Budgetary Planning

CHAPTER 24

BUDGETARY PLANNING

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

I tem SO BT Item SO BT Item SO BT Item SO BT Item SO BT

True-False Statements

1. 1 K 9. 2 C 17. 3 K 25. 4 K s33. 3 2. 1 C 10. 2 C 18. 3 C 26. 5 C s34. 3 3. 1 C 11. 2 C 19. 3 C 27. 5 C s35. 5

4. 1 C 12. 2 C 20. 3 C 28. 6 K s36. 6 5. 1 C 13. 2 K 21. 3 C 29. 6 C 6. 1 K 14. 2 K 22. 3 K 30. 6 C

7. 2 K 15. 2 C 23. 3 C s31. 1 8. 2 K 16. 3 K 24. 3 C s32. 2

Multiple Choice Questions

37. 1 K 53. 2 K 69. 3 C 85. 4 C 101. 6 C 38. 1 K 54. 2 K 70. 3 K 86. 4 K 102. 6 C 39. 1 C 55. 2 K 71. 3 K 87. 5 C 103. 6 C

40. 1 C 56. 2 K 72. 3 AP 88. 5 K 104. 6 C 41. 1 C 57. 2 C 73. 3 AP 89. 5 C 105. 6 C 42. 2 C 58. 2 C 74. 3 AP 90. 5 K 106. 6 C

43. 2 C 59. 2 AP 75. 3 AP 91. 5 C s107. 1 44. 2 C 60. 3 AP 76. 3 AP 92. 5 K s108. 2 45. 2 C 61. 3 C 77. 3 AP 93. 5 AP s109. 3

46. 2 C 62. 3 C 78. 3 C 94. 5 K s110. 5

47. 2 C 63. 3 K 79. 3 C 95. 5 AP s111. 5 48. 2 C 64. 3 C 80. 3 K 96. 5 C

s112. 6

49. 2 C 65. 3 C 81. 3 C 97. 5 AP s113. 6 50. 2 K 66. 3 C 82. 3 C 98. 5 C 51. 2 K 67. 3 K 83. 3 AP 99. 6 C

52. 2 K 68. 3 C 84. 4 AP 100. 6 K

Exercises

114. 3 AP 118. 3 AP 122. 3 AP 126. 5 AP 115. 3 AP 119. 3 AP 123. 4 AP 127. 5 C

116. 3 AP 120. 3 C 124. 4 AP 128. 5 AP 117. 3 AP 121. 3 AP 125. 5 AP 129. 6 C

Completion Statements

130. 1 K 133. 2 K 136. 2 K 139. 3 K 131. 1 K 134. 2 K 137. 3 K 140. 5 K 132. 2 K 135. 2 K 138. 3 K 141. 6 K

s Study Guide question.

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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

I tem Type Item Type Item Type Item Type Item Type Item Type Item Type

Study Objective 1

1. TF 4. TF s31. TF 39. MC

s107. MC

2. TF 5. TF 37. MC 40. MC 130. C 3. TF 6. TF 38. MC 41. MC 131. C

Study Objective 2

7. TF 12. TF 42. MC 47. MC 52. MC 57. MC 133. C 8. TF 13. TF 43. MC 48. MC 53. MC 58. MC 134. C 9. TF 14. TF 44. MC 49. MC 54. MC 59. MC 135. C

10. TF 15. TF 45. MC 50. MC 55. MC s108. MC 136. C 11. TF

s32. TF 46. MC 51. MC 56. MC 132. C

Study Objective 3

17. TF 24. TF 64. MC 71. MC 78. MC 114. Ex 121. Ex 18. TF s33. TF 65. MC 72. MC 79. MC 115. Ex 122. Ex 19. TF s34. TF 66. MC 73. MC 80. MC 116. Ex 137. C 20. TF 60. MC 67. MC 74. MC 81. MC 117. Ex 138. C 21. TF 61. MC 68. MC 75. MC 82. MC 118. Ex 139. C 22. TF 62. MC 69. MC 76. MC 83. MC 119. Ex 23. TF 63. MC 70. MC 77. MC s109. MC 120. Ex

Study Objective 4

25. TF 84. MC 85. MC 86. MC 123. Ex 124. Ex

Study Objective 5

26. TF 88. MC 91. MC 94. MC 97. MC s111. MC 127. Ex 27. TF 89. MC 92. MC 95. MC 98. Ex 125. Ex 128. Ex

s35. TF 90. MC 93. MC 96. MC s110. MC 126. Ex 140. C

Study Objective 6

28. TF s36. TF 101. MC 104. MC s112. MC 141. C 29. TF 99. MC 102. MC 105. MC s113. MC 30. TF 100. MC 103. MC 106. MC 129. Ex

Note: TF = True-False C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions.

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CHAPTER STUDY OBJECTIVES

1. Identify the benefits of budgeting. The primary advantages of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) contributes to positive behavior patterns.

2. Describe the essentials of effective budgeting. The essentials of effective budgeting are

(a) sound organizational structure, (b) research and analysis, and (c) management acceptance.

3. Identify the budgets that comprise the master budget. The master budget consists of the

following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manu-facturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet.

4. Describe the sources for preparing the budgeted income statement. The budgeted

income statement is prepared from (a) the sales budget, (b) the budgets for direct materials, direct labor, and manufacturing overhead, and (c) the selling and administrative expense budget.

5. Explain the principal sections of a cash budget. The cash budget has three sections

(receipts, disbursements, and financing) and the beginning and ending cash balances. 6. Indicate the applicability of budgeting in nonmanufacturing companies. Budgeting may

be used by merchandisers for development of a master budget. In service enterprises, budgeting is a critical factor in coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts.


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TRUE-FALSE STATEMENTS

1. Budgets are statements of management's plans stated in financial terms. 2. A benefit of budgeting is that it provides definite objectives for evaluating performance. 3. A budget can be a means of communicating a company's objectives to external parties. 4. A budget can be used as a basis for evaluating performance. 5. A well-developed budget can operate and enforce itself. 6. The budget itself and the administration of the budget are the responsibility of the

accounting department. 7. Effective budgeting requires clearly defined lines of authority and responsibility. 8. The flow of input data for budgeting should be from the highest levels of responsibility to

the lowest. 9. Budgets can have a positive or negative effect on human behavior depending on the

manner in which the budget is developed and administered. 10. A budget can facilitate the coordination of activities among the segments of a large

company. 11. The longer the budget period, the more reliable the estimates of future outcomes. 12. The budget committee has the responsibility for coordinating the preparation of the

budget. 13. The budget is developed within the framework of a sales forecast. 14. Budgeting and long-range planning are two terms that describe the same process. 15. Long-range plans are used more as a review of progress toward long-term goals rather

than an evaluation of specific results to be achieved. 16. The master budget reflects management's long-term plans encompassing five years or

more. 17. The master budget consists of operating and financial budgets.

18. Financial budgets must be completed before the operating budgets can be prepared.

19. The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.

20. The number of direct labor hours needed for production is obtained from the production budget.

21. A manufacturing overhead budget is not needed if the company develops a predeter-mined overhead rate to apply overhead.

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22. The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.

23. A production budget should be prepared before the sales budget. 24. The direct materials budget contains both quantity and cost data. 25. The budgeted income statement indicates the expected profitability of operations for the

next year. 26. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the

end of any month. 27. The budgeted balance sheet is prepared entirely from the budgets for the current year. 28. The starting point when budgeting for a not-for-profit organization is generally to budget

expenditures first. 29. A merchandiser has a merchandise purchases budget rather than a production budget. 30. A critical factor in budgeting for a service firm is to determine the amount of products to

purchase. The following questions are from the Study Guide. s31. The budget itself and the administration of the budget are entirely accounting

responsibilities. s32. Financial planning models and statistical and mathematical techniques may be used in

forecasting sales. s33. The direct materials budget is derived from the direct materials units required for

production plus desired ending direct materials units less beginning direct materials units. s34. The manufacturing overhead budget shows the expected manufacturing overhead costs. s35. In order to develop a budgeted balance sheet, the previous year's balance sheet is

needed. s36. In service enterprises, the critical factor in budgeting is coordinating materials and

equipment with anticipated services.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. T 7. T 13. T 19. F 25. T s31. F 2. T 8. F 14. F 20. T 26. F s32. T 3. F 9. T 15. T 21. F 27. F s33. T 4. T 10. T 16. F 22. F 28. T s34. T 5. F 11. F 17. T 23. F 29. T s35. T 6. F 12. T 18. F 24. T 30. F s36. F


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MULTIPLE CHOICE QUESTIONS

37. A budget a. is a substitute for management. b. is an aid to management. c. can operate or enforce itself. d. is the responsibility of the accounting department. 38. Accounting generally has the responsibility for a. setting company goals. b. expressing the budget in financial terms. c. enforcing the budget. d. administration of the budget. 39. Which one of the following is not a benefit of budgeting? a. It facilitates the coordination of activities. b. It provides definite objectives for evaluating performance. c. It provides assurance that the company will achieve its objectives. d. It requires all levels of management to plan ahead on a recurring basis. 40. Budgeting is usually most closely associated with which management function? a. Planning b. Directing c. Motivating d. Controlling 41. Which of the following items do not follow from the adoption of a budget? a. Promote efficiency b. Deterrent to waste c. Basis for performance evaluation d. Guarantee of accomplishing the profit objective 42. A common starting point in the budgeting process is a. expected future net income. b. past performance. c. to motivate the sales force. d. a clean slate, with no expectations. 43. If budgets are to be effective, all of the following must be present except a. acceptance at all levels of management. b. research and analysis in setting realistic goals. c. stockholders' approval of the budget. d. sound organizational structure. 44. If budgets are to be effective, there must be a. a history of successful operations. b. independent verification of budget goals. c. an organizational structure with clearly defined lines of authority and responsibility. d. excess plant capacity.

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45. It is important that budgets be accepted by a. division managers. b. department heads. c. supervisors. d. all of these. 46. Which of the following statements about budget acceptance in an organization is true?

a. The most widely accepted budget by the organization is the one prepared by top management.

b. The most widely accepted budget by the organization is the one prepared by the department heads.

c. Budgets are hardly ever accepted by anyone except top management. d. Budgets have a greater chance of acceptance if all levels of management have

provided input into the budgeting process. 47. Top management notices a variation from budget and an investigation of the difference

reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable?

a. Department managers should be held accountable for all variances from budgets for their departments.

b. Department managers should only be held accountable for controllable variances for their departments.

c. Department managers should be credited for favorable variances even if they are beyond their control.

d. Department managers' performances should not be evaluated based on actual results to budgeted results.

48. An unrealistic budget is more likely to result when it a. has been developed in a top down fashion. b. has been developed in a bottom up fashion. c. has been developed by all levels of management. d. is developed with performance appraisal usages in mind. 49. A budget is most likely to be effective if a. it is used to assess blame when things do not occur according to plans. b. it is not used to evaluate a manager's performance.

c. employees and managers at the lower levels do not get involved in the budgeting process.

d. it has top management support. 50. In many companies, responsibility for coordinating the preparation of the budget is

assigned to a. the company's independent certified public accountants. b. the company's internal auditors. c. the company's board of directors. d. a budget committee. 51. A budget period should be a. monthly. b. for a year or more. c. long-term. d. long enough to provide an obtainable goal under normal business conditions.


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52. If a company has adopted continuous budgeting, the budget will show plans for a. every day. b. a full year ahead. c. the current year and the next year. d. at least five years. 53. The most common budget period is a. one month. b. three months. c. six months. d. twelve months. 54. Budget development for the coming year usually starts a. a year in advance. b. the first month of the year to be budgeted. c. several months before the end of the current year. d. the last month of the previous year. 55. The budget committee would not normally include the a. research director. b. treasurer. c. sales manager. d. external auditor. 56. The budget committee in a company is often headed by the a. president. b. controller. c. treasurer. d. budget director. 57. Long-range planning a. generally presents more detailed information than an annual budget. b. generally encompasses a longer period of time than an annual budget. c. is usually more accurate than an annual budget. d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis. 58. Long-range planning usually encompasses a period of at least a. six months. b. 1 year. c. 5 years. d. 10 years. 59. Which of the following is not a proper match-up?

a. Long range planning Strategies

b. Budgeting Short-term goals

c. Long-range planning 5 years

d. Budgeting Long-term goals

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60. If there were 30,000 pounds of raw materials on hand on January 1, 60,000 pounds are desired for inventory at January 31, and 180,000 pounds are required for January production, how many pounds of raw materials should be purchased in January?

a. 150,000 pounds b. 240,000 pounds c. 120,000 pounds d. 210,000 pounds 61. The total direct labor hours required in preparing a direct labor budget are calculated

using the a. sales forecast. b. production budget. c. direct materials budget. d. sales budget. 62. The direct materials and direct labor budgets provide information for preparing the a. sales budget. b. production budget. c. manufacturing overhead budget. d. cash budget. 63. A sales forecast a. shows a forecast for the firm only. b. shows a forecast for the industry only. c. shows forecasts for the industry and for the firm. d. plays a minor role in the development of the master budget. 64. Which of the following is not an operating budget? a. Direct labor budget b. Sales budget c. Production budget d. Cash budget 65. Which of the following is not a financial budget? a. Capital expenditure budget b. Cash budget c. Manufacturing overhead budget d. Budgeted balance sheet 66. Which of the following is done to improve the reliability of the sales forecast? a. Employ financial planning models b. Lengthen the planning horizon to more than a year c. Rely solely on outside consultants d. Use the sales forecasts from the previous year 67. The financial budgets include the a. cash budget and the selling and administrative expense budget. b. cash budget and the budgeted balance sheet. c. budgeted balance sheet and the budgeted income statement. d. cash budget and the production budget.


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68. The culmination of preparing operating budgets is the a. budgeted balance sheet. b. production budget. c. cash budget. d. budgeted income statement. 69. An overly optimistic sales budget may result in a. increases in selling prices late in the year. b. insufficient inventories. c. increased sales during the year. d. excessive inventories. 70. In a production budget, total required units are the budgeted sales units plus a. beginning finished goods units. b. desired ending finished goods units. c. desired ending finished goods units plus beginning finished goods units. d. desired ending finished goods units minus beginning finished goods units. 71. The direct materials budget details

1. the quantity of direct materials to be purchased. 2. the cost of direct materials to be purchased. a. 1 b. 2 c. both 1 and 2 d. neither 1 nor 2 72. The production budget shows expected unit sales of 16,000. Beginning finished goods

units are 2,800. Required production units are 16,800. What are the desired ending finished goods units?

a. 2,000. b. 2,800. c. 3,200. d. 3,600. 73. The production budget shows expected unit sales are 10,000. The required production

units are 10,400. What are the beginning and desired ending finished goods units, respectively?

Beginning Units Ending Units a. 1,000 600 b. 600 1,000 c. 400 1,000 d. 1,000 400 74. The production budget shows that expected unit sales are 16,000. The total required units

are 18,000. What are the required production units? a. 2,000 b. 3,000 c. 4,000 d. Cannot be determined from the data provided.

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75. The direct materials budget shows:

Units to be produced 3,000 Total pounds needed for production 6,000 Total materials required 6,600

What are the direct materials per unit? a. 1.08 pounds b. 2.0 pounds c. 2.2 pounds d. Cannot be determined from the data. 76. The direct materials budget shows:

Desired ending direct materials 12,000 pounds Total materials required 18,000 pounds Direct materials purchases 15,800 pounds

The total direct materials needed for production is a. 6,000 pounds. b. 2,200 pounds. c. 3,800 pounds. d. 33,800 pounds. 77. If the required direct materials purchases are 8,000 pounds, the direct materials required

for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds?

a. 20,000 b. 4,000 c. 12,000 d. 8,000 78. Which of the following expenses would not appear on a selling and administrative

expense budget? a. Sales commissions b. Depreciation c. Property taxes d. Indirect labor 79. Which of the following would not appear as a fixed expense on a selling and admini-

strative expense budget? a. Freight-out b. Office salaries c. Property taxes d. Depreciation 80. A master budget consists of a. an interrelated long-term plan and operating budgets. b. financial budgets and a long-term plan. c. interrelated financial budgets and operating budgets. d. all the accounting journals and ledgers used by a company.


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81. The starting point in preparing a master budget is the preparation of the a. production budget. b. sales budget. c. purchasing budget. d. personnel budget. 82. Which one of the following is not needed in preparing a production budget? a. Budgeted unit sales b. Budgeted raw materials c. Beginning finished goods units d. Ending finished goods units 83. A company budgeted unit sales of 51,000 units for January, 2002 and 60,000 units for

February, 2002. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 15,300 units of inventory on hand on December 31, 2001, how many units should be produced in January, 2002 in order for the company to meet its goals?

a. 53,700 units b. 51,000 units c. 48,300 units d. 69,000 units 84. A company determined that the budgeted cost of producing a product is $20 per unit. On

June 1, there were 20,000 units on hand, the sales department budgeted sales of 75,000 units in June, and the company desires to have 30,000 units on hand on June 30. The budgeted cost of goods manufactured for June would be

a. $1,300,000. b. $1,900,000. c. $1,500,000. d. $1,700,000. 85. Of the following items, which one is not obtained from an individual operating budget? a. Selling and administrative expenses b. Accounts receivable c. Cost of goods sold d. Sales 86. Which of the following statements about a budgeted income statement is not true? a. The budgeted income statement is prepared after the financial budgets are prepared. b. The budgeted income statement is prepared on the accrual basis of accounting. c. The budgeted income statement can be prepared in a multiple-step format. d. The budgeted income statement is prepared using the individual operating budgets. 87. The single most important output in preparing financial budgets is the a. sales forecast. b. determination of the unit cost of the product. c. cash budget. d. budgeted income statement.

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88. Which of the following does not appear as a separate section on the cash budget? a. Cash receipts b. Cash disbursements c. Capital expenditures d. Financing 89. The financing section of a cash budget is needed if there is a cash deficiency or if the

ending cash balance is less than a. the prior years. b. management's minimum required balance. c. the amount needed to avoid a service charge at the bank. d. the industry average. 90. Beginning cash balance plus total receipts a. equals ending cash balance. b. must equal total disbursements. c. equals total available cash. d. is the excess of available cash over disbursements. 91. The projection of financial position at the end of the budget period is found on the a. budgeted income statement. b. cash budget. c. budgeted balance sheet. d. sales budget. 92. What is the proper preparation sequencing of the following budgets?

1. Budgeted Balance Sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted Income Statement a. 1, 2, 3, 4 b. 2, 3, 1, 4 c. 2, 3, 4, 1 d. 2, 4, 1, 3 93. The following information was taken from Sloan Company’s cash budget for the month of

July: Beginning cash balance $ 90,000 Cash receipts 57,000 Cash disbursements 102,000

If the company has a policy of maintaining a minimum end of the month cash balance of $75,000, the amount the company would have to borrow is

a. $30,000. b. $15,000. c. $45,000. d. $18,000. 94. The cash budget reflects a. all revenues and all expenses for a period. b. expected cash receipts and cash disbursements from all sources. c. all the items that appear on a budgeted income statement. d. all the items that appear on a budgeted balance sheet.


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95. The following credit sales are budgeted by Roswell Company:

January $34,000 February 50,000 March 70,000 April 60,000

The company's past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of April is

a. $61,720. b. $56,000. c. $60,000. d. $58,800. 96. Which one of the following sections would not appear on a cash budget? a. Cash receipts b. Financing c. Investing d. Cash disbursements 97. A company's past experience indicates that 60% of its credit sales are collected in the

month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were:

January $ 80,000 February 48,000 March 120,000

The cash inflow in the month of March is expected to be a. $90,400. b. $68,400. c. $72,000. d. $86,400. 98. Which one of the following items would never appear on a cash budget? a. Office salaries expense b. Interest expense c. Depreciation expense d. Travel expense 99. Which one of the following budgets would be prepared for a manufacturer but not for a

merchandiser? a. Direct labor budget b. Cash budget c. Sales budget d. Budgeted income statement 100. The formula for determining budgeted merchandise purchases is budgeted a. production + desired ending inventory – beginning inventory. b. sales + beginning inventory – desired ending inventory. c. cost of goods sold + desired ending inventory – beginning inventory. d. cost of goods sold + beginning inventory – desired ending inventory.

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101. The master budget for a service enterprise a. will have the same types of budgets as a merchandiser. b. may include a sales budget for sales revenue. c. will not include a budgeted income statement. d. includes a service revenue budget based on expected client billings. 102. Budgeting in not-for-profit organizations a. is not important because they are not profit-oriented. b. usually starts with budgeting expenditures, rather than receipts. c. is necessary only if some product is produced and sold. d. consists entirely of budgeted contributions. 103. For a merchandiser, the starting point in the development of the master budget is the a. cash budget. b. sales budget. c. selling and administrative expenses budget. d. budgeted income statement. 104. Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget. b. merchandise purchases budget. c. master time sheet. d. sales forecast. 105. An appropriate activity index for a college or university for budgeting faculty positions

would be the a. faculty hours worked. b. number of administrators. c. credit hours taught by a department. d. number of days in the school term. 106. A critical factor in budgeting for a service firm is to a. hire professional staff to perform the budgeting work. b. coordinate professional staff needs with anticipated services. c. classify all personnel as either variable or fixed. d. budget expenditures before anticipated receipts.

The following questions are from the Study Guide. s107. The responsibility for expressing management's budgeting goals in financial terms is

performed by the a. accounting department. b. top management. c. lower level of management. d. budget committee. s108. For better management acceptance, the flow of input data for budgeting should begin with

the a. accounting department. b. top management. c. lower levels of management. d. budget committee.


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s109. Turlington Company has 12,000 units in beginning finished goods. If sales are expected to be 60,000 units for the year and Turlington desires ending finished goods of 15,000 units, how many units must the company produce?

a. 57,000. b. 60,000. c. 63,000. d. 75,000. s110. On January 1, Ghauri Company has a beginning cash balance of $21,000. During the year,

the company expects cash disbursements of $170,000 and cash receipts of $145,000. If Ghauri requires an ending cash balance of $20,000, the company must borrow

a. $16,000. b. $20,000. c. $24,000. d. $46,000. s111. Auermann Company's direct materials budget shows total cost of direct materials

purchases for January $125,000, February $150,000 and March $175,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for March are

a. $165,000. b. $160,000. c. $150,000. d. $130,000. s112. A purchases budget is used instead of a production budget by a. merchandising companies. b. service enterprises. c. not-for-profit organizations. d. manufacturing companies. s113. Which of the following statements is incorrect? a. A continuous twelve-month budget results from dropping the month just ended and

adding a future month. b. The production budget is derived from the direct materials and direct labor budget. c. The cash budget shows anticipated cash flows. d. In the budget process for non-profit organizations, the emphasis is on cash flow

rather than on revenue and expenses.

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

37. b 48. a 59. d 70. d 81. b 92. c 103. b 38. b 49. d 60. d 71. c 82. b 93. a 104. b 39. c 50. d 61. b 72. d 83. a 94. b 105. c 40. a 51. d 62. d 73. b 84. d 95. c 106. b

41. d 52. b 63. c 74. d 85. b 96. c s107. a 42. b 53. d 64. d 75. b 86. a 97. a s108. c 43. c 54. c 65. c 76. a 87. c 98. c s109. c

44. c 55. d 66. a 77. c 88. c 99. a s110. c 45. d 56. d 67. b 78. d 89. b 100. c s111. a 46. d 57. b 68. d 79. a 90. c 101. d s112. a

47. b 58. c 69. d 80. c 91. c 102. b s113. b

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EXERCISES

Ex. 114

Dolan Company has budgeted the following unit sales: 2002 Units April 15,000 May 30,000 June 45,000 July 25,000 Of the units budgeted, 40% are sold in the Southern Region at an average price of $15 per unit and the remainder are sold by the Eastern Region at an average price of $12 per unit. Instructions

Prepare separate sales budgets for each region and for the company in total for the second quarter of 2002. Solution 114 (15–20 min.)

DOLAN COMPANY Sales Budget

For the Quarter Ending June 30, 2002 Southern Division April May June Total Expected units sales 6,000 12,000 18,000 36,000 Unit selling price $15 $15 $15 $15 Total sales $90,000 $180,000 $270,000 $540,000 Eastern Division Expected unit sales 9,000 18,000 27,000 54,000 Unit selling price $12 $12 $12 $12 Total sales $108,000 $216,000 $324,000 $648,000 Total Company Expected unit sales 15,000 30,000 45,000 90,000 Total sales $198,000 $396,000 $594,000 $1,188,000

Ex. 115

Jensen Company manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows:

Units of Product

2002 Regular Deluxe Total July 10,000 15,000 25,000 August 6,000 10,000 16,000 September 9,000 14,000 23,000 October 8,000 12,000 20,000


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Ex. 115 (cont.)

It takes 2 pounds of direct materials to produce the Regular product and 4 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on hand at the end of each month equal to 20% of the next month's production needs for the Regular product and 10% of the next month's production needs for the Deluxe product. Direct materials inventory on hand at June 30 were 4,000 pounds for the Regular product and 6,000 pounds for the Deluxe product. The cost per pound of materials is $5 Regular and $7 Deluxe. Instructions

Prepare separate direct materials budgets for each product for the third quarter of 2002. Solution 115 (25–30 min.)

JENSEN COMPANY Direct Materials Budget—Regular

For the Quarter Ending September 30, 2002 July August September Total Units to be produced 10,000 6,000 9,000 Direct materials per unit × 2 × 2 × 2 Total pounds needed for production 20,000 12,000 18,000 Add: Desired ending direct materials (pounds) 2,400 3,600 3,200* Total materials required 22,400 15,600 21,200 Less: Beginning direct materials (pounds) 4,000 2,400 3,600 Direct materials purchases 18,400 13,200 17,600 Cost per pound × $5 × $5 × $5 Total cost of direct materials purchases $92,000 $66,000 $88,000 $246,000 *20% × (8,000 × 2)

JENSEN COMPANY Direct Materials Budget—Deluxe

For the Quarter Ending September 30, 2002 July August September Total Units to be produced 15,000 10,000 14,000 Direct materials per unit × 4 × 4 × 4 Total pounds needed for production 60,000 40,000 56,000 Add: Desired ending direct materials (pounds) 4,000 5,600 4,800* Total materials required 64,000 45,600 60,800 Less: Beginning direct materials (pounds) 6,000 4,000 5,600 Direct materials purchases 58,000 41,600 55,200 Cost per pound × $7 × $7 × $7 Total cost of direct materials purchases $406,000 $291,200 $386,400 $1,083,600 *10% × (12,000 × 4)

Budgetary Planning

24-19

Ex. 116

Yang Company has budgeted the following unit sales:

2002 Units January 10,000 February 8,000 March 9,000 April 11,000 May 15,000

The finished goods units on hand on December 31, 2001, was 2,000 units. Each unit requires 3 pounds of raw materials that are estimated to cost an average of $4 per pound. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. They also have a policy of maintaining a raw materials inventory at the end of each month equal to 30% of the pounds needed for the following month's production. There were 8,640 pounds of raw materials on hand at December 31, 2001.

Instructions

For the first quarter of 2002, prepare (1) a production budget and (2) a direct materials budget. Solution 116 (25–30 min.)

(1) YANG COMPANY Production Budget

For the Quarter Ending March 31, 2002 January February March Total Expected unit sales 10,000 8,000 9,000 Desired ending finished goods units 1,600 1,800 2,200* Total required units 11,600 9,800 11,200 Less: Beginning finished goods units 2,000 1,600 1,800 Required production units 9,600 8,200 9,400 27,200 *April units: 11,000 × 20%. (2) YANG COMPANY

Direct Materials Budget For the Quarter Ending March 31, 2002

January February March Total Units to be produced 9,600 8,200 9,400 Direct materials per unit × 3 × 3 × 3 Total pounds needed for production 28,800 24,600 28,200 Desired ending direct materials (pounds) 7,380 8,460 10,620** Total materials required 36,180 33,060 38,820 Less: Beginning direct materials (pounds) 8,640 7,380 8,460 Direct materials purchases 27,540 25,680 30,360 Cost per pound × $4 × $4 × $4 Total cost of direct materials purchases $110,160 $102,720 $121,440 $334,320

**April units: 11,800 × 3 = 35,400 × 30%.


24-20

Ex. 117

Avila Company has budgeted the following unit sales: 2002 2003 Quarter Units Quarter Units 1 70,000 1 60,000 2 30,000 3 50,000 4 90,000 The finished goods inventory on hand on December 31, 2001 was 7,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 10% of the next quarter's anticipated sales. Instructions Prepare a production budget for 2002. Solution 117 (15–20 min.)

AVILA COMPANY Production Budget

For the Year Ended December 31, 2002 Quarter 1 2 3 4 Total Expected unit sales 70,000 30,000 50,000 90,000 Desired ending finished goods units 3,000 5,000 9,000 6,000* Total required units 73,000 35,000 59,000 96,000 Less: Beginning finished goods units 7,000 3,000 5,000 9,000 Required production units 66,000 32,000 54,000 87,000 239,000 *2003 Q1: 60,000 units × 10% = 6,000. Ex. 118

The following facts are known:

The total pounds needed for production are 2 times the units to be produced.

The desired ending direct materials inventory is 20% of the total pounds needed for production.

The beginning direct materials inventory is equal in number to 10% of the units to be produced.

Cost per pound is $10.

Total cost of the direct materials purchases is $1,610,000. Instructions

Prepare a direct materials budget for the period.

Budgetary Planning

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Solution 118 (12–17 min.)

Let X = total units to be produced. Then total pounds needed equals 2X. Desired ending inventory is .20 × 2X. The beginning inventory is .10X.

The direct materials budget is: Units to be produced X 70,000* Direct materials per unit 2 × 2 Total pounds needed for production 2X 140,000 Add: Desired ending direct materials .2(2X) .4X 28,000 Total materials required 2.4X 168,000 Less: Beginning direct materials .10X 7,000 Direct materials purchases 2.3X 161,000 Cost per pound $10 × 10 Total cost of direct materials purchases $1,610,000

*2X + .2(2X) – .1X = 161,000 2X + .4X – .1X = 161,000 2.3X = 161,000 X = 70,000 Ex. 119

Norris Company is preparing its direct labor budget for 2002 from the following production budget based on a calendar year:

Quarter Units 1 40,000 2 20,000 3 30,000 4 50,000

Each unit requires 1.5 hours of direct labor. The union contract provides for a 10% increase in wage rate to $11 per hour on October 1.

Instructions

Prepare a direct labor budget for 2002. Solution 119 (15–20 min.)

NORRIS COMPANY Direct Labor Budget

For the Year Ending December 31, 2002

Quarter 1 2 3 4 Total Units to be produced 40,000 20,000 30,000 50,000 Direct labor time (hours) per unit × 1.5 × 1.5 × 1.5 × 1.5 Total required direct labor hours 60,000 30,000 45,000 75,000 Direct labor cost per hour × $10* × $10 × $10 × $11 Total direct labor cost $600,000 $300,000 $450,000 $825,000 $2,175,000

*$11 ÷ 110% = $10.


24-22

Ex. 120

For each item given, identify the budget in which it will appear. If an item will appear on more than one budget, then indicate as many budgets as are relevant. Budget Code:

DM Direct Materials Budget DL Direct Labor Budget P Production Budget S Sales Budget C Cash Budget BBS Budgeted Balance Sheet BIS Budgeted Income Statement SA Selling and Administrative Expense Budget MOH Manufacturing Overhead Budget 1. Ending cash balance 2. Total selling and administrative expenses 3. Total sales (in dollars) 4. Interest expense 5. Ending raw materials inventory (in Dollars) 6. Ending finished goods inventory (in Dollars) Solution 120 (10–13 min.)

1. Ending cash balance BBS, C

2. Total selling and administrative expenses SA, BIS

3. Total sales (in dollars) S, BIS

4. Interest expense C, BIS

5. Ending raw materials inventory BBS, DM

6. Ending finished goods inventory BBS, BIS Ex. 121

Eller Company is preparing its master budget for 2002. Relevant data pertaining to its sales budget are as follows: Sales for the year are expected to total 4,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $1.50 per unit for the first quarter and then be increased to $1.75 per unit in the second quarter. Instructions

Prepare a sales budget for 2002 for Eller Company.

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ELLER COMPANY Sales Budget

For the Year Ending December 31, 2002

Quarter 1 2 3 4 Year Unit sales 1,000,000 1,200,000 600,000 1,200,000 4,000,000 Unit selling price × $1.50 × $1.75 × $1.75 × $1.75 Var. Total sales $1,500,000 $2,100,000 $1,050,000 $2,100,000 $6,750,000

Ex. 122

Lawsen Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2002, the following data are developed: 1. Sales: 15,000 units; unit selling price: $30 2. Variable costs per dollar of sales: Sales commissions 6% Delivery expense 2% Advertising 4% 3. Fixed costs per quarter: Sales salaries $24,000 Office salaries 12,000 Depreciation 6,000 Insurance 2,000 Utilities 1,000

Instructions

Prepare a selling and administrative expense budget for the first quarter of 2002. Solution 122 (12–17 min.)

LAWSEN COMPANY

Selling and Administrative Expense Budget For the Quarter Ended March 31, 2002

Variable expenses Sales commissions ($450,000 × 6%) $27,000 Delivery expense ($450,000 × 2%) 9,000 Advertising ($450,000 × 4%) 18,000 Total variable 54,000 Fixed expenses Sales salaries $24,000 Office salaries 12,000 Depreciation 6,000 Insurance 2,000 Utilities 1,000 Total fixed 45,000 Total selling and administrative expenses $99,000


24-24

Ex. 123

The Northeast Regional Division of Irwin Wholesale Corporation has been requested to prepare a quarterly budgeted income statement for 2002. The regional manager expects that sales in the first quarter of 2002 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2002.

The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales. Budgeted ending inventory on December 31, 2001 is $33,000. Quarterly salaries are $5,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows:

Rent expense $6,000 Depreciation on office equipment $3,000 Utilities expense $ 900 Miscellaneous expenses 2% of sales

The income statement for the first quarter of 2001 was as follows:

Income Statement For the Three Months Ended March 31, 2001

Sales ....................................................................................................... $120,000 Cost of goods sold .................................................................................. 66,000 Gross profit ............................................................................................. 54,000 Operating expenses Sales salaries .................................................................................. $11,800 Rent expense .................................................................................. 6,000 Depreciation .................................................................................... 3,000 Utilities ............................................................................................. 900 Miscellaneous ................................................................................. 2,600 Total operating expenses ........................................................ 24,300 Net income .............................................................................................. $ 29,700

Instructions

Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2002. (Show computations.) Solution 123 (18–23 min.)

IRWIN WHOLESALE CORPORATION Northeast Regional Division Budgeted Income Statement

For the Quarter Ending March 31, 2002 Sales (1) ................................................................................................................. $132,000 Cost of goods sold (2) ............................................................................................ 70,950 Gross profit ............................................................................................................ 61,050 Operating expenses Sales salaries (3) ........................................................................................... 11,600 Rent expense ................................................................................................. 6,000 Depreciation ................................................................................................... 3,000 Utilities ............................................................................................................ 900 Miscellaneous (4) ........................................................................................... 2,640 Total operating expenses ....................................................................... 24,140 Net income ............................................................................................................. $ 36,910

Budgetary Planning

24-25

Solution 123 (cont.)

(1) Sales Qtr. 1 $120,000 × 110% = $132,000 (2) Cost of goods sold Beginning inventory $ 33,000 Purchases ($132,000 × 55% = $72,600) 72,600 Cost of goods available 105,600 Ending inventory ($132,000 × 105% = $138,600 × 25% = $34,650) 34,650 Cost of goods sold $ 70,950 (3) Sales salaries: $5,000 + ($132,000 × .05) = $11,600. (4) Miscellaneous expenses: $132,000 × .02 = $2,640. Ex. 124

In September 2002, the budget committee of Sharpe Company assembles the following data: 1. Expected Sales October $700,000 November 750,000 December 800,000 2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount.

Instructions

Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule. Solution 124 (16–21 min.)

SHARPE COMPANY Budgeted Income Statement

For the Month Ending October 31, 2002

Sales $700,000 Cost of goods sold Inventory, October 1 $ 84,000 Purchases 426,000 Cost of goods available for sale 510,000 Less: Inventory, October 31 90,000 Cost of goods sold 420,000 Gross profit $280,000 Supporting Computations: Budgeted cost of goods sold (1) $420,000 Desired ending merchandise inventory (2) 90,000 Total 510,000 Less: Beginning merchandise inventory (3) 84,000 Budgeted merchandise purchases $426,000

October (1) $700,000 × 60% = $420,000. (2) ($750,000 × 60%) × 20% = $90,000. (3) $420,000 × 20% = $84,000.


24-26

Ex. 125

Timmons Company has budgeted sales revenues as follows:

Budgeted Sales Revenues January $ 65,000 February 90,000 March 110,000 April 50,000 May 55,000 June 30,000

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible. Instructions

Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June.


TIMMONS COMPANY Expected Cash Receipts from Sales

For the Quarter Ended June 30 April May June February sales Credit sales: ($90,000 × .80 × .05) $ 3,600 March sales Credit sales: ($110,000 × .80 × .30) 26,400 ($110,000 × .80 × .05) $ 4,400 April sales Credit sales: ($50,000 × .80 × .60) 24,000 ($50,000 × .80 × .30) 12,000 ($50,000 × .80 × .05) $ 2,000 Cash sales: ($50,000 × .20) 10,000 May sales Credit sales: ($55,000 × .80 × .60) 26,400 ($55,000 × .80 × .30) 13,200 Cash sales: ($55,000 × .20) 11,000 June sales Credit sales: ($30,000 × .80 × .60) 14,400 Cash sales: ($30,000 × .20) 6,000 Total cash receipts $64,000 $53,800 $35,600

Budgetary Planning

24-27

Ex. 126

Finagan Company has budgeted sales revenues as follows:

June July August Credit sales $54,000 $ 58,000 $ 36,000 Cash sales 36,000 102,000 78,000 Total sales $90,000 $160,000 $114,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are:

June $120,000 July 100,000 August 42,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $19,000 each month, (b) dividends of $41,400 will be paid in July, and (c) purchase of a computer in August for $12,000 cash.

The company wishes to maintain a minimum cash balance of $20,000 at the end of each month. The company borrows money from the bank at 9% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $20,000. Assume that borrowed money in this case is for one month.

Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Solution 126 (25–35 min.)

FINAGAN COMPANY Cash Budget

For the Two Months of July and August

July August Beginning cash balance $ 20,000 $ 20,000 Add: Receipts Collections from customers 56,400 44,800 Cash sales 102,000 78,000 Total receipts 158,400 122,800 Total available cash 178,400 142,800 Less: Disbursements Purchases 110,000 71,000 Selling and administrative expenses 19,000 19,000 Dividends 41,400 Computer purchase 12,000 Total disbursements 170,400 102,000 Excess (deficiency) of available cash over disbursements 8,000 40,800 Financing Borrowings 12,000 Repayments (12,090)* Ending cash balance $ 20,000 $ 28,710


24-28

Solution 126 (cont.)

*12,000 × 9% × 1/12 = $90 + $12,000 = $12,090.

Schedule of Expected Collections from Customers

Credit sales July August June (54,000 × 40%) $21,600 July ($58,000) 34,800 $23,200 August ($36,000) 21,600 Total collections $56,400 $44,800

Schedule of Expected Payments for Purchase of Inventory

Inventory purchases July August June ($120,000) $ 60,000 July ($100,000) 50,000 $50,000 August ($42,000) 21,000 Total payments $110,000 $71,000 Ex. 127

The City National Bank has asked Naylor, Inc. for a budgeted balance sheet for the year ended December 31, 2002. The following information is available:

1. The cash budget shows an expected cash balance of $50,000 at December 31, 2002.

2. The 2002 sales budget shows total annual sales of $600,000. All sales are made on account and accounts receivable at December 31, 2002 are expected to be 15% of annual sales.

3. The merchandise purchases budget shows budgeted cost of goods sold for 2002 of $300,000 and ending merchandise inventory of $70,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2002.

4. The December 31, 2001 balance sheet includes the following balances: Equipment $196,000, Accumulated Depreciation $80,000, Common Stock $180,000, and Retained Earnings $32,000.

5. The budgeted income statement for 2002 includes the following: depreciation on equipment $5,000, federal income taxes $16,000, and net income $74,000. The income taxes will not be paid until 2003.

6. In 2002, management does not expect to purchase additional equipment or to declare any dividends. It does expect to pay all operating expenses, other than depreciation, in cash.

Instructions

Prepare an unclassified budgeted balance sheet at December 31, 2002.

Budgetary Planning

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NAYLOR, INC. Budgeted Balance Sheet

December 31, 2002

Assets Cash ........................................................................................................ $ 50,000 Accounts receivable ................................................................................ 90,000 Merchandise inventory ............................................................................ 70,000 Equipment ............................................................................................... $196,000 Less: Accumulated depreciation ($80,000 + $10,000)............................ 90,000 106,000 Total assets ..................................................................................... $316,000

Liabilities and Stockholders' Equity Accounts payable .................................................................................... $ 14,000 Income taxes payable ............................................................................. 16,000 Common stock ........................................................................................ 180,000 Retained earnings ................................................................................... 106,000 Total liabilities and stockholders' equity .......................................... $316,000 Ex. 128

The management of Horton Company estimates that credit sales for August, September, October, and November will be $180,000, $210,000, $230,000, and $160,000, respectively. Experience has shown that collections are made as follows: In month of sale 25% In first month after sale 60% In second month after sale 10% Instructions

Determine the collections from customers in October and November. Show all computations. Solution 128 (13–18 min.)

Collections from Customers October November August Sales ($180,000 × .10) $ 18,000 $ -0- September Sales ($210,000 × .60) 126,000 ($210,000 × .10) 21,000 October Sales ($230,000 × .25) 57,500 ($230,000 × .60) 138,000 November Sales ($160,000 × .25) -0- 40,000 Total collections $201,500 $199,000


24-30

Ex. 129

In September 2002, the management of Yancey Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November. 1. Expected Sales October $1,000,000 November 1,400,000 December 1,800,000 2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 25% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions

Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month. Solution 129 (12–17 min.)

YANCEY COMPANY Merchandise Purchases Budget

For the Months of October and November, 2002 October November Budgeted cost of goods sold $600,000 $ 840,000 Desired ending merchandise inventory 210,000 270,000 Total 810,000 1,110,000 Less: Beginning merchandise inventory 150,000 210,000 Required merchandise purchase $660,000 $ 900,000 October November $1,000,000 × 60% = $600,000 $1,400,000 × 60% = $840,000 $840,000 × 25% = $210,000 $1,800,000 × 60% × 25% = $270,000 $600,000 × 25% = $150,000

Budgetary Planning

24-31

COMPLETION STATEMENTS

130. A _________________ is a formal written statement of management's plans expressed in

financial terms.

131. A budget is a primary means of ________________ agreed upon objectives throughout

the business organization.

132. Effective budgeting is dependent on an _________________________ in which authority

and responsibility are clearly defined.

133. The budget should have the support of _________________ and should be an important

basis for _________________________ by comparing actual results to expected results.

134. Many companies use ____________________________ budgets by dropping the month

just ending and adding a future month.

135. A __________________ is responsible for coordinating the preparation of the budget in

many companies.

136. A major difference between the annual budget and long-range planning is the

____________________ over which the data pertain.

137. The ____________________ is the starting point in preparing the master budget.

138. The formula for developing a production budget is ___________________ plus

______________________ minus _______________________.

139. The ________________ is a set of interrelated budgets that constitutes a plan of action

for a specified period of time.

140. Three major sections of a cash budget are (1) ___________________, (2)

____________________, and (3) ______________________.

141. The two major differences between the master budgets of a merchandiser and a

manufacturer are that the merchandiser will have a ______________________ budget

and will not have __________________ budgets.

Answers to Completion Statements 130. budget 137. sales budget 131. communicating 138. budgeted sales units, 132. organizational structure desired ending finished goods units, 133. top management, evaluating beginning finished goods units performance 139. master budget 134. continuous twelve-month 140. cash receipts, cash disbursements, 135. budget committee financing 136. time period 141. merchandise purchases, manufacturing


24-32

MATCHING 142. Match the items below by entering the appropriate code letter in the space provided. A. Budget F. Production budget B. Financial budgets G. Cash budget C. Budget committee H. Long-range planning D. Master budget I. Direct materials budget E. Sales forecast J. Sales budget ____ 1. A selection of strategies to achieve long-term goals. ____ 2. An estimate of expected sales for the budget period. ____ 3. Budgets that indicate the cash resources needed for expected operations and planned

capital expenditures. ____ 4. The projection of potential sales for the industry and the company's expected share of

such sales. ____ 5. Management's plans expressed in financial terms for a specified future time period. ____ 6. A projection of anticipated cash flows. ____ 7. A group responsible for coordinating the preparation of the budget. ____ 8. A projection of production requirements to meet expected sales. ____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period. ____ 10. An estimate of the quantity and cost of direct materials to be purchased.

Answers to Matching 1. H 6. G 2. J 7. C 3. B 8. F 4. E 9. D 5. A 10. I

Budgetary Planning

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SHORT-ANSWER ESSAY QUESTIONS S-A E 143

Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly. Solution 143

When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behavior patterns by motivating personnel to meet planned objectives. However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals. S-A E 144

Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions. Solution 144

Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms. Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies. Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented. Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning. S-A E 145 (Ethics)

Ken Clarke is a new production manager. After a great deal of effort, including considerable market research, he completes his budget and submits it to his boss, Diane Jackson. Without even looking at it, she asks him what his "fudge factor" was, and which items contained the most slack. Ken, very surprised, responds that he doesn't use any "fudge factor," and that all his figures are honest. Ms. Jackson counters by asking him how he would respond if he had to cut about 20% from his budget, as it is. She tells him that most budgets are trimmed in committee, and he had better be ready. She returns the budget to him, and tells him to come back with something reasonable. Required:

1. Is it ethical to build slack into a budget? Explain. 2. Was it ethical for Ms. Jackson to refuse to accept a budget without slack? Briefly explain.


24-34

Solution 145

1. Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical.

2. As Ken Clarke's superior, Ms. Jackson has the obligation to correct his mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Ken must continue to be honest. One way to do that would be for Ken to submit his trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Ms. Jackson the ability to intelligently defend his budget while in committee.

S-A E 146 (Communication)

At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Ed Tucker, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process.

Required:

You are the accounting manager. Write a memo to Mr. Tucker. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible. Solution 146

TO: Ed Tucker FROM: Mary Barnes SUBJECT: Budgets At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well.

Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use.

I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible.

(signed)

Documents

Budgetary Planning