Multiple Choice Questions
1. Generally speaking, budgets are not
used to:
A. identify a company's most profitable
products.
B. evaluate performance.
C. create a plan of action.
D. assist in the control of profit and
operations.
E. facilitate communication and coordinate
activities.
Answer:
A LO: 1 Type: RC
2. Which of the following choices correctly
denotes managerial functions that are commonly associated with budgeting?
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Planning
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Performance
Evaluation
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Coordination
of Activities
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A.
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Yes
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Yes
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No
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B.
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Yes
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Yes
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Yes
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|||
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C.
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Yes
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No
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No
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D.
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Yes
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No
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Yes
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E.
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No
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Yes
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No
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Answer:
B LO: 1 Type: RC
3. A formal budget program will almost always
result in:
A. higher sales.
B. more cash inflows than cash outflows.
C. decreased expenses.
D. improved profits.
E. a detailed plan against which actual results
can be compared.
Answer:
E LO: 1 Type: RC, N
4. A budget serves as a benchmark against which:
A. actual results can be compared.
B. allocated results can be compared.
C. actual results become inconsequential.
D. allocated results become inconsequential.
E. cash balances can be compared to expense
totals.
Answer:
A LO: 1 Type: RC
5. The comprehensive set of budgets that serves
as a company's overall financial plan is commonly known as:
A. an integrated budget.
B. a pro-forma budget.
C. a master budget.
D. a financial budget.
E. a rolling budget.
Answer:
C LO: 1 Type: RC
6. A company's plan for the acquisition of
long-lived assets, such as buildings and equipment, is commonly called a:
A. pro-forma budget.
B. master budget.
C. financial budget.
D. profit plan.
E. capital budget.
Answer:
E LO: 1 Type: RC
7. Wilson Corporation is budgeting its equipment
needs on an on-going basis, with a new quarter being added to the budget as the
current quarter is completed. This type
of budget is most commonly known as a:
A. capital budget.
B. rolling budget.
C. revised budget.
D. pro-forma budget.
E. financial budget.
Answer:
B LO: 1 Type: RC
8. An organization's budgets will often be
prepared to cover:
A. one month.
B. one quarter.
C. one year.
D. periods longer than one year.
E. all of the above.
Answer:
E LO: 1 Type: RC
9. A manufacturing firm would begin preparation
of its master budget by constructing a:
A. sales budget.
B. production budget.
C. cash budget.
D. capital budget.
E. set of pro-forma financial statements.
Answer:
A LO: 1, 4 Type: RC
10. Which of the following budgets is based on many
other master-budget components?
A. Direct labor budget.
B. Overhead budget.
C. Sales budget.
D. Cash budget.
E. Selling and administrative expense budget.
Answer:
D LO: 1, 4 Type: N
11. The budgeted income statement, budgeted
balance sheet, and budgeted statement of cash flows comprise:
A. the final portion of the master budget.
B. the depiction of an organization's overall
actual financial results.
C. the first step of the master budget.
D. the portion of the master budget prepared
after the sales forecast and before the remainder of the operational budgets.
E. the second step of the master budget.
Answer:
A LO: 1, 4 Type: RC
12. Which of the following budgets is prepared at
the end of the budget-construction cycle?
A. Sales budget.
B. Production budget.
C. Budgeted financial statements.
D. Cash budget.
E. Overhead budget.
Answer:
C LO: 1, 4 Type: N
13. Which of the following would depict the
logical order for preparing (1) a production budget, (2) a cash budget, (3) a
sales budget, and (4) a direct-labor budget?
A. 1-3-4-2.
B. 2-3-1-4.
C. 2-1-3-4.
D. 3-1-4-2.
E. 3-1-2-4.
Answer:
D LO: 1, 4 Type: N
14. The master budget contains the following components,
among others: (1) direct-material budget, (2) budgeted balance sheet, (3)
production budget, and (4) cash budget.
Which of these components would be prepared first and which would be
prepared last?
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First
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Last
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A.
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1
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4
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B.
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1
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2
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C.
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3
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4
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D.
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3
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2
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E.
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4
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1
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Answer:
D LO: 1, 4 Type: N
15. A company's sales forecast would likely
consider all of the following factors except:
A. political and legal events.
B. advertising and pricing policies.
C. general economic and industry trends.
D. top management's attitude toward
decentralized operating structures.
E. competition.
Answer:
D LO: 1 Type: RC
16. Which of the following would be considered
when preparing a company's sales forecast?
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Anticipated
Advertising
Campaigns
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General
Economic
Trends
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Expected
Competitive
Actions
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A.
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Yes
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Yes
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No
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B.
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Yes
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No
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Yes
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C.
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Yes
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No
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No
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D.
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Yes
|
Yes
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Yes
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E.
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No
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No
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Yes
|
Answer:
D LO: 1 Type: RC
17. Which of the following statements best
describes the relationship between the sales-forecasting process and the
master-budgeting process?
A. The sales forecast is typically completed
after completion of the master budget.
B. The sales forecast is typically completed
approximately halfway through the master-budget process.
C. The sales forecast is typically completed
before the master budget and has no impact on the master budget.
D. The sales forecast is typically completed
before the master budget and has little impact on the master budget.
E. The sales forecast is typically completed
before the master budget and has significant impact on the master budget.
Answer:
E LO: 1 Type: N
18. Which of the following organizations is not
likely to use budgets?
A. Manufacturing firms.
B. Merchandising firms.
C. Firms in service industries.
D. Nonprofit organizations.
E. None of the above, as all are likely to use
budgets.
Answer:
E LO: 2 Type: RC
19. Activity-based budgeting:
A. begins with a forecast of products and
services to be produced, and customers served.
B. ends with a forecast of products and services
to be produced, and customers served.
C. parallels the flow of analysis that is
associated with activity-based costing.
D. reverses the flow of analysis that is
associated with activity-based costing.
E. is best described by choices "A"
and "D" above.
Answer:
E LO: 3 Type: RC
20. A company that uses activity-based budgeting
performs the following:
1—Plans activities for the budget period.
2—Forecasts the demand for products and services as well as
the customers to be served.
3—Budgets the
resources necessary to carry out activities.
Which
of the following denotes the proper order of the preceding activities?
A. 1-2-3.
B. 2-1-3.
C. 2-3-1.
D. 3-1-2.
E. 3-2-1.
Answer:
B LO: 3 Type: RC
21. Santa Fe Corporation has a highly automated
production facility. Which of the
following correctly shows the two factors that would likely have the most
direct influence on the company's manufacturing overhead budget?
A. Sales volume and labor hours.
B. Contribution margin and cash payments.
C. Production volume and management judgment.
D. Labor hours and management judgment.
E. Management judgment and indirect labor cost.
Answer:
C LO: 4 Type: N
22. May Production Company, which uses
activity-based budgeting, is in the process of preparing a manufacturing
overhead budget. Which of the following
would likely appear on that budget?
A. Batch-level costs: Production setup.
B. Unit-level costs: Depreciation.
C. Unit-level costs: Maintenance.
D. Product-level costs: Insurance and property
taxes.
E. Facility and general operations-level costs:
Indirect material.
Answer:
A LO: 4 Type: N
23. FastTec, which sells electronics in retail
outlets and on the Internet, uses activity-based budgeting in the preparation
of its selling, general, and administrative expense budget. Which of the following costs would the
company likely classify as a unit-level expense on its budget?
A. Media advertising.
B. Retail outlet sales commissions.
C. Salaries of web-site maintenance personnel.
D. Administrative salaries.
E. Salary of sales manager employed at store no.
23.
Answer:
B LO: 4 Type: N
24. Which of the following would have no
effect, either direct or indirect, on an organization's cash budget?
A. Sales revenues.
B. Outlays for professional labor.
C. Advertising expenditures.
D. Raw material purchases.
E. None of the above, as all of these items
would have some influence.
Answer:
E LO: 4 Type: N
25. Atlanta Sporting Goods sells bicycles
throughout the southeastern United States.
The following data were taken from the most recent quarterly sales
forecast:
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End-of-Month
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Expected Sales
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Target Inventory
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April
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1,700 units
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200 units
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May
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1,850 units
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270 units
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June
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2,000 units
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310 units
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On
the basis of the information presented, how many bicycles should the company
purchase in May?
A. 1,780.
B. 1,920.
C. 2,050.
D. 2,120.
E. Some other amount.
Answer:
B LO: 4 Type: A
26. Swanson plans to sell 10,000 units of a
particular product during July, and expects sales to increase at the rate of
10% per month during the remainder of the year.
The June 30 and September 30 ending inventories are anticipated to be 1,100
units and 950 units, respectively. On
the basis of this information, how many units should Swanson purchase for the
quarter ended September 30?
A. 31,850.
B. 32,150.
C. 32,950.
D. 33,250.
E. Some other amount.
Answer:
C LO: 4 Type: A, N
27. York Corporation plans to sell 41,000 units
of its single product in March. The
company has 2,800 units in its March 1 finished-goods inventory and anticipates
having 2,400 completed units in inventory on March 31. On the basis of this information, how many
units does York plan to produce during March?
A. 40,600.
B. 41,400.
C. 43,800.
D. 46,200.
E. Some other amount.
Answer:
A LO: 4 Type: A
28. Coleman, Inc., anticipates sales of 50,000
units, 48,000 units, and 51,000 units in July, August, and September,
respectively. Company policy is to
maintain an ending finished-goods inventory equal to 40% of the following
month's sales. On the basis of this
information, how many units would the company plan to produce in August?
A. 46,800.
B. 49,200.
C. 49,800.
D. 52,200.
E. Some other amount.
Answer:
B LO: 4 Type: A
29. Telcer & Company had 3,000 units in
finished-goods inventory on December 31.
The following data are available for the upcoming year:
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January
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February
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Units to be
produced
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9,400
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10,200
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Desired
ending finished-goods inventory
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2,500
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2,100
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|
The
number of units the company expects to sell in January is:
A. 6,900.
B. 8,900.
C. 9,400.
D. 9,900.
E. 11,900.
Answer:
D LO: 4 Type: A
30. Tidewater plans to sell 85,000 units of
product no. 794 in May, and each of these units requires three units of raw
material. Pertinent data follow.
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Product No. 794
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Raw Material
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Actual May 1
inventory
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11,000 units
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29,000 units
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Desired May
31 inventory
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17,000 units
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20,000 units
|
On
the basis of the information presented, how many units of raw material should
Tidewater purchase for use in May production?
A. 228,000.
B. 246,000.
C. 264,000.
D. 282,000.
E. Some other amount.
Answer:
C LO: 4 Type: A
31.
An examination of
Short Corporation’s inventory accounts revealed the following information:
Raw materials, June 1: 46,000 units
Raw materials, June 30: 51,000 units
Purchases of raw materials during June: 185,000 units
Short’s finished product requires four units of raw
materials. On the basis of this
information, how many finished products were manufactured during June?
A.
45,000.
B.
47,500.
C.
57,750.
D.
70,500.
E.
Some other
amount.
Answer:
A LO: 4 Type: A
32. Nguyen plans to sell 40,000 units of product
no. 75 in June, and each of these units requires five square feet of raw
material. Pertinent data follow.
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Product No. 75
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Raw Material
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Actual June 1 inventory
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5,500
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18,000 square feet
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Estimated June 30 inventory
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4,300
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? square feet
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If
the company purchases 201,000 square feet of raw material during the month, the
estimated raw-material inventory on June 30 would be:
A. 11,000 square feet.
B. 13,000 square feet.
C. 23,000 square feet.
D. 25,000 square feet.
E. some other amount.
Answer:
D LO: 4 Type: A
Use the
following to answer questions 33-34:
Northwest
manufactures a product requiring 0.5 ounces of platinum per unit. The cost of platinum is approximately $360
per ounce; the company maintains an ending platinum inventory equal to 10% of
the following month's production usage.
The following data were taken from the most recent quarterly production
budget:
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July
|
August
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September
|
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Planned
production in units
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1,000
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1,100
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980
|
33. The cost of platinum to be purchased to
support August production is:
A. $195,840.
B. $198,000.
C. $200,160.
D. $391,680.
E. Some other amount.
Answer:
A LO: 4 Type: A
34. If it takes two direct labor hours to produce
each unit and Northwest's cost per labor hour is $15, direct labor cost for
August would be budgeted at:
A. $16,500.
B. $31,200.
C. $33,000.
D. $34,800.
E. Some other amount.
Answer:
C LO: 4 Type: A
35. Uno makes all sales on account, subject to
the following collection pattern: 30% are collected in the month of sale; 60%
are collected in the first month after sale; and 10% are collected in the
second month after sale. If sales for
October, November, and December were $70,000, $80,000, and $60,000, respectively,
what were the firm's budgeted collections for December?
A. $18,000.
B. $66,000.
C. $73,000.
D. $74,000.
E. Some other amount.
Answer:
C LO: 4 Type: A
36. Vern's makes all sales on account, subject to
the following collection pattern: 20% are collected in the month of sale; 70%
are collected in the first month after sale; and 10% are collected in the
second month after sale. If sales for
October, November, and December were $70,000, $60,000, and $50,000,
respectively, what was the budgeted receivables balance on December 31?
A. $40,000.
B. $46,000.
C. $49,000.
D. $59,000.
E. Some other amount.
Answer:
B LO: 4 Type: A
37. Drago makes
all sales on account, subject to the following collection pattern: 30% are collected
in the month of sale; 60% are collected in the first month after sale; and 10%
are collected in the second month after sale.
If sales for June July, and August were $120,000, $160,000, and
$220,000, respectively, what were the firm’s budgeted collections for August
and the company’s budgeted receivables balance on August 31?
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August Collections
|
August 31
Receivables Balance
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A.
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$162,000
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$182,000
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B.
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$174,000
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$170,000
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C.
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$190,000
|
$154,000
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D.
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$262,000
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$ 82,000
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E.
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Some
other combination of figures not listed above.
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Answer:
B LO: 4 Type: A
38. Diego makes all purchases on account, subject
to the following payment pattern:
Paid
in the month of purchase: 30%
Paid
in the first month following purchase: 60%
Paid
in the second month following purchase: 10%
If
purchases for January, February, and March were $200,000, $180,000, and
$230,000, respectively, what were the firm's budgeted payments in March?
A. $69,000.
B. $138,000.
C. $177,000.
D. $197,000.
E. Some other amount.
Answer:
D LO: 4 Type: A
39. Brooklyn makes all purchases on account,
subject to the following payment pattern:
Paid
in the month of purchase: 30%
Paid
in the first month following purchase: 65%
Paid
in the second month following purchase: 5%
If
purchases for April, May, and June were $200,000, $160,000, and $250,000,
respectively, what was the firm's budgeted payables balance on June 30?
A. $175,000.
B. $179,000.
C. $183,000.
D. $189,000.
E. Some other amount.
Answer: C LO: 4
Type: A
40. Wolfe, Inc., began operations on January 1 of
the current year with a $12,000 cash balance.
Forty percent of sales are collected in the month of sale; 60% are
collected in the month following sale.
Similarly, 20% of purchases are paid in the month of purchase, and 80%
are paid in the month following purchase.
The following data apply to January and February:
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January
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February
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Sales
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$35,000
|
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$55,000
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Purchases
|
30,000
|
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40,000
|
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Operating expenses
|
7,000
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9,000
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|
If operating expenses are paid in the month
incurred and include monthly depreciation charges of $2,500, determine the
change in Wolfe's cash balance during February.
A. $2,000 increase.
B. $4,500 increase.
C. $5,000 increase.
D. $7,500 increase.
E. Some other amount.
Answer:
B LO: 4 Type: A
Use the
following to answer questions 41-43:
The Grainger
Company's budgeted income statement reflects the following amounts:
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Sales
|
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Purchases
|
|
Expenses
|
|
January
|
$120,000
|
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$78,000
|
|
$24,000
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February
|
110,000
|
|
66,000
|
|
24,200
|
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March
|
125,000
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81,250
|
|
27,000
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April
|
130,000
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|
84,500
|
|
28,600
|
Sales are
collected 50% in the month of sale, 30% in the month following sale, and 19% in
the second month following sale. One
percent of sales is uncollectible and expensed at the end of the year.
Grainger pays
for all purchases in the month following purchase and takes advantage of a 3%
discount. The following balances are as
of January 1:
|
Cash
|
$88,000
|
|
Accounts
receivable*
|
58,000
|
|
Accounts
payable
|
72,000
|
*Of this
balance, $35,000 will be collected in January and the remaining amount will be
collected in February.
The monthly
expense figures include $5,000 of depreciation.
The expenses are paid in the month incurred.
41. Grainger's expected cash balance at the end
of January is:
A. $87,000.
B. $89,160.
C. $92,000.
D. $94,160.
E. $113,160.
Answer:
D LO: 4 Type: A
42. Grainger's budgeted cash receipts in February
are:
A. $91,000.
B. $95,000.
C. $113,090.
D. $113,640.
E. $114,000.
Answer:
E LO: 4 Type: A
43. Grainger's budgeted cash payments in February
are:
A. $75,660.
B. $94,860.
C. $97,200.
D. $99,860.
E. $102,200.
Answer:
B LO: 4 Type: A
44. End-of-period figures for accounts receivable
and payables to suppliers would be found on the:
A. cash budget.
B. budgeted schedule of cost of goods
manufactured.
C. budgeted income statement.
D. budgeted balance sheet.
E. budgeted statement of cash flows.
Answer:
D LO: 4 Type: RC
45. Which of the following statements about
financial planning models (FPMs) is (are) false?
A. FPMs express a company's financial and
operating relationships in mathematical terms.
B. FPMs allow a user to explore the impact of
changes in variables.
C. FPMs are commonly known as
"what-if" models.
D. FPMs have become less popular in recent years
because of computers and spreadsheets.
E. Statements "C" and "D"
are both false.
Answer:
D LO: 5 Type: RC
46. Consider the following statements about
budget administration:
I.
Regardless
of size, the budgeting process is a very formal process in all organizations.
II.
The
budget manual is prepared to communicate budget procedures and deadlines to
employees throughout an organization.
III.
Effective
internal control procedures require that the budget director be an individual
other than the controller.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
Answer:
B LO: 6 Type: N
47. Which of the following statements concerning
the budget director is false?
A. The budget director is often the
organization's controller.
B. The budget director has the responsibility of
specifying the process by which budget data will be gathered.
C. The budget director collects information and
participates in preparing the master budget.
D. The budget director communicates budget
procedures and deadlines to employees throughout the organization.
E. The budget director usually has the authority
to give final approval to the master budget.
Answer:
E LO: 6 Type: RC
48. E-budgeting:
A. often uses specialized software to streamline
the budgeting process.
B. is an Internet-based budgeting procedure.
C. requires significant network security
provisions.
D. is becoming more commonplace as businesses
expand their operations throughout the world.
E. possesses all of the above attributes.
Answer:
E LO: 6 Type: RC
49. Consider the following statements about
zero-base budgeting:
I.
The
budget for virtually every activity in an organization is initially set to the
level that existed during the previous year.
II.
The
budget forces management to rethink each phase of an organization's operations
before resources are allocated.
III.
To
receive funding for the upcoming period, individual activities must be
justified in terms of continued usefulness to the organization.
Which
of the above statements is (are) true?
A. II only.
B. III only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer:
D LO: 6 Type: RC
50. Consider the following statements about
companies that are involved with international operations:
I.
Budgeting
for these firms is often very involved because of fluctuating values in foreign
currencies.
II.
Multinational
firms may encounter hyperinflationary economies.
III.
Such
organizations often face changing laws and political climates that affect
business activity.
Which
of the above statements is (are) true?
A. I only.
B. III only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer:
E LO: 6 Type: RC
51. The budgeting technique that focuses on
different phases of a product such as planning and concept design, testing,
manufacturing, and distribution and customer service is known as:
A. cash-flow budgeting.
B. zero-base budgeting.
C. base budgeting.
D. comprehensive budgeting.
E. life-cycle budgeting.
Answer:
E LO: 7 Type: RC
52. Consider the following statements about
budgeting and a product's life cycle:
I.
Budgets
should focus on costs that are incurred only after a product has been
introduced to the marketplace.
II.
Life-cycle
costs would include those related to product planning, preliminary design,
detailed design and testing, production, and distribution and customer service.
III.
When
a life cycle is short, companies must make certain that before a commitment is
made to a product, the product's life-cycle costs are covered.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer:
D LO: 7 Type: RC
53. The difference between the revenue or cost
projection that a person provides, and a realistic estimate of the revenue or
cost, is called:
A. passing the buck.
B. budgetary slack.
C. false budgeting.
D. participative budgeting.
E. resource allocation processing.
Answer:
B LO: 8 Type: RC
54. If a manager builds slack into a budget, how
would that manager handle estimates of revenues and expenses?
|
|
Revenues
|
|
Expenses
|
|
A.
|
Underestimate
|
|
Underestimate
|
|
B.
|
Underestimate
|
|
Overestimate
|
|
C.
|
Overestimate
|
|
Underestimate
|
|
D.
|
Overestimate
|
|
Overestimate
|
|
E.
|
Estimate
correctly
|
|
Estimate
correctly
|
Answer:
B LO: 8 Type: RC
55 The following events took place when Managers
A, B, and C were preparing budgets for the upcoming period:
I.
Manager
A increased property tax expenditures by 2% when she was informed of a recent
rate hike by local authorities.
II.
Manager
B reduced sales revenues by 4% when informed of recent aggressive actions by a
new competitor.
III.
Manager
C, who supervises employees with widely varying skill levels, used the highest
wage rate in the department when preparing the labor budget.
Assuming
that the percentage amounts given are reasonable, which of the preceding cases
is (are) an example of building slack in budgets?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer:
C LO: 8 Type: N
56. Consider the following statements about
budgetary slack:
I.
Managers
build slack into a budget so that they stand a greater chance of receiving
favorable performance evaluations.
II.
Budgetary
slack is used by managers to guard against uncertainty and unforeseen events.
III.
Budgetary
slack is used by managers to guard against dollar cuts by top management in the
resource allocation process.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer:
E LO: 8 Type: RC
57. When an organization involves its many
employees in the budgeting process in a meaningful way, the organization is
said to be using:
A. budgetary slack.
B. participative budgeting.
C. budget padding.
D. imposed budgeting.
E. employee-based budgeting.
Answer:
B LO: 8 Type: RC
58. Which of the following outcomes is (are)
sometimes associated with participative budgeting?
A. Employees make little effort to achieve
budgetary goals.
B. Budget preparation time can be somewhat
lengthy.
C. The problem of budget padding may arise.
D. Financial modeling becomes much more
difficult to undertake.
E. Budget preparation time can be somewhat
lengthy and budget padding may arise.
Answer:
E LO: 8 Type: RC
59. Company A uses a heavily participative
budgeting approach whereas at Company B, top management develops all budgets
and imposes them on lower-level personnel.
Which of the following statements is false?
A. A's employees will likely be more motivated
to achieve budgetary goals than the employees of Company B.
B. B's employees may be somewhat disenchanted
because although they will be evaluated against a budget, they really had
little say in budget development.
C. Budget padding will likely be a greater
problem at Company B.
D. Budget preparation time will likely be longer
at Company A.
E. Ethical issues are more likely to arise at
Company A, especially when the budget is used as a basis for performance
appraisal.
Answer:
C LO: 8 Type: N
EXERCISES
Revenue and
Labor Budgeting—University Setting
60. Virginia State University (VSU) is preparing
its master budget for the upcoming academic year. Currently, 12,000 students are enrolled on
campus; however, the admissions office is forecasting a 5% growth in the student
body despite a tuition hike to $80 per credit hour. The following additional information has been
gathered from an examination of university records and conversations with
university officials:
·
VSU
is planning to award 150 tuition-free scholarships.
·
The
average class has 30 students, and the typical student takes 15 credit hours
each semester.
·
Each
class is three credit hours.
·
Each
faculty member teaches five classes during the academic year.
Required:
A.
Compute
the budgeted tuition revenue for the upcoming academic year.
B.
Determine
the number of faculty members needed to cover classes.
C.
In
preparing the university's master budget, should the administration begin with
a forecast of students or a forecast of faculty members? Briefly explain.
LO: 4 Type: A, N
Answer:
A.
Total
student body: 12,000 + (12,000 x 5%) = 12,600;
Tuition-paying
students: 12,600 - 150 = 12,450;
Forecasted
tuition revenue: 12,450 students x 30 credit hours x $80 = $29,880,000
B.
Each
student generates 10 "enrollments" per year (15 credit hours x 2 semesters
÷ 3 credit hours per class). Thus,
126,000 "enrollments" (12,600 students x 10) must be covered.
Classes to
be taught: 126,000 ÷ 30 students per class = 4,200 classes;
Faculty
needed: 4,200 classes ÷ 5 classes per professor = 840 faculty
C.
The
university should begin with a forecast of the number of students. While the number of faculty may be a key
driver for a variety of expenditures, 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.
Production
Budget
61. Thrifty Corporation has experienced a number
of out-of-stock situations with respect to its finished-goods inventories. Inventory at the end of May, for example, was
only 40 units—an all-time low.
Management
desires to implement a policy whereby finished-goods inventory is 70% of the
following month's sales. Budgeted sales
for June, July, and August are expected to be 4,500 units, 5,100 units, and 4,900
units, respectively.
Required:
Determine
the number of units that Thrifty must produce in June and July.
LO: 4 Type: A
Answer:
|
Budgeted
sales in June (units)
|
4,500
|
|
Add: Desired
ending finished-goods inventory (5,100 x 70%)
|
3,570
|
|
Total
finished units needed
|
8,070
|
|
Less:
Beginning finished-goods inventory
|
40
|
|
Number of
units to be produced in June
|
8,030
|
|
|
|
|
Budgeted
sales in July (units)
|
5,100
|
|
Add: Desired
ending finished-goods inventory (4,900 x 70%)
|
3,430
|
|
Total
finished units needed
|
8,530
|
|
Less: Beginning
finished-goods inventory
|
3,570
|
|
Number of
units to be produced in July
|
4,960
|
Direct-Material Purchases
Budget
62. Turbo Manufacturing plans to produce 20,000
units, 24,000 units, and 30,000 units, respectively, in October, November, and
December. Each of these units requires
four units of part no. 879, which the company can purchase for $7 each. Turbo has 35,000 units of part no. 879 in
stock on September 30.
Required:
Prepare
a direct-material purchases budget for October and November if management
desires to maintain an ending raw-material inventory equal to 40% of the
following month's production usage.
LO: 4 Type: A
Answer:
|
|
October
|
November
|
|
Planned
production
|
20,000
|
24,000
|
|
Units of part
no. 879
|
x 4
|
x 4
|
|
Units of part
no. 879 used in production
|
80,000
|
96,000
|
|
Add: Desired
ending inventory*
|
38,400
|
48,000
|
|
Total units
of part no. 879 needed
|
118,400
|
144,000
|
|
Less:
Beginning inventory of part no. 879
|
35,000
|
38,400
|
|
Units of part
no. 879 to be purchased
|
83,400
|
105,600
|
|
Cost per unit
|
x $7
|
x $7
|
|
Cost of
direct material purchases
*October:
24,000 x 4 x 40%; November: 30,000 x 4 x 40%
|
$583,800
|
$739,200
|
Production and Direct-Material Purchases
Budgets
63. Scot Company plans to sell 400,000 units of
finished product in July 20x1.
Management (1) anticipates a growth rate in sales of 5% per month
thereafter and (2) desires a monthly ending finished-goods inventory (in units)
of 80% of the following month's estimated sales. There are 300,000 completed units in the June
30, 20x1 inventory.
Each
unit of finished product requires four pounds of direct material at a cost of
$1.50 per pound. There are 1,600,000
pounds of direct material in inventory on June 30, 20x1.
Required:
A.
Prepare
a production budget for the quarter ended September 30, 20x1. Note: For both part "A" and
part "B" of this problem, prepare your budget on a quarterly (not
monthly) basis.
B.
Independent
of your answer to part "A," assume that Scot plans to produce
1,200,000 units of finished product for the quarter ended September 30. If the firm desires to stock direct materials
at the end of this period equal to 25% of current production usage, compute the
cost of direct material purchases for the quarter.
LO: 4 Type: A
Answer:
|
A.
|
Projected
sales:
|
|
|
|
July
|
400,000
|
|
|
August
(400,000 x 1.05)
|
420,000
|
|
|
September
(420,000 x 1.05)
|
441,000
|
|
|
Quarterly
total
|
1,261,000
|
|
|
|
|
|
|
Total
quarterly sales
|
1,261,000
|
|
|
Add: Desired
9/30 inventory (463,050* x 80%)
|
370,440
|
|
|
Total units
needed
|
1,631,440
|
|
|
Less: 6/30
inventory
|
300,000
|
|
|
Total
quarterly production requirement
|
1,331,440
|
|
|
*October sales: 441,000 x 1.05 = 463,050
|
|
|
|
|
|
|
B.
|
Material to
be used in production (1,200,000 x 4 pounds)
|
4,800,000
|
|
|
Add: Desired
9/30 inventory (4,800,000 x 25%)
|
1,200,000
|
|
|
Direct
materials needed
|
6,000,000
|
|
|
Less: 6/30
inventory
|
1,600,000
|
|
|
Pounds to be
purchased during the quarter
|
4,400,000
|
|
|
Direct
material cost per pound
|
x $1.50
|
|
|
Total
quarterly cost of purchases
|
$6,600,000
|
Budget
Linkages: Production, Materials, Labor, Balance Sheet
64. Atlantic Corporation assembles bicycles by
purchasing frames, wheels, and other parts from various suppliers. Consider the following data:
·
The company
plans to sell 25,000 bicycles during each month of the year's first quarter.
·
A
review of the accounting records disclosed a finished-goods inventory of 1,400
bicycles on January 1 and an expected finished-goods inventory of 1,850
bicycles on January 31.
·
Atlantic
has 4,300 wheels in inventory on January 1, a level that is expected to drop by
5% at month-end.
·
Assembly
time totals 30 minutes per bicycle, and workers are paid $14 per hour.
·
Atlantic
accounts for employee benefits as a component of direct labor cost. Pension and insurance costs average $2 per
hour (total); additionally, the company pays Social Security taxes that amount
to 8% of gross wages earned.
Required:
A.
How
many bicycles does Atlantic expect to produce (i.e., assemble) in January?
B.
How
many wheels must be purchased to satisfy production needs?
C.
Compute
Atlantic's total direct labor cost.
D.
Briefly
explain how the company's purchasing activity would affect the end-of-period
balance sheet.
LO: 4 Type: A, N
Answer:
|
A.
|
Finished-goods inventory is
expected to increase by 450 units (1,850 - 1,400). Thus, the company will assemble 25,450
bicycles (25,000 + 450).
|
||
|
B.
|
Atlantic's production will
require 50,900 wheels (25,450 x 2).
Given that inventory will drop by 215 units (4,300 x 5%), the company
must purchase 50,685 wheels (50,900 - 215).
|
||
|
C.
|
Assembly time: 25,450
bicycles x 30/60 = 12,725 hours
|
|
|
|
|
Labor cost:
|
|
|
|
|
Wages:
12,725 hours x $14
|
$178,150
|
|
|
|
Pension
and insurance: 12,725 hours x $2
|
25,450
|
|
|
|
Social
Security taxes: $178,150 x 8%
|
14,252
|
|
|
|
Total
|
$217,852
|
|
|
D.
|
Purchasing activity would
likely affect the balance sheet in several ways. Atlantic's Cash account would decrease and
any end-of-period obligations to suppliers would be disclosed as accounts
payable. In addition, the wheels on
hand at the end of the period would affect raw-material inventories, and the
cost of wheels acquired and used would influence the ending inventory of
bicycles.
|
||
Production, Materials, and
Labor Budgets
65. Jacobs manufactures two products: A and
B. The firm predicts a sales volume of
10,000 units for product A and ending finished-goods inventory of 2,000
units. These numbers for product B are
12,000 and 3,000, respectively. Jacobs
currently has 7,000 units of A in inventory and 9,000 units of B.
The
following raw materials are required to manufacture these products:
|
|
|
Required for Product
|
|||
Raw Material
|
Cost per Pound
|
A
|
B
|
||
|
X
|
$2.00
|
|
2 pounds
|
|
|
|
Y
|
2.50
|
|
1 pound
|
1 pound
|
|
|
Z
|
1.25
|
|
|
3 pounds
|
|
Product
A requires three hours of cutting time and two hours of finishing time; B
requires one hour and three hours, respectively. The direct labor rate for cutting is $10 per
hour and $18 per hour for finishing.
Required:
A.
Prepare
a production budget in units.
B.
Prepare
a materials usage budget in pounds and dollars.
C.
Prepare
a direct labor budget in hours and dollars for product A.
LO: 4 Type: A
Answer:
|
A.
|
|
A
|
B
|
||||
|
|
Sales volume
in units
|
10,000
|
12,000
|
||||
|
|
Add: Ending
finished-goods inventory
|
2,000
|
3,000
|
||||
|
|
Total units required
|
12,000
|
15,000
|
||||
|
|
Less:
Beginning finished-goods inventory
|
7,000
|
9,000
|
||||
|
|
Total units
to be produced
|
5,000
|
6,000
|
||||
|
B.
|
Raw Material
Usage
|
A
|
B
|
||||
|
|
X: 2 pounds x 5,000
|
10,000
|
|
||||
|
|
Y: 1 pound x 5,000; 1
pound x 6,000
|
5,000
|
6,000
|
||||
|
|
Z: 3 pounds x 6,000
|
|
18,000
|
||||
|
|
|
|
|
||||
|
|
X: 10,000 pounds x $2.00
|
$20,000
|
|
||||
|
|
Y: (5,000 + 6,000) pounds
x $2.50
|
27,500
|
|
||||
|
|
Z: 18,000 pounds x $1.25
|
22,500
|
|
||||
|
|
Total cost
|
$70,000
|
|
||||
|
C.
|
Cutting
|
|
|
|
Production in units
|
5,000
|
|
|
Direct labor hours per
unit
|
x 3
|
|
|
Usage in direct labor
hours
|
15,000
|
|
|
Direct labor rate
|
x $10
|
|
|
Direct labor cost
|
$150,000
|
|
|
|
|
|
|
Finishing
|
|
|
|
Production in units
|
5,000
|
|
|
Direct labor hours per
unit
|
x 2
|
|
|
Usage in direct labor
hours
|
10,000
|
|
|
Direct labor rate
|
x $18
|
|
|
Direct labor cost
|
$180,000
|
|
|
Total budgeted direct
labor cost
|
$330,000
|
Cash
Collections
66. Tara Company has the following historical
collection pattern for its credit sales:
70% collected in
month of sale
15% collected in
the first month after sale
10% collected in
the second month after sale
4% collected in
the third month after sale
1% uncollectible
Budgeted
credit sales for the last six months of the year follow.
|
July
|
$30,000
|
|
August
|
35,000
|
|
September
|
40,000
|
|
October
|
45,000
|
|
November
|
50,000
|
|
December
|
42,500
|
Required:
A.
Calculate
the estimated total cash collections during October.
B.
Calculate
the estimated total cash collections during the year's fourth quarter.
LO: 4 Type: A
Answer:
|
A.
|
Month of Sale
|
October Collections
|
||
|
|
July
|
$30,000 x 4% =
|
$ 1,200
|
|
|
|
August
|
$35,000 x 10% =
|
3,500
|
|
|
|
September
|
$40,000 x 15% =
|
6,000
|
|
|
|
October
|
$45,000 x 70% =
|
31,500
|
|
|
|
Total
|
|
$42,200
|
|
|
B.
|
|
Credit
|
Amount Collected
|
|||||
|
|
Month of Sale
|
Sales
|
October
|
November
|
December
|
|||
|
|
July
|
$ 30,000
|
$ 1,200
|
|
|
|||
|
|
August
|
35,000
|
3,500
|
$ 1,400
|
|
|||
|
|
September
|
40,000
|
6,000
|
4,000
|
$ 1,600
|
|||
|
|
October
|
45,000
|
31,500
|
6,750
|
4,500
|
|||
|
|
November
|
50,000
|
|
35,000
|
7,500
|
|||
|
|
December
|
42,500
|
|
|
29,750
|
|||
|
|
Total
|
$242,500
|
$42,200
|
$47,150
|
$43,350
|
|||
|
|
|
|
||||||
|
|
Total collections in the
fourth quarter
|
$132,700
|
||||||
Cash Inflows
and Cash Management
67. The accounting records of Backspace, Inc.,
revealed an accounts receivable balance of $195,000 on January 1, 20x6. Forty percent of the company's sales are for cash,
and the remaining 60% are on account. Of
the credit sales, 30% are collected in the month of sale and 70% are collected
in the following month. Total sales in
January and February are expected to amount to $500,000 and $530,000,
respectively.
Assume
that in the latter half of 20x6, Backspace hired a new sales manager who
aggressively tried to maximize the company's market share. She implemented a compensation system for the
sales force that was 100% commission based, with the commission calculated on
the basis of gross sales dollars. Sales
volume increased dramatically in a very short period of time, and the sales and
collection patterns changed, as follows:
|
Cash sales: 20%
|
|
|
Credit sales: 80%
|
|
|
Collected
in the month of sale
|
15%
|
|
Collected
in the month following sale
|
75%
|
|
Uncollectible
|
10%
|
Required:
A.
Compute
the company's cash inflows for January and February, 20x6.
B.
Determine
the outstanding receivables balance at the end of February.
C.
Compare
the sales and collection patterns before and after the arrival of the
new sales manager. Have things improved
or deteriorated? Explain.
D.
On
the basis of the information presented, determine what likely caused the
improvement or deterioration in collection patterns.
LO: 4 Type: A, N
Answer:
A.
January:
Accounts receivable ($195,000) + January cash sales ($500,000 x 40%)
+ January
credit sales collected in January ($500,000 x 60% x 30%) = $485,000
February:
January credit sales collected in February ($500,000 x 60% x 70%) +
February cash
sales ($530,000 x 40%) + February credit sales collected in February ($530,000
x 60% x 30%) = $517,400
B.
Since
credit sales are collected over two months, 70% of February's credit sales are
still outstanding: $530,000 x 60% x 70% = $222,600
C.
Although
sales have increased, the credit and collection patterns have
deteriorated. One of the company's
likely objectives is to accelerate cash inflows. Notice that in percentage terms, cash sales
have declined (40% vs. 20%); credit customers now take longer to pay as judged
by collections in the month of sale (30% vs. 15%); and high levels of
uncollectibles have arisen (0% vs. 10%).
D.
The
data reveal that total sales increased as did the percentage of sales made on
credit. It appears that the sales
manager's emphasis on market share may have led to sales being made to poor
credit risks [as judged by the high rate of uncollectibles and reduced
percentages of sales being settled in the month of sale (both cash and
credit)]. These actions may have been
triggered by a commission system based on gross sales, thus
"encouraging" employees to increase sales despite the credit
worthiness and profitability of the customer.
Cash
Budgeting
68. Renson Corporation, a wholesaler, provided
the following information:
|
Month
|
Merchandise Purchases
|
Sales
|
|
January
|
$142,000
|
$172,000
|
|
February
|
148,000
|
166,000
|
|
March
|
136,000
|
165,000
|
|
April
|
154,000
|
178,000
|
|
May
|
160,000
|
166,000
|
Customers
pay 60% of their balances in the month of sale, 30% in the month following sale,
and 10% in the second month following sale.
The company pays all invoices in the month following purchase and takes
advantage of a 3% discount on all amounts due.
Cash payments for operating expenses in May will be $119,500; Renson's
cash balance on May 1 was $127,800.
Required:
Determine
the following:
A.
Expected
cash collections during May.
B.
Expected
cash disbursements during May.
C.
Expected
cash balance on May 31.
LO: 4 Type: A
Answer:
|
A.
|
Month
|
|
Sales
|
Percent
|
Collections
|
|
|
|
March
|
$165,000
|
10%
|
$ 16,500
|
||
|
|
April
|
178,000
|
30%
|
53,400
|
||
|
|
May
|
166,000
|
60%
|
99,600
|
||
|
|
Total
|
|
|
$169,500
|
||
|
B.
|
April
purchases to be paid in May
|
$154,000
|
|
|
Less: 3%
cash discount
|
4,620
|
|
|
Net
amount
|
$149,380
|
|
|
Add:
Cash payments for expenses
|
119,500
|
|
|
Total
expected cash disbursements
|
$268,880
|
|
C.
|
Balance,
May 1
|
$127,800
|
|
|
Add:
Expected collections
|
169,500
|
|
|
Subtotal
|
$297,300
|
|
|
Less:
Expected payments
|
268,880
|
|
|
Expected
balance, May 31
|
$ 28,420
|
Interpretation
of Budget Data
69. Stiles Enterprises reported the following
cash collections in July and August from credit sales:
|
|
July
|
|
August
|
|
|
From June
receivables
|
$
33,000
|
|
|
|
|
From July
sales
|
105,000
|
|
$ 45,000
|
|
|
From August
sales
|
|
|
168,000
|
|
The
company sells a single product for $20, and all sales are collected over a
two-month period.
Required:
A.
Determine
the number of units that were sold in July.
B.
Determine
the percent of credit sales collected in the month of sale and the percent of
sales collected in the month following sale.
C.
How
many units were sold in August?
D.
Determine
the accounts receivable balance as of August 31.
LO: 4 Type: A, N
Answer:
A.
July
sales: $105,000 + $45,000 = $150,000; $150,000 ÷ $20 = 7,500 units
B.
July
sales collected in July: $105,000 ÷ $150,000 = 70%
Seventy
percent of credit sales are collected in the month of sale; the remaining 30%
are collected in the month following sale.
C.
Seventy
percent of August sales were collected in August; thus, total August sales =
$168,000 ÷
0.70, or $240,000. August sales in
units: $240,000 ÷ $20 = 12,000
D.
$240,000
- $168,000 = $72,000
Cash and the Budgeting Process
70.
Sherman Company
provides services in the retail flooring industry. The following information is available for
20x5:
·
Twenty percent of
the firm’s services are for cash and the remaining 80% are on account. Of the credit services, 40% are collected in
the month that the service is provided, with the remaining 60% collected in the
following month.
·
Services provided
in January are expected to total $250,000 and grow at the rate of 5% per month
thereafter.
·
January’s cash
collections are expected to be $240,400, and month-end receivables are forecast
at $120,000.
·
Monthly cash
operating costs and depreciation during the first quarter of the year are
approximated at $250,000 and $15,000, respectively.
·
Sherman’s
December 31, 20x4 balance sheet revealed accounts payable balances of
$28,000. This amount is related to the
company’s operating costs and is expected to grow to $36,000 by the end of
20x5’s first quarter. All operating
costs are paid within 30 days of incurrence.
·
Company policy
requires that a $20,000 minimum cash balance be maintained, and Sherman’s 20x4
year-end balance sheet showed that the firm was in compliance with policy by
having cash of $23,000.
Required:
A.
Determine the
sales revenue earned that will appear on the income statement for the quarter
ended March 31, 20x5.
B.
Compute the
company’s first-quarter cash collections.
C.
Compute the cash
balance that would appear on the March 31, 20x5 balance sheet.
D.
What are some
possible actions the company could pursue if, at any time during the quarter,
it finds that the cash balance has fallen below the stated minimum.
LO: 4 Type: A, N
Answer:
A.
The income
statement will report revenues earned of $788,125 [$250,000 + ($250,000 x 1.05
= $262,500) + ($262,500 x 1.05 = $275,625)].
B.
Collections for
the first quarter total $766,225 ($240,400 + $256,500 + $269,325):
|
January:
|
|
|
|
Given
|
|
$240,400
|
|
February:
|
|
|
|
January receivables
|
$120,000
|
|
|
February cash services: $262,500 x 20%
|
52,500
|
|
|
February credit services: $262,500 x 80% x 40%
|
84,000
|
$256,500
|
|
March:
|
|
|
|
February credit services: $262,500 x 80% x 60%
|
$126,000
|
|
|
March cash services: $275,625 x 20%
|
55,125
|
|
|
March credit services: $275,625 x 80% x 40%
|
88,200
|
$269,325
|
C.
The ending cash
balance is $47,225: $23,000 (January 1 balance) + $766,225 (collections) -
$28,000 (December payables) - $750,000 (monthly cash expenses x 3) + $36,000
(March payables).
D. Several
possible actions include securing a short-term loan or line of credit, working
with clients in an attempt to accelerate inflows, and working with vendors to
temporarily delay payments. The goal is
to have added funds on hand so that operations continue smoothly and are not
disrupted because of sporadic or ongoing shortages.
Budgeted
Income Statement; Partial Balance Sheet
71. The following information relates to DFW
Corporation:
·
All
sales are on account and are budgeted as follows: February, $350,000; March,
$360,000; and April, $400,000. DFW
collects 70% of its sales in the month of sale and 30% in the following month.
·
Cost
of goods sold averages 60% of sales.
Purchases total 65% of the following month's sales and are paid in the
month following acquisition.
·
Cash
operating expenses total $60,000 per month and are paid when incurred. Monthly depreciation amounts to $18,000.
·
Selected
amounts taken from the January 31 balance sheet were: accounts receivable,
$115,000; plant and equipment (net), $107,000; and retained earnings, $85,000.
Required:
A.
Prepare
a budgeted income statement that summarizes activity for the two months ended
March 31, 20x1.
B.
Compute
the amounts that would appear on the March 31 balance sheet for accounts
receivable, plant and equipment (net), and retained earnings.
LO: 4 Type: A
Answer:
|
A.
|
Income Statement for the Two Months Ended
March 31, 20x1
|
||
|
|
Sales revenue ($350,000 + $360,000)
|
|
$710,000
|
|
|
Cost of goods sold ($710,000 x 60%)
|
|
426,000
|
|
|
Gross margin
|
|
$284,000
|
|
|
Operating expenses:
|
|
|
|
|
Cash
operating expenses ($60,000 x 2)
|
$120,000
|
|
|
|
Depreciation
($18,000 x 2)
|
36,000
|
156,000
|
|
|
Net income
|
|
$128,000
|
|
B.
|
Accounts receivable: $115,000 - $115,000 +
$350,000 - ($350,000 x 70%) + $360,000 - ($350,000 x 30%) - ($360,000 x 70%)
= $108,000
Plant and equipment (net): $107,000 - $18,000
- $18,000 = $71,000
Retained earnings: $85,000 + $128,000 =
$213,000
|
||
DISCUSSION
QUESTIONS
Purposes of
Budgeting Systems
72. Discuss the importance of budgeting and
identify five purposes of budgeting systems.
LO: 1 Type: RC
Answer:
Budgets
aid in determining how to acquire resources, and when and how these resources
should be used. In plain and simple
terms, a formal budgeting program is a key ingredient to effective management. The five purposes of budgeting are to:
1. develop a plan of action.
2. facilitate communication of the plan and
coordinate various views within an organization.
3. allocate limited resources effectively and
efficiently.
4. serve as a benchmark to control profit and
operations.
5. evaluate performance and provide
incentives to managers.
Sales
Forecast
73. List several factors that an organization
might consider when developing a sales forecast.
LO: 1 Type: RC
Answer:
·
Past
sales levels and economic trends for the firm as well as for the industry as a
whole
·
General
conditions in the economy such as growth or decline, recession or boom, etc.
·
External
forces such as weather or potential strikes
·
Political
or legal factors such as litigation or new legislation
·
Pricing
policies of the organization
·
Advertising
and promotion plans
·
Competitors'
actions
·
Potential
for new product lines
·
Market
research studies
Budgetary
Slack
74. Tara Pineno, new-accounts manager at East
Bank of Clarion, has been asked to project how many new accounts she will open
during 20x2. The local economy has been
growing, and the bank has experienced a 10% increase in the number of new
accounts over each of the past five years.
In 20x1, the bank had 10,000 accounts.
Tara
is paid a salary, plus a bonus of $20 for every new account above the budgeted
amount. Thus, if the annual budget calls
for 1,000 new accounts, and 1,080 new accounts are obtained, her bonus will be
$1,600 (80 x $20).
Pineno
believes that the local economy will continue to grow at the same rate in 20x2
as it has in recent years. She decided
to submit a projection of 700 new accounts for 20x2.
Required:
Your
consulting firm has been hired by the bank president to make recommendations
for improving the bank's operation.
Write a memorandum to the president defining and explaining the negative
consequences of budgetary slack. Also
discuss the bank's bonus system for the new-accounts manager and how the bonus
program tends to encourage budgetary slack.
LO: 8 Type: RC
Answer:
Memorandum
Date: Today
To: President,
East Bank of Clarion
From: I.M.
Student and Associates
Subject: Budgetary
slack
Budgetary
slack is the difference between a budget estimate that a person provides and a
realistic determination of the amount.
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 the manager's bonus is
determined by the number of new accounts opened in excess of the budgeted
number, there is an incentive for the manager to understate her activity
projections. There is evidence of this
behavior, as a 10% increase over the bank's current 10,000 accounts would be
1,000 new accounts in 20x2. Tara's
projection, however, is only 700.
Participative Budgeting
75. James Corporation, headquartered in Chicago,
has a manufacturing plant in Dallas.
Plant managers desire to participate in the company's budget efforts,
which, for the past 10 years, have been handled solely by top executives in
Chicago. Dallas managers feel that by
becoming involved, they can make great strides in terms of improving operating
performance of their aging facility.
Required:
Briefly
discuss this situation, focusing on the benefits and problems of letting Dallas
managers participate in the company's budgetary efforts.
LO: 8 Type: RC, N
Answer:
Participative
budgets will make the plant managers feel that their opinions are valued by top
management and, generally speaking, the plant managers will have a better
attitude about trying to achieve the budget.
Additionally, it is possible in this case that the participative
approach will result in a more realistic budget document. Chicago personnel may be too far removed from
daily activities in Dallas to get an accurate picture of on-going operations.
On the
negative side, a participative budget may take longer to prepare and may lead
to some local in-fighting when compared with one that is imposed from corporate
headquarters. Also, participative
budgets may have some padding or slack, as the Dallas managers are faced with
an aging facility. This facility may be
inefficient and, with their participation, managers may bend the numbers a bit
to improve appearance.
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