tuition revenue. $8,304, Faculty needed to cover classes: Total student body. 10,500 Classes per student per year... x 10 Total student class enrollments to be covered. 105,000 Students per class (class-size target). 25 Classes to be taught. 4,200 Classes taught per professor. 5 Faculty needed Solutions Manual

17 PROBLEM 9-33 (CONTINUED) 3. Possible actions might include: Hire part-time instructors Use graduate teaching assistants Increase the teaching load for each professor Increase class size and reduce the number of sections to be offered Have students take an Internet-based course offered by another university 4. No. While the number of faculty may be a key driver, the number of faculty is highly dependent on the number of students. Students (and tuition revenue) are akin to sales the starting point in the budgeting process. PROBLEM 9-34 (30 MINUTES) Note: all financial data in solution is in thousands (i.e., 000 omitted). 1. Schedule of cash collections: January February March Collection of accounts receivable: $55,000 x 20%... $ 11,000 Collection of January sales ($150,000): 60% in January; 35% in February.. 90,000 $ 52,500 Collection of February sales ($180,000): 60% in February; 35% in March.. 108,000 $ 63,000 Collection of March sales ($185,000): 60% in March; 35% in April.. 111,000 Sale of equipment. 5,000 Total cash collections $101,000 $160,500 $179, Schedule of cash disbursements: January February March Payment of accounts payable... $ 22,000 Payment of January purchases ($90,000): 70% in January; 30% in February.. 63,000 $ 27,000 Payment of February purchases ($100,000): 70% in February; 30% in March.. 70,000 $ 30,000 Payment of March purchases ($140,000): 70% in March; 30% in April.. 98,000 Cash operating costs.. 31,000 24,000 45,000 Total cash disbursements... $116,000 $121,000 $173,000 Managerial Accounting, 9/e Global Edition 9-17

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19 PROBLEM 9-34 (CONTINUED) 3. Cash budget: January February March Beginning cash balance. $ 20,000 $ 20,000 $ 44,300 Total receipts. 101, , ,000 Subtotal. $121,000 $180,500 $223,300 Less: Total disbursements 116, , ,000 Cash excess (deficiency) before financing $ 5,000 $ 59,500 $ 50,300 Financing: Borrowing to maintain $20,000 balance.. 15,000 Loan principal repaid (15,000) Loan interest paid.. (200)* Ending cash balance $ 20,000 $ 44,300 $ 50,300 * $15,000 x 8% x 2/12 PROBLEM 9-35 (30 MINUTES) 1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the following month. December receivables of $216,000 equal 60% of December s sales; thus, December sales total $360,000 ($216,000.6). Since the selling price is $40 per unit, Highlands sold 9,000 units ($360,000 $40). 2. Since the company expects to sell 10,000 units, sales revenue will total $400,000 (10,000 units x $40). 3. Highlands collected 40% of February s sales in February, or $156,800. Thus, February s sales total $392,000 ($156,800.4). Combining January sales ($152,000 + $228,000), February sales ($392,000), and March sales ($400,000), the company will report revenue of $1,172, Sixty percent of March s sales will be outstanding, or $240,000 ($400,000 x 60%). 5. Finished-goods inventories are maintained at 20% of the following month s sales. January sales total $380,000 ($152,000 + $228,000), or 9,500 units ($380,000 $40). Thus, the December 31 inventory is 1,900 units (9,500 x 20%). Managerial Accounting, 9/e Global Edition 9-19

20 PROBLEM 9-35 (CONTINUED) 6. February sales will total 9,800 units ($392,000 $40), giving rise to a January 31 inventory of 1,960 units (9,800 x 20%). Letting X denote production, then: 12/31/x0 inventory + X January 20x1 sales = 1/31/x1 inventory 1,900 + X - 9,500 = 1,960 X 7,600 = 1,960 X = 9, Financing required is $7,000 ($30,000 minimum balance - $23,000 ending balance): Cash balance, January 1 $ 45,000 Add: January receipts ($216,000 + $152,000).. 368,000 Subtotal $413,000 Less: January payments 390,000 Cash balance before $ 23,000 financing Solutions Manual

21 PROBLEM 9-36 (45 MINUTES) 1. The cash budget for Alpha-Tech for the second quarter of 20x5 is presented below. Supporting calculations follow. ALPHA-TECH Cash Budget For the Second Quarter of 20x5 April May June Beginning balance... $ 500,000 $ 500,000 $ 1,230,000 Collections: a February sales... March sales... April sales... May sales... 4,000,000 5,400,000 3,600,000 6,900,000 4,600,000 7,500,000 Add: Total receipts... $9,400,000 $10,500,000 $12,100,000 Total cash available... $9,900,000 $11,000,000 $13,330,000 Disbursements: Accounts payable b... Wages c... General and administrative d... Property taxes... Income taxes e... $4,155,000 3,450, ,000 $ 4,735,000 3,750, ,000 $ 5,285,000 4,200, , ,000 1,280,000 Deduct: Total disbursements... $9,785,000 $ 9,385,000 $10,725,000 Cash balance... $ 115,000 $ 1,615,000 $ 2,605,000 Cash borrowed ,000 Cash repaid (385,000) Ending balance... $ 500,000 $ 1,230,000 $ 2,605,000 a 60% of sales in first month after sale; 40% of sales in second month after sale. b See next page. c 30% of current month sales. d (Total, less property taxes and depreciation) divided by 12. e 40% $3,200,000. Managerial Accounting, 9/e Global Edition 9-21

22 PROBLEM 9-36 (CONTINUED) b Accounts payable: Total* Percentage February March April May June Cost of goods sold: February... $4,000, $1,200,000 March... 3,600, ,520,000 March... 3,600, $1,080,000 April... 4,600, ,220,000 April... 4,600, $1,380,000 May... 5,000, ,500,000 May... 5,000, $1,500,000 June... 5,600, ,920,000 $3,720,000 $4,300,000 $4,880,000 $5,420,000 Payments: February... $3,720, $ 930,000 March... 4,300, ,225,000 March... 4,300, $1,075,000 April... 4,880, ,660,000 April... 4,880, $1,220,000 May... 5,420, ,065,000 $ 0 $ 0 $4,155,000 $4,735,000 $5,285,000 *For cost of goods sold, this amount is equal to 40% of sales. For payments, this amount is equal to the cost of goods sold. 2. Cash budgeting is important for Alpha-Tech because as sales grow, so will expenditures for inputs. Since these expenditures generally precede cash receipts, the company must plan for possible financing to cover the gap between payments and receipts. The cash budget shows the probable cash position at certain points in time, allowing the company to plan for borrowing, as Alpha-Tech must do in April. Cash budgeting also facilitates the control of excess cash. The company may be losing investment opportunities if excess cash is left idle. The cash budget alerts management to periods when there will be excess cash available for investment, thus facilitating financial planning and cash control Solutions Manual

23 PROBLEM 9-37 (40 MINUTES) 1. The use of alternative accounting methods to manipulate reported earnings is unethical because it violates the Standards of Ethical Conduct for Management Accountants. The competence standard is violated because of failure to comply with technical standards and lack of appropriate analysis. The integrity standard is violated because this action induces people to carry out duties unethically due to extreme management pressure, subverts the attainment of an organization's objectives, and discredits the profession. The objectivity standard is violated because of failure to communicate information fully and fairly. 2. Yes, costs related to revenue should be expensed in the period in which the revenue is recognized. Perishable supplies are purchased for use in the current period, will not provide benefits in future periods, and should be matched against the revenue recognized in the current period. The accounting treatment for the supplies was not in accordance with generally accepted accounting principles. 3. Mats Günther s actions were appropriate. Upon discovering the change in the method of accounting for supplies, Günther brought the matter to the attention of his immediate superior, Kern. Upon learning of the arrangement with Pristeel, Günther told Kern the action was improper and requested that the accounts be corrected and the arrangement discontinued. Günther clarified the situation with a qualified and objective peer (advisor) before disclosing Kern's arrangement with Pristeel to TCC s president, Kern's immediate superior. Contact with levels above the immediate superior should be initiated only with the superior's knowledge, assuming the superior is not involved. In this case, the superior is involved. Thus, Günther has acted appropriately by approaching Ritter without Kern's knowledge. Managerial Accounting, 9/e Global Edition 9-23

24 PROBLEM 9-38 (25 MINUTES) 1. Sales budget April May June Sales (in sets)... 10,000 12,000 15,000 Sales price per set... $54 $54 $54 Sales revenue... $540,000 $648,000 $810, Production budget (in sets) April May June Sales... 10,000 12,000 15,000 Add: Desired ending inventory... 2,400 3,000 3,000 Total requirements... 12,400 15,000 18,000 Less: Projected beginning inventory... 2,000 2,400 3,000 Planned production... 10,400 12,600 15, Raw-material purchases April May June Planned production (sets)... 10,400 12,600 15,000 Raw material required per set (cubic meters) Raw material required for production (cubic meters) Add: Desired ending inventory of raw material (cubic meters) Total requirements Less: Projected beginning inventory of raw material (cubic meters) Planned purchases of raw material (cubic meters) Cost per cubic meter... $250 $250 $250 Planned purchases of raw material (dollars)... $ 53,100 $ 64,200 $ 75, Solutions Manual

25 PROBLEM 9-38 (CONTINUED) 4. Direct-labor budget April May June Planned production (sets)... 10,400 12,600 15,000 Direct-labor hours per set Direct-labor hours required... 15,600 18,900 22,500 Cost per hour... $22 $22 $22 Planned direct-labor cost... $343,200 $415,800 $495, In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet xls PROBLEM 9-39 (40 MINUTES) 1. Empire Chemical Company s production budget (in gallons) for the three products for 20x2 is calculated as follows: Yarex Darol Norex Sales for 20x ,000 40,000 25,000 Add: Inventory, 12/31/x2 (.08 20x3 sales)... 5,200 2,800 2,400 Total required... 65,200 42,800 27,400 Deduct: Inventory, 12/31/x1 (.08 20x2 sales)... 4,800 3,200 2,000 Required production in 20x ,400 39,600 25, The company s conversion cost budget for 20x2 is shown in the following schedule: Conversion hours required: Yarex (60,400.07)... 4,228 Darol (39,600.10)... 3,960 Norex (25,400.16)... 4,064 Total hours... 12,252 Conversion cost budget (12,252 $20)... $245,040 Managerial Accounting, 9/e Global Edition 9-25

26 PROBLEM 9-39 (CONTINUED) 3. Since the 20x1 usage of Islin is 100,000 gallons, the firm s raw-material purchases budget (in dollars) for Islin for 20x2 is as follows: Quantity of Islin required for production in 20x2 (in gallons): Yarex (60,400 1)... Darol (39,600.7)... Norex (25,400.5)... 60,400 27,720 12,700 Subtotal ,820 Add: Required inventory, 12/31/x2 (100,820.10)... 10,082 Subtotal ,902 Deduct: Inventory, 1/1/x2 (100,000.10)... 10,000 Required purchases (gallons) ,902 Purchases budget (100,902 gallons $5 per gallon)... $504, The company should continue using Islin, because the cost of using Philin is $76,316 greater than using Islin, calculated as follows: Change in material cost from substituting Philin for Islin: 20x2 production requirements: Philin (100,820 $5 1.2)... Islin (100,820 $5)... $604, ,100 Increase in cost of raw material... $100,820 Change in conversion cost from substituting Philin for Islin: Philin (12,252 $20.9)... $220,536 Islin (12,252 $20) ,040 Decrease in conversion cost... $(24,504) Net increase in production cost... $ 76,316 PROBLEM 9-40 (60 MINUTES) 1. Sales budget for 20x0: Units Price Total Light coils... 60,000 $120 $ 7,200,000 Heavy coils... 40, ,800,000 Projected sales... $14,000, Solutions Manual

27 PROBLEM 9-40 (CONTINUED) 2. Production budget (in units) for 20x0: Light Coils Heavy Coils Projected sales... 60,000 40,000 Add: Desired inventories, December 31, 20x ,000 9,000 Total requirements... 85,000 49,000 Deduct: Expected inventories, January 1, 20x ,000 8,000 Production required (units)... 65,000 41, Raw-material purchases budget (in quantities) for 20x0: Sheet Metal Raw Material Copper Wire Platforms Light coils (65,000 units projected to be produced) ,000 65,000 Heavy coils (41,000 units projected to be produced) ,500 61,500 41,000 Production requirements , ,500 41,000 Add: Desired inventories, December 31, 20x ,000 16,000 7,000 Total requirements , ,500 48,000 Deduct: Expected inventories, January 1, 20x ,000 14,500 6,000 Purchase requirements (quantity) , ,000 42, Raw-material purchases budget for 20x0: Raw Material Required (units) Anticipated Purchase Price Raw Material Total Sheet metal ,500 $16 $3,752,000 Copper wire , ,280,000 Platforms... 42, ,000 Total... $5,158,000 Managerial Accounting, 9/e Global Edition 9-27

28 PROBLEM 9-40 (CONTINUED) 5. Direct-labor budget for 20x0: Projected Production (units) Hours per Unit Total Hours Rate Total Cost Light coils... 65, ,000 $15 $1,950,000 Heavy coils... 41, , ,460,000 Total... $4,410, Manufacturing overhead budget for 20x0: Cost Driver Quantity Cost Driver Rate Budgeted Cost Purchasing and material handling ,500 kg. a $0.55 $199,375 Depreciation, utilities, and inspection ,000 coils b $ ,000 Shipping ,000 c $ ,000 General manufacturing overhead ,000 hr. d $ ,000 Total manufacturing overhead... $1,482,375 a 362,500 = 234, ,000 (from req. 3) b 106,000 = 65, ,000 (from req. 2) c 100,000 = 60, ,000 (total units sold, from problem) d 253,000 = 130, ,000 (from req. 5) 9-28 Solutions Manual

29 PROBLEM 9-41 (45 MINUTES) 1. The benefits that can be derived from implementing a budgeting system include the following: The preparation of budgets forces management to plan ahead and to establish goals and objectives that can be quantified. Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the objectives of the entire firm. The budgeting process promotes internal communication and coordination. Budgets provide directions for day-to-day control of operations, clarify duties to be performed, and assign responsibility for these duties. Budgets help in measuring performance and providing incentives. Budgets provide a vehicle for resource allocation. Managerial Accounting, 9/e Global Edition 9-29

30 PROBLEM 9-41 (CONTINUED) 2. Sales Budget a. Schedule b. Subsequent Schedule Production Budget Selling Expense Budget Budgeted Income Statement Ending Inventory Budget (units) Production Budget (units) Direct-Material Budget Direct-Labor Budget Manufacturing-Overhead Budget Cost-of-Goods-Manufactured Budget Cost-of-Goods-Sold Budget (includes ending inventory in dollars) Selling Expense Budget Research and Development Budget Administrative Expense Budget Budgeted Income Statement Capital Expenditures Budget Cash Receipts and Disbursements Budget Budgeted Balance Sheet Budgeted Statement of Cash Flows Production Budget Direct-Material Budget Direct-Labor Budget Manufacturing-Overhead Budget Cost-of-Goods-Manufactured Budget Cost-of-Goods-Manufactured Budget Cost-of-Goods-Manufactured Budget Cost-of-Goods-Sold Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Income Statement Budgeted Income Statement Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows Cash Receipts and Disbursements Budget Budgeted Balance Sheet Budgeted Statement of Cash Flows Budgeted Balance Sheet Budgeted Statement of Cash Flows Budgeted Statement of Cash Flows 9-30 Solutions Manual

31 PROBLEM 9-42 (45 MINUTES) 1. The revised operating budget for Toronto Business Associates for the fourth quarter is presented below. Supporting calculations follow: TORONTO BUSINESS ASSOCIATES REVISED OPERATING BUDGET FOR THE FOURTH QUARTER OF 20X1 Revenue: Consulting fees: Computer system consulting... $478,125 Management consulting ,000 Total consulting fees... $946,125 Other revenue... 10,000 Total revenue... $956,125 Expenses: Consultant salary expenses*... $510,650 Travel and related expenses... 57,875 General and administrative expenses... 93,000 Depreciation expense... 40,000 Corporate expense allocation... 75,000 Total expenses... $776,525 Operating income... $179,600 *$510,650 = $245,000 + $265,650. (See supporting calculations.) Managerial Accounting, 9/e Global Edition 9-31

32 PROBLEM 9-42 (CONTINUED) Supporting calculations: Schedule of projected revenues for the fourth quarter of 20x1: Computer System Consulting Management Consulting Third Quarter: Revenue... $421,875 $315,000 Hourly billing rate... $75 $90 Billable hours... 5,625 3,500 Number of consultants Hours per consultant Fourth-quarter planned increase Billable hours per consultant Number of consultants Billable hours... 6,375 5,200 Billing rate... $75 $90 Projected revenue... $478,125 $468, Solutions Manual

33 PROBLEM 9-42 (CONTINUED) Schedules of projected salaries, travel, general and administrative, and allocated corporate expenses: Computer System Consulting Management Consulting Compensation: Existing consultants: Annual salary... $ 46,000 $ 50,000 Quarterly salary... $ 11,500 $ 12,500 Planned increase (10%)... 1,150 1,250 Total fourth-quarter salary per consultant... $ 12,650 $ 13,750 Number of consultants Total... $ 189,750 $137,500 New consultants at old salary (3 $12,500) ,500 Total salary... $ 189,750 $175,000 Benefits (40%)... 75,900 70,000 Total compensation... $ 265,650 $245,000 Travel expenses: Computer system consultants (425 hrs. 15)... 6,375 Management consultants (400 hrs. 13)... 5,200 Total hours... 11,575 Rate per hour*... $5 Total travel expense... $ 57,875 General and administrative ($100,000 93%)... $ 93,000 Corporate expense allocation ($50, %)... $ 75,000 *Third-quarter travel expense hours = rate 9,125 = (350 10) + (375 15) $45,625 9,125 = $ An organization would prepare a revised operating budget when the assumptions underlying the original budget are no longer valid. The assumptions may involve factors outside or inside the company. Changes in assumptions involving external factors may include changes in demand for the company's products or services, changes in the cost of various inputs to the company, or changes in the economic or political environment in which the company operates. Changes in assumptions involving internal factors may include changes in company goals or objectives. Managerial Accounting, 9/e Global Edition 9-33

34 PROBLEM 9-43 (60 MINUTES) 1. Sales budget: Box C Box P Total Sales (in units) 500, ,000 Sales price per unit $.90 $1.30 Sales revenue $450,000 $650,000 $1,100, Production budget (in units): Box C Box P Sales , ,000 Add: Desired ending inventory... 5,000 15,000 Total units needed , ,000 Deduct: Beginning Inventory... 10,000 20,000 Production requirements , , Raw-material budget: PAPERBOARD Box C Box P Total Production requirement (number of boxes) , ,000 Raw material required per box (kilograms) Raw material required for production (kilograms)... 74, , ,500 Add: Desired ending raw-material inventory... 2,500 Total raw-material needs ,000 Deduct: Beginning raw-material inventory... 7,500 Raw material to be purchased ,500 Price (per kilogram)... $.40 Cost of purchases (paperboard)... $ 97, Solutions Manual

35 PROBLEM 9-43 (CONTINUED) CORRUGATING MEDIUM Box C Box P Total Production requirements (number of boxes) , ,000 Raw material required per box (kilograms) Raw material required for production (kilograms)... 49,500 74, ,750 Add: Desired ending raw-material inventory... 5,000 Total raw-material needs ,750 Deduct: Beginning raw-material inventory... 2,500 Raw material to be purchased ,250 Price (per kilogram)... $.20 Cost of purchases (corrugating medium)... $ 25,250 Total cost of raw-material purchases ($97,000 + $25,250)... $122, Direct-labor budget: Box C Box P Total Production requirements (number of boxes) 495, ,000 Direct labor required per box (hours) Direct labor required for production (hours) 1, ,475 3,712.5 Direct-labor rate... $12 Total direct-labor cost... $44, Manufacturing-overhead budget: Indirect material... $ 10,500 Indirect labor... 50,000 Utilities... 25,000 Property taxes... 18,000 Insurance... 16,000 Depreciation... 29,000 Total overhead... $ 148,500 Managerial Accounting, 9/e Global Edition 9-35

36 PROBLEM 9-43 (CONTINUED) 6. Selling and administrative expense budget: Salaries and fringe benefits of sales personnel... $ 85,000 Advertising... 15,000 Management salaries and fringe benefits... 90,000 Clerical wages and fringe benefits... 26,000 Miscellaneous administrative expenses... 4,000 Total selling and administrative expenses... $ 220, Budgeted income statement: Sales revenue [from sales budget, req. (1)]... $1,100,000 Less: Cost of goods sold: Box C: 500,000 $.21*... $105,000 Box P: 500,000 $.43* , ,000 Gross margin... $ 780,000 Selling and administrative expenses ,000 Income before taxes... $ 560,000 Income tax expense (40%) ,000 Net income... $ 336,000 *Calculation of manufacturing cost per unit: (a) Predetermined overhead rate = = budgetedmanufactur ing overhead volume of direct-laborhours $148,500 (495,000)(.0025) (495,000)(.005) $148,500 = $40per hour 3,712.5 hours 9-36 Solutions Manual

37 PROBLEM 9-43 (CONTINUED) (b) Calculation of manufacturing cost per unit: Box C Box P Direct material: Paperboard.15 kg. $.40 per kg... $ kg. $.40 per kg... $.14 Corrugating medium.10 lb. $.20 per kg lb. $.20 per kg Direct labor:.0025 hr. $12 per hr hr. $12 per hr Applied manufacturing overhead:.0025 hr. $40 per hr hr. $40 per hr Manufacturing cost per unit... $.21 $.43 PROBLEM 9-44 (40 MINUTES) 1. Strategic planning identifies the overall objective of an organization and generally considers the impact of external factors such as competitive forces, market demand, and technological changes when identifying overall objectives. Budgeting is the quantitative expression of plans evolving from strategic planning. The time horizon for budgeting is generally a year, or an operating cycle, and greater attention is focused on internal factors than on external factors. Managerial Accounting, 9/e Global Edition 9-37

38 PROBLEM 9-44 (CONTINUED) 2. For each of the financial objectives established by the board of directors and president of Healthful Foods, Inc., the calculations to determine whether John Winslow s budget attains these objectives are presented in the following table. CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS, INC. Objective Increase sales by 12% ($850, = $952,000) Increase before-tax income by 15% ($105, = $120,750) Maintain long-term debt at or below 16% of assets ($2,050, = $328,000) Maintain cost of goods sold at or below 70% of sales ($947, = $663,425) Attained/ Not Attained Calculations Not attained ($947,750 $850,000)/$850,000 = 11.5% Attained ($120,750 $105,000)/$105,000 = 15% Attained $308,000/$2,050,000 = 15% (rounded) Not attained $669,500/$947,750 = 70.6% (rounded) 3. The accounting adjustments contemplated by John Winslow are unethical because they will result in intentionally overstating income by understating the cost of goods sold. The specific standards of ethical conduct for management accountants violated by Winslow are as follows: Competence. By making the accounting adjustments, Winslow violated the competency standard by not preparing financial statements in accordance with technical standards. Integrity. Winslow violated the integrity standard by engaging in an activity that prejudiced his ability to carry out his duties ethically, and by engaging in an activity that appears to be a conflict of interest. Credibility. By overstating the inventory and reclassifying certain costs, Winslow has violated the credibility standard. He has failed to communicate information fairly and objectively and has failed to disclose all relevant information that would influence the users understanding of the report Solutions Manual

39 PROBLEM 9-45 (120 MINUTES) 1. Sales budget: 20x0 20x1 December January February March First Quarter Total sales... $400,000 $440,000 $484,000 $532,400 $1,456,400 Cash sales* , , , , ,100 Sales on account , , , ,300 1,092,300 *25% of total sales. 75% of total sales. 2. Cash receipts budget: 20x1 January February March First Quarter Cash sales... $110,000 $121,000 $133,100 $ 364,100 Cash collections from credit sales made during current month*... 33,000 36,300 39, ,230 Cash collections from credit sales made during preceding month , , , ,700 Total cash receipts... $413,000 $454,300 $499,730 $1,367,030 *10% of current month's credit sales. 90% of previous month's credit sales. Managerial Accounting, 9/e Global Edition 9-39

40 PROBLEM 9-45 (CONTINUED) 3. Purchases budget: 20x0 20x1 December January February March First Quarter Budgeted cost of goods sold... $280,000 $308,000 $338,800 $372,680 $1,019,480 Add: Desired ending inventory , , , ,340* 186,340 Total goods needed... $434,000 $477,400 $525,140 $559,020 $1,205,820 Less: Expected beginning inventory , , , , ,000** Purchases... $294,000 $323,400 $355,740 $372,680 $1,051,820 *Since April's expected sales and cost of goods sold are the same as the projections for March, the desired ending inventory for March is the same as that for February. The desired ending inventory for the quarter is equal to the desired ending inventory on March 31, 20x1. **The beginning inventory for the quarter is equal to the December ending inventory. 50% x $280,000 (where $280,000 = December cost of goods sold = December sales of $400,000 x 70%) 9-40 Solutions Manual

41 PROBLEM 9-45 (CONTINUED) 4. Cash disbursements budget: 20x1 January February March First Quarter Inventory purchases: Cash payments for purchases during the current month*... $129,360 $142,296 $149,072 $ 420,728 Cash payments for purchases during the preceding month , , , ,884 Total cash payments for inventory purchases... $305,760 $336,336 $362,516 $1,004,612 Other expenses: Sales salaries... $ 21,000 $ 21,000 $ 21,000 $ 63,000 Advertising and promotion... 16,000 16,000 16,000 48,000 Administrative salaries... 21,000 21,000 21,000 63,000 Interest on bonds**... 15, ,000 Property taxes** , ,400 Sales commissions... 4,400 4,840 5,324 14,564 Total cash payments for other expenses... $ 77,400 $ 68,240 $ 63,324 $ 208,964 Total cash disbursements... $383,160 $404,576 $425,840 $ 1,213,576 *40% of current month s purchases [see requirement (3)]. 60% of the prior month's purchases [see requirement (3)]. **Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31. Managerial Accounting, 9/e Global Edition 9-41

42 PROBLEM 9-45 (CONTINUED) 5. Summary cash budget: 20x1 January February March First Quarter Cash receipts [from req. (2)]... $ 413,000 $ 454,300 $ 499,730 $1,367,030 Cash disbursements [from req. (4)]... (383,160) (404,576) (425,840) (1,213,576) Change in cash balance during period due to operations... $ 29,840 $ 49,724 $ 73,890 $ 153,454 Sale of marketable securities (1/2/x1)... 15,000 15,000 Proceeds from bank loan (1/2/x1) , ,000 Purchase of equipment... (125,000) (125,000) Repayment of bank loan (3/31/x1)... (100,000) (100,000) Interest on bank loan*... (2,500) (2,500) Payment of dividends... (50,000) (50,000) Change in cash balance during first quarter... $ (9,046) Cash balance, 1/1/x ,000 Cash balance, 3/31/x1... $ 25,954 *$100,000 10% per year 1/4 year = $2, Analysis of short-term financing needs: Projected cash balance as of December 31, 20x0... $ 35,000 Less: Minimum cash balance... 25,000 Cash available for equipment purchases... $ 10,000 Projected proceeds from sale of marketable securities... 15,000 Cash available... $ 25,000 Less: Cost of investment in equipment ,000 Required short-term borrowing... $(100,000) 9-42 Solutions Manual

43 PROBLEM 9-45 (CONTINUED) 7. INTERCOASTAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 20X1 Sales revenue... $1,456,400 Less: Cost of goods sold... 1,019,480 Gross margin... $ 436,920 Selling and administrative expenses: Sales salaries... $63,000 Sales commissions... 14,564 Advertising and promotion... 48,000 Administrative salaries... 63,000 Depreciation... 75,000 Interest on bonds... 7,500 Interest on short-term bank loan... 2,500 Property taxes... 2,700 Total selling and administrative expenses ,264 Net income... $ 160, INTERCOASTAL ELECTRONICS COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1 Retained earnings, 12/31/x0... $ 107,500 Add: Net income ,656 Deduct: Dividends... 50,000 Retained earnings, 3/31/x1... $ 218,156 Managerial Accounting, 9/e Global Edition 9-43

44 PROBLEM 9-45 (CONTINUED) 9. INTERCOASTAL ELECTRONICS COMPANY BUDGETED BALANCE SHEET MARCH 31, 20X1 Cash... $ 25,954 Accounts receivable* ,370 Inventory ,340 Buildings and equipment (net of accumulated depreciation) ,000 Total assets... $1,247,664 Accounts payable**... $ 223,608 Bond interest payable... 5,000 Property taxes payable Bonds payable (10%; due in 20x6) ,000 Common Stock ,000 Retained earnings ,156 Total liabilities and stockholders' equity... $ 1,247,664 *Accounts receivable, 12/31/x0... $ 270,000 Sales on account [req. (1)]... 1,092,300 Total cash collections from credit sales [req. (2)] ($109,230 + $893,700)... (1,002,930) Accounts receivable, 3/31/x1... $ 359,370 Buildings and equipment (net), 12/31/x0... $ 626,000 Cost of equipment acquired ,000 Depreciation expense for first quarter... (75,000) Buildings and equipment (net), 3/31/x1... $ 676,000 **Accounts payable, 12/31/x0... $ 176,400 Purchases [req. (3)]... 1,051,820 Cash payments for purchases [req. (4)]... (1,004,612) Accounts payable, 3/31/x1... $ 223, Solutions Manual