Chapter 9 Financial Planning and Analysis: The Master Budget 403

! Problem 9–38
Empire Chemical Company produces three products using three different continuous processes. The Production and Materials
products are Yarex, Darol, and Norex. Projected sales in gallons for the three products for the years 20x2 Budgets
and 20x3 are as follows: (LO 9-3, 9-6, 9-7)
20x2 20x3
2. Conversion cost budget:
Yarex .................................................................................................................................... 60,000 65,000
$245,040
Darol .................................................................................................................................... 40,000 35,000
4. Increase in cost of raw
Norex ................................................................................................................................... 25,000 30,000 material: $100,820
Inventories are planned for each product so that the projected finished-goods inventory at the
beginning of each year is equal to 8 percent of that year’s projected sales.
Because of the continuous nature of Empire’s processes, work-in-process inventory for each of the
products remains constant throughout the year.
The raw-material requirements of the three products are shown in the following chart.

Raw Material Units Unit Price Yarex Darol Norex

Gamma .......................... pounds .................. $ 8.00 .................... .2 ................... .4 ................... (0
Murad ............................. pounds .................. 6.00 ................... .4 ................... 0 ................... .5
Islin ................................. gallons .................. 5.00 .................... 1.0 ................. .7 ................... .5
Tarden ............................ gallons .................. 10.00 .................... ( 0 ................... .3 ................... .5

Raw-material inventories are planned so that each raw material’s projected inventory at the begin-
ning of a year is equal to 10 percent of the previous year’s usage of that raw material.
The conversion requirements in hours per gallon for the three products are Yarex, .07 hour; Darol,
.10 hour; and Norex, .16 hour. The conversion cost of $20 per hour is considered 100 percent variable.

Required:

1. Determine Empire Chemical Company’s production budget (in gallons) for the three products for
20x2.
2. Determine Empire Chemical Company’s conversion cost budget for 20x2.
3. Assuming the 20x1 usage of Islin is 100,000 gallons, determine the company’s raw-material pur-
chases budget (in dollars) for Islin for 20x2.
4. Assume that for 20x2 production, Empire Chemical Company could replace the raw material
Islin with the raw material Philin. The usage of Philin would be the same as the usage of Islin. ! Problem 9–39
However, Philin would cost 20 percent more than Islin and would cut production times on all three Sales, Production, and
products by 10 percent. Determine whether management should use Philin or Islin for the 20x2 Purchases Budgets; Activity-
production, supporting your decision with appropriate calculations. For this requirement, ignore Based Overhead Budget
any impact of beginning and ending inventory balances. (LO 9-3, 9-4, 9-5, 9-6)

(CMA, adapted) 2. Production required (units),

heavy coils: 41,000
6. Production overhead bud-
Vista Electronics, Inc. manufactures two different types of coils used in electric motors. In the fall of the get for 20x0, total production
current year, Erica Becker, the controller, compiled the following data. overhead: $1,464,250
Sales forecast for 20x0 (all units to be shipped in 20x0):

Product Units Price

Light coil ................................................................................................................ 60,000 $120
Heavy coil .............................................................................................................. 40,000 170

Raw-material prices and inventory levels:

Expected Inventories, Desired Inventories, Anticipated
Raw Material January 1, 20x0 December 31, 20x0 Purchase Price
Sheet metal ...................... 32,000 lb. 36,000 lb. $8
Copper wire ...................... 29,000 lb. 32,000 lb. 5
Platforms ........................... 6,000 units 7,000 units 3

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404 Chapter 9 Financial Planning and Analysis: The Master Budget

Use of raw material:

Amount Used per Unit

Raw Material Light Coil Heavy Coil

Sheet metal ...................................................................... 4 lb. 5 lb.
Copper wire ...................................................................... 2 lb. 3 lb.
Platforms ........................................................................... 1 unit

Direct-labor requirements and rates:

Product Hours per Unit Rate per Hour
Light coil ........................................................................... 2 $15
Heavy coil ......................................................................... 3 20

Finished-goods inventories (in units):

Expected Desired
Product January 1, 20x0 December 31, 20x0
Light coil ........................................................................... 20,000 25,000
Heavy coil ......................................................................... 8,000 9,000

Production overhead:

Overhead Cost Item Activity-Based Budget Rate

Purchasing and material handling ................................... $.25 per pound of sheet metal and copper wire purchased
Depreciation, utilities, and inspection ............................. $4.00 per coil produced (either type)
Shipping ............................................................................ $1.00 per coil shipped (either type)
General production overhead .......................................... $3.00 per direct-labor hour

Required: Prepare the following budgets for 20x0.

1. Sales budget (in dollars).
2. Production budget (in units).
3. Raw-material purchases budget (in quantities).
4. Raw-material purchases budget (in dollars).
5. Direct-labor budget (in dollars).
6. Production-overhead budget (in dollars).

(CPA, adapted)

! Problem 9–40
United Security Systems, Inc. (USSI) manufactures and sells security systems. The company started
Interrelationships Between
by installing photoelectric security systems in offices and has expanded into the private-home market.
Components of Master Budget
USSI has a basic security system that has been developed into three standard products, each of which
(LO 9-5, 9-6, 9-8)
can be adapted to meet the specific needs of customers. The manufacturing operation is moderate
in size, as the bulk of the component manufacturing is completed by independent contractors. The
security systems are approximately 85 percent complete when received from contractors and require
only final assembly in the USSI plant. Each product passes through at least one of three assembly
operations.
USSI operates in a rapidly growing community. There is evidence that a great deal of new com-
mercial construction will take place in the near future, and management has decided to pursue this new
market. In order to be competitive, the firm will have to expand its operations.
In view of the expected increase in business, Sandra Feldman, the controller, believes that USSI
should implement a complete budgeting system. Feldman has decided to make a formal presentation to
the company’s president explaining the benefits of a budgeting system and outlining the budget sched-
ules and reports that would be necessary.

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