Chapter 15
Budgeting and Financial Planning
True / False Questions
1. A slightly inaccurate sales
forecast will not affect the other schedules comprising the master
budget.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
2. The master budget is a
comprehensive profit plan tying together all phases of an organization's
operations.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
3. The idea behind participative
budgeting is to involve employees throughout an organization in the budgetary
process with the belief that they will be more willing to accept it.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
4. Strategic long-range plans are
usually stated in rather specific terms.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 1
5. Econometric models can include
many relevant predictors that can be manipulated in order to examine different
hypothetical conditions and relate them to the sales forecast.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
6. Base-budgeting is similar to
zero-based budgeting in that it sets the initial budget for virtually
everything to zero.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
7. Padding the budget or
manipulating reported results in order to maximize one's personal gain or that
of others is considered unethical behavior.
TRUE
TRUE
AACSB: Analytic, Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 5
8. [Appendix] In addition to
helping management decide how much to order at a time, the EOQ model can help
in deciding when to order and how much inventory should be held as a safety
stock.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
9. The master budget is a detailed
plan for the coming year, expressed in quantitative terms.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 2
10. The master budget is based on
many assumptions and estimates of known parameters.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
11. A financial planning model is
a set of mathematical relationships expressing interactions between the various
operational, financial, and environmental events that determine the overall
results of an organization's activities.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
12. Budgetary padding is the
difference between the revenue or cost projections provided and an actual
revenue or cost.
FALSE
FALSE
AACSB: Analytic, Ethics
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
13. Critical success factors are
the key strengths most responsible for making an organization successful.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 1
14. Where direct labor belongs on
the cost hierarchy depends on management's ability to adjust the organization's
labor force to match short-term requirements, as well as management's attitude
about making such adjustments.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
15. Under zero-based budgeting,
the budget for virtually every activity in the firm is initially set to zero
and each activity must be justified in terms of its continued usefulness in
order to receive funding during the budgetary process.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
16. The concept of cost management
whereby costs are actively managed is key to the emerging philosophy of
contemporary budgeting and financial planning.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 6
17. All organizations begin the
budgeting process with plans for (1) the goods or services to be provided and
(2) the revenue to be available from sales or other sources.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
18. When constructing a budget
using ABC concepts, it is difficult to understand why costs occur and hard to
mange costs to improve profitability.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 6
19. Activity Based Budgeting
recognizes that all costs can be easily divided into fixed and variable
costs.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
20. [Appendix] The EOQ formula
ignores the costs of holding inventory in calculating the optimum economic
order quantity.
FALSE
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 7
21. [Appendix] The JIT philosophy
is that inventories should be minimized by more frequent deliveries in smaller
quantities.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 7
22. [Appendix] While the economics
underlying the EOQ support the JIT viewpoint that inventory should be purchased
or produced in small quantities, thus keeping inventories to a minimum, their
basic philosophies are quite different.
TRUE
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
Multiple Choice Questions
23. Which of the following is not
a purpose of budgeting?
a. Facilitating communication and control
b. Managing financial and operational performance
c. Evaluating performance and providing incentives
D. All are purposes
a. Facilitating communication and control
b. Managing financial and operational performance
c. Evaluating performance and providing incentives
D. All are purposes
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 1
24. When preparing a sales
forecast, which of the following is not a factor to be considered?
a. Economic trends in the company's industry
b. Political and legal events
C. A change in the management of the company
d. New products contemplated by the company of other firms
a. Economic trends in the company's industry
b. Political and legal events
C. A change in the management of the company
d. New products contemplated by the company of other firms
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Hard
Learning Objective: 2
25. Which of the following is a
difference between master budgets for nonprofit organizations and those for
other companies?
a. Nonprofit organizations begin their budgeting process with a budget showing the level of service to be provided
b. Nonprofit organizations prepare budgets showing their anticipated funding
c. Nonprofit organizations frequently provide services free of charge, thus having no traditional sales budget
D. All of the above are differences
a. Nonprofit organizations begin their budgeting process with a budget showing the level of service to be provided
b. Nonprofit organizations prepare budgets showing their anticipated funding
c. Nonprofit organizations frequently provide services free of charge, thus having no traditional sales budget
D. All of the above are differences
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 2
26. Multinational firms have
additional challenges when preparing budgets. Which of the following is not
such a challenge?
a. A multinational firm's budget must reflect the translation of foreign currency into U.S. dollars
b. High or unpredictable inflation (or deflation) makes it difficult to prepare budgets
c. The economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, etc
D. All of the above are challenges
a. A multinational firm's budget must reflect the translation of foreign currency into U.S. dollars
b. High or unpredictable inflation (or deflation) makes it difficult to prepare budgets
c. The economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, etc
D. All of the above are challenges
AACSB: Analytic
AICPA BB: Critical Thinking, Global
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 2
27. Which of the following is
typically considered fixed under traditional budgeting processes, but
considered variable under activity based budgeting:
a. Set ups, inspections and purchasing
b. Material handling, designing and quality control
C. A and B
d. None of the above
a. Set ups, inspections and purchasing
b. Material handling, designing and quality control
C. A and B
d. None of the above
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
28. Direct labor is not a unit
level cost when:
a. Management cannot adjust labor to declines in production because of restriction in contracts
b. Management strives to maintain a stable labor force and will not sacrifice morale by laying off workers
c. Neither A nor B
D. Both A and B
a. Management cannot adjust labor to declines in production because of restriction in contracts
b. Management strives to maintain a stable labor force and will not sacrifice morale by laying off workers
c. Neither A nor B
D. Both A and B
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 3
29. Tarheel Company produces and
sells specialized portfolio cases. It expects to sell 20,000 cases next year at
$75 each. There is a beginning inventory of 1,500 cases and the company wants
to have an ending inventory equal to 30 percent of this year's sales. How many
cases need to be produced?
a. 15,500
b. 20,000
C. 24,500
d. 26,000
a. 15,500
b. 20,000
C. 24,500
d. 26,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
Use the following to answer
questions 30-31:
Butler Company produces tea sets. The following sales have been predicted for the third quarter of the year:
The inventory on hand July 1st was 2,000 sets. The ending finished goods inventory is budgeted at 20 percent of the next month's sales. The sets sell for $200 each. October sales are estimated at 8,000 sets.
Butler Company produces tea sets. The following sales have been predicted for the third quarter of the year:
The inventory on hand July 1st was 2,000 sets. The ending finished goods inventory is budgeted at 20 percent of the next month's sales. The sets sell for $200 each. October sales are estimated at 8,000 sets.
30. How many sets should Butler
Company produced in July?
a. 2,000
B. 10,200
c. 12,000
d. 12,200
a. 2,000
B. 10,200
c. 12,000
d. 12,200
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
31. How many sets should be
produced in September?
a. 2,000
B. 8,000
c. 9,000
d. 10,600
a. 2,000
B. 8,000
c. 9,000
d. 10,600
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
32. Carson Inc., a retail
establishment, expects sales of $500,000 of a particular item in March. Its
gross profit percentage is 60 percent. The ending inventory in February of this
item cost $40,000 and the company wants an ending inventory of $38,000 (cost).
How much needs to be purchased?
a. $38,000
B. $198,000
c. $498,000
d. $502,000
a. $38,000
B. $198,000
c. $498,000
d. $502,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
33. Lexington, Inc. has developed
the following production budget for one of its products for the second quarter
of the year:
Each unit takes 4 pounds of material 256, which costs $3 per pound. Lexington, Inc. has 1,600 pounds of material on hand March 30th and wants an ending inventory of material 256 at 5 percent of the next month's production. Production in July is expected to be 12,000 units. How much material 256 needs to be purchased in May and at what cost?
a. 62,280, $186,840
B. 60,920, $182,760
c. 64,000, $192,000
d. 61,600, $184,800
Each unit takes 4 pounds of material 256, which costs $3 per pound. Lexington, Inc. has 1,600 pounds of material on hand March 30th and wants an ending inventory of material 256 at 5 percent of the next month's production. Production in July is expected to be 12,000 units. How much material 256 needs to be purchased in May and at what cost?
a. 62,280, $186,840
B. 60,920, $182,760
c. 64,000, $192,000
d. 61,600, $184,800
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
34. Loft Company has the following
information for next month: planned production of 20,000 units which require 3
gallons of Material A each; beginning inventory of Material A of 4,800 gallons;
desired ending inventory of Material A of 6,000 gallons. How much material A
needs to be purchased?
a. 21,200 gallons
b. 60,000 gallons
C. 61,200 gallons
d. 70,800 gallons
a. 21,200 gallons
b. 60,000 gallons
C. 61,200 gallons
d. 70,800 gallons
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
Use the following to answer
questions 35-36:
Chang Inc. has developed the following units costs for the production of one of its products, based on a normal activity of 10,000 units per month:
Chang Inc. has developed the following units costs for the production of one of its products, based on a normal activity of 10,000 units per month:
35. What is the total amount of
direct labor budgeted for a month in which production is expected to be 11,000
units?
a. $165,000
b. $225,000
C. $247,500
d. $297,000
a. $165,000
b. $225,000
C. $247,500
d. $297,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
36. What is the total amount of
overhead included in the overhead budget for a month in which production is
expected to be 11,000 units?
A. $612,000
b. $643,500
c. $600,000
d. $594,000
A. $612,000
b. $643,500
c. $600,000
d. $594,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
Use the following to answer
questions 37-38:
Jorge Inc. has developed the following sales forecast for the first third of the year:
Collection pattern:
60 percent in the month of sale
40 percent in the month after sale
The company's selling price is $20 per unit and they desire an ending inventory equal to 30 percent of the next month's sales.
Jorge Inc. has developed the following sales forecast for the first third of the year:
Collection pattern:
60 percent in the month of sale
40 percent in the month after sale
The company's selling price is $20 per unit and they desire an ending inventory equal to 30 percent of the next month's sales.
37. What is the budgeted beginning
balance in units for finished goods inventory on March 1?
a. 9,800
B. 9,000
c. 6,000
d. 5,000
a. 9,800
B. 9,000
c. 6,000
d. 5,000
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 3
38. How much is expected to be
collected from sales in February?
a. $260,000
b. $300,000
C. $590,000
d. $560,000
a. $260,000
b. $300,000
C. $590,000
d. $560,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
39. The Budget Director is
responsible for
A. Coordinating, gathering and organizing
b. Approving the final budget
c. Authorizing changes to the Budget
d. Authorizing all salary changes
A. Coordinating, gathering and organizing
b. Approving the final budget
c. Authorizing changes to the Budget
d. Authorizing all salary changes
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 4
40. The _____ is (are) the
person(s) responsible for directing and coordinating the overall budgeting
process in large organizations.
A. Budget director
b. Budget committee
c. Board of directors
d. Treasurer
A. Budget director
b. Budget committee
c. Board of directors
d. Treasurer
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 4
41. Which of the following is not
a reason for padding a budget with slack?
a. People often perceive their performance will look better in their superior's eyes if they can "beat the budget"
B. The budget was developed by top management who have no idea of what goes
c. on in the various units of the company
d. Budgetary slack is often used to cope with uncertainty
e. Budgetary cost projections often are cut in the resource allocation process
a. People often perceive their performance will look better in their superior's eyes if they can "beat the budget"
B. The budget was developed by top management who have no idea of what goes
c. on in the various units of the company
d. Budgetary slack is often used to cope with uncertainty
e. Budgetary cost projections often are cut in the resource allocation process
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 5
Use the following to answer
questions 42-43:
Hessen is a wholesaler. The sales budget for November is $500,000 with a gross margin percentage of 65 percent. All purchases are paid for in the month following the purchase. Hessen's beginning inventory is $40,000 and an ending inventory, stated at cost, of $32,000 is desired. The beginning balance in accounts payable is $200,000.
Hessen is a wholesaler. The sales budget for November is $500,000 with a gross margin percentage of 65 percent. All purchases are paid for in the month following the purchase. Hessen's beginning inventory is $40,000 and an ending inventory, stated at cost, of $32,000 is desired. The beginning balance in accounts payable is $200,000.
42. What is the November 30th
balance in accounts payable?
A. $167,000
b. $207,000
c. $492,000
d. $508,000
A. $167,000
b. $207,000
c. $492,000
d. $508,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
43. What is the cash paid for
purchases in November?
a. $135,000
b. $175,000
C. $200,000
d. $240,000
a. $135,000
b. $175,000
C. $200,000
d. $240,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
Use the following to answer
questions 44-46:
Williams Pharmacy Inc. has the following sales budget for the first two quarters of next year:
Cash collections have been determined to follow the pattern below:
60 percent of sales collected in month of sales
25 percent of sales collected in month after sale
12 percent of sales collected two months after sale
3 percent of sales is uncollectible
Williams Pharmacy Inc. has the following sales budget for the first two quarters of next year:
Cash collections have been determined to follow the pattern below:
60 percent of sales collected in month of sales
25 percent of sales collected in month after sale
12 percent of sales collected two months after sale
3 percent of sales is uncollectible
44. Cash collections for March
are
a. $188,000
B. $218,000
c. $224,900
d. $225,500
a. $188,000
B. $218,000
c. $224,900
d. $225,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
45. What is the ending balance of
accounts receivable for March, assuming uncollectibles are written off after
the second month?
a. $30,000
b. $92,000
c. $129,500
D. $122,000
a. $30,000
b. $92,000
c. $129,500
D. $122,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
46. Cash collections for April
are
A. $213,500
b. $219,500
c. $220,400
d. $226,400
A. $213,500
b. $219,500
c. $220,400
d. $226,400
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
47. The ____ is a schedule of
expected cash receipts and disbursements that predicts the effect on the cash
position at given levels of operations.
a. Statement cash flows
b. Balance sheet
C. Cash budget
d. Income statement
a. Statement cash flows
b. Balance sheet
C. Cash budget
d. Income statement
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
Use the following to answer
questions 48-50:
Carlos Co. produces tables. The sales estimated for the third quarter of the year are as follows:
The beginning inventory finished goods balance should equal 25 percent of each month's sales for the third quarter and 20 percent of each month's sales for the fourth quarter. October sales are estimated at 20,000 tables. The cost of producing a table is $185.
Carlos Co. produces tables. The sales estimated for the third quarter of the year are as follows:
The beginning inventory finished goods balance should equal 25 percent of each month's sales for the third quarter and 20 percent of each month's sales for the fourth quarter. October sales are estimated at 20,000 tables. The cost of producing a table is $185.
48. How many tables will be
produced in August?
a. 36,250
b. 35,000
C. 33,750
d. 32,250
a. 36,250
b. 35,000
C. 33,750
d. 32,250
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
49. How many tables will be
produced in the quarter?
a. 95,000
B. 91,500
c. 92,500
d. 98,500
a. 95,000
B. 91,500
c. 92,500
d. 98,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
50. What will be the cost of goods
manufactured in September?
a. $6,197,500
b. $6,012,500
c. $5,087,500
D. $4,902,500
a. $6,197,500
b. $6,012,500
c. $5,087,500
D. $4,902,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
Use the following to answer
questions 51-54:
Abracadabra Co. manufactures magic sets. The sales planned for next year are 22,000 sets. Beginning material inventory is sufficient to produce 5,000 sets. Beginning work in process inventory is 1,000 sets that are 100 percent complete as to materials and 60 percent complete as to labor and overhead; there is no ending inventory. The finished goods inventory has a beginning inventory of 3,000 sets and a target inventory of 5,000 sets for December 31. The sets sell for $75. Direct materials cost $15; direct labor is $10; and manufacturing overhead is $12.
Abracadabra Co. manufactures magic sets. The sales planned for next year are 22,000 sets. Beginning material inventory is sufficient to produce 5,000 sets. Beginning work in process inventory is 1,000 sets that are 100 percent complete as to materials and 60 percent complete as to labor and overhead; there is no ending inventory. The finished goods inventory has a beginning inventory of 3,000 sets and a target inventory of 5,000 sets for December 31. The sets sell for $75. Direct materials cost $15; direct labor is $10; and manufacturing overhead is $12.
51. What will be the total sales
for the year?
a. $1,725,000
B. $1,650,000
c. $1,572,000
d. $1,500,000
a. $1,725,000
B. $1,650,000
c. $1,572,000
d. $1,500,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
52. How many sets will be
produced?
a. 20,000
b. 22,000
c. 23,000
D. 24,000
a. 20,000
b. 22,000
c. 23,000
D. 24,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
53. What will be the amount of
cost of goods sold?
a. $740,000
B. $814,000
c. $851,000
d. $888,000
a. $740,000
B. $814,000
c. $851,000
d. $888,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
54. What will be the total costs
of direct materials used during the year?
a. $360,000
B. $345,000
c. $330,000
d. $315,000
a. $360,000
B. $345,000
c. $330,000
d. $315,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
55. Each of the following are
facility level costs expect:
a. Property taxes
B. Set-up costs
c. Air conditioning costs
d. Security guards
a. Property taxes
B. Set-up costs
c. Air conditioning costs
d. Security guards
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Easy
Learning Objective: 3
56. Which of the following is not
a shortcoming of participative budgeting?
A. It involves employees throughout the organization in the budgetary process
b. Too much participation and discussion can lead to vacillation and delay
c. When those involved in the process disagree significantly and irreconcilably, the participative process can accentuate the differences
d. The problem of budget padding can be severe unless incentives for accurate projections can be provided
A. It involves employees throughout the organization in the budgetary process
b. Too much participation and discussion can lead to vacillation and delay
c. When those involved in the process disagree significantly and irreconcilably, the participative process can accentuate the differences
d. The problem of budget padding can be severe unless incentives for accurate projections can be provided
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
57. [Appendix] Which of the
following is not an ordering cost?
a. Clerical costs of preparing purchase order
b. Transportation costs
C. Insurance
d. Receiving costs
a. Clerical costs of preparing purchase order
b. Transportation costs
C. Insurance
d. Receiving costs
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 7
58. [Appendix] Which of the
following is not a holding cost?
a. Costs of storage space
b. Foregone interest on working capital tied up in inventory
c. Deterioration, theft, spoilage, or obsolescence
D. All are holding costs
a. Costs of storage space
b. Foregone interest on working capital tied up in inventory
c. Deterioration, theft, spoilage, or obsolescence
D. All are holding costs
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 7
59. [Appendix] Which of the
following is not a shortage cost?
a. Lost sales resulting in dissatisfied customers
b. Loss of quantity discounts on purchases
c. Disrupted production
D. Time spent finding suppliers and expediting orders
a. Lost sales resulting in dissatisfied customers
b. Loss of quantity discounts on purchases
c. Disrupted production
D. Time spent finding suppliers and expediting orders
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
Use the following to answer
questions 60-62:
Hackett Co. uses an EOQ model to determine its purchase quantities for the year. The following information is available: annual demand 40,000 units of material; cost of placing an order $20; cost of carrying the material in inventory $10 per unit. The material costs $100 per unit.
Hackett Co. uses an EOQ model to determine its purchase quantities for the year. The following information is available: annual demand 40,000 units of material; cost of placing an order $20; cost of carrying the material in inventory $10 per unit. The material costs $100 per unit.
60. [Appendix] Using the EOQ
formula, what is the order quantity (round to nearest whole unit)?
a. 894 units
B. 400 units
c. 354 units
d. 126 units
a. 894 units
B. 400 units
c. 354 units
d. 126 units
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
61. [Appendix] What is the number
of orders that need to be placed and the annual holding cost (round to nearest
whole number)?
a. 44 orders; $4,470
b. 50 orders; $2,500
c. 71 orders; $1,770
D. 100 orders; $2,000
a. 44 orders; $4,470
b. 50 orders; $2,500
c. 71 orders; $1,770
D. 100 orders; $2,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
62. [Appendix] What is the total
annual cost of the inventory policy (round to nearest whole number)?
A. $4,000
b. $5,320
c. $6,260
d. $8,790
A. $4,000
b. $5,320
c. $6,260
d. $8,790
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
63. [Appendix] The annual carrying
costs are
Refer To: 15-65
a. $36
b. $75
C. $1,200
d. $2,400
Refer To: 15-65
a. $36
b. $75
C. $1,200
d. $2,400
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
64. [Appendix] The annual ordering
costs are
Refer To: 15-65
a. $36
B. $75
c. $1,200
d. $2,400
Refer To: 15-65
a. $36
B. $75
c. $1,200
d. $2,400
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
65. [Appendix] Using the EOQ
formula, the economic order quantity, rounded up to the nearest unit is
Refer To: 15-65
a. 40
b. 142
C. 200
d. 347
Refer To: 15-65
a. 40
b. 142
C. 200
d. 347
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
Essay Questions
66. Pascal CO. has developed the following sales budget for
the first six months of the coming year"
The beginning inventory on January 1 is 8,000 units. The desired ending inventory for the coming year is to be 25 percent of next month's sales.
Each unit requires 6 units of material X at $8 per unit and 3 units of material Y at $2 per unit. There are 99,000 units of X and 49,500 units of Y on hand January 1 and the desired ending inventory for these will be 30 percent of next month's needs for the coming year.
The beginning inventory on January 1 is 8,000 units. The desired ending inventory for the coming year is to be 25 percent of next month's sales.
Each unit requires 6 units of material X at $8 per unit and 3 units of material Y at $2 per unit. There are 99,000 units of X and 49,500 units of Y on hand January 1 and the desired ending inventory for these will be 30 percent of next month's needs for the coming year.
Required:
(1) Prepare production budgets for February, March and April
(2) Prepare purchase budgets for materials X and Y in units and dollars for the same months.
(1) Prepare production budgets for February, March and April
(2) Prepare purchase budgets for materials X and Y in units and dollars for the same months.
Answer:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
67. The following information was
pulled off the various schedules of the master budget prepared by Zamir Co. and
other accounts for May:
All materials purchased were used
Required:
(1) Prepare a budgeted income statement for May
(2) Prepare a budgeted balance sheet for May
All materials purchased were used
Required:
(1) Prepare a budgeted income statement for May
(2) Prepare a budgeted balance sheet for May
Answer:
(1)
(2)
*Retained Earnings = $281,000-($18,000+$90,000+$150,000) = $281,000 - $258,000 = $23,000
(2)
*Retained Earnings = $281,000-($18,000+$90,000+$150,000) = $281,000 - $258,000 = $23,000
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
68. Ledford Corporation has the
following information available from various schedules to prepare its cash
budget for the June:
Receipts:
Sales (terms 2/10, net 30): May $90,000, June $100,000, July $120,000
Collection pattern: 65% in month of sale, 70% take the discount
35% in month after sale
Income from investments: May $500; June $750; July $350
Disbursements: all expenses are paid for when incurred. Materials are purchased and paid for in the month before they are used.
Required:
(1) Prepare the cash budget for June
(2) While you are not asked to prepare a budgeted cash flow statement, what similarities, if any, are there between the cash budget and a Statement of Cash Flow prepared under the direct method?
Receipts:
Sales (terms 2/10, net 30): May $90,000, June $100,000, July $120,000
Collection pattern: 65% in month of sale, 70% take the discount
35% in month after sale
Income from investments: May $500; June $750; July $350
Disbursements: all expenses are paid for when incurred. Materials are purchased and paid for in the month before they are used.
Required:
(1) Prepare the cash budget for June
(2) While you are not asked to prepare a budgeted cash flow statement, what similarities, if any, are there between the cash budget and a Statement of Cash Flow prepared under the direct method?
Answer:
(2) Like the Statement of Cash Flow, both emphasize cash. The cash receipts section shows cash collected from customers and investment income which are part of operating activities. It might also show some investing activities items such as proceeds from sale of noncurrent assets.
The cash disbursements section shows cash paid to suppliers and other cash operating activities, all part of operating activities. Depreciation expense is explicitly left out of both. The disbursements might also include some items from investing activities, e.g., purchases of equipment, and from financing activities, e.g., dividends paid.
The section that explicitly looks at financing issues makes up the bulk of the financing section items but also includes interest expense, an operating activity.
A well prepared cash budget can easily be turned into a budgeted statement of cash flows.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
69. Commodore Company, a retailer,
has developed the sales budget for the next six months of its rolling budget.
Gross profit has averaged 35 percent of sales over the last 3 months and this
trend is expected to continue. Purchases of merchandise are made a month before
needed and are paid 60 percent in the month of purchase and 40 percent the
following month. Wages, estimated at 10 percent of sales, are paid in the month
of sale while operating expenses, 15 percent of sales, are paid in the month of
the sale. There is a $63,000 balance in Accounts Payable on March 31, all of
which is paid in April.
Required:Prepare a schedule of cash disbursements for April, May, and June.
Required:Prepare a schedule of cash disbursements for April, May, and June.
Answer:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
70. Prefetto Company is in the
process of preparing its cash budget for the year. The sales forecast for the
last six months of the year follows:
The historical analysis of payment patterns of their customers has provided the following percentages:
50 percent in month of sale
35 percent in month after sale
10 percent in second month after sale
5 uncollectible
Payments made in the month of sale receive a 2 percent discount.
Required: Prepare a detailed Cash Collections from Sales Schedule for October, November, and December.
The historical analysis of payment patterns of their customers has provided the following percentages:
50 percent in month of sale
35 percent in month after sale
10 percent in second month after sale
5 uncollectible
Payments made in the month of sale receive a 2 percent discount.
Required: Prepare a detailed Cash Collections from Sales Schedule for October, November, and December.
Answer:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 3
71. Charmed Enterprises, a
chocolate distribution company, prepares its master budget on a monthly and
quarterly basis.
For the months of January, February and March, you are to compute the:
(a) Schedule of expected cash collections
(b) Inventory purchase budget and Cash Disbursements
(c) Cash budget
(1) Actual Sales in December were $60,000
(2) Budgeted Sales for January, February, March and April are
(3) Sales are collected at a rate of 30% for cash, and 70% on credit. All payments on credit sales are collected in the month following the sale. $42,000 is the balance in accounts receivable at December 31, 2005. The beginning cash balance is $10,000 with no loans outstanding.
(4) Beginning inventory at January 1, 2006 is $12,600
(5) The companies gross profit rate is 40%
(6) Monthly expenses are budgeted as follows:
(a) Shipping is 5% of sales
(b) Depreciation $2,000 per month
(c) Other expenses 6% of sales
(d) Salaries and Wages are fixed at $9,000 per month
(e) Advertising is $4,500
(7) In January, the company expects to purchase equipment of $11,000 and in February they expect to purchase equipment of $3,000 and $4,000 in March $4,000
(8) At the end of each month, inventory on hand should equal 30% of the following month's sales needs, stated at cost.
(9) December cash purchases for inventory were $36,600. We pay for inventory ½ in the current month and ½ in the month following (therefore we will pay $18,300 in January for December purchases).
(10) The company is required by its loan covenants to maintain a cash balance of $10,000. Further, it has an open line of credit with the bank. To reduce banking transaction cost, borrowing must be done at the beginning of a month and all repayments must be made at the end of a month. Finally, loans and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of repayment of principal. The annual interest rate is 6%.
For the months of January, February and March, you are to compute the:
(a) Schedule of expected cash collections
(b) Inventory purchase budget and Cash Disbursements
(c) Cash budget
(1) Actual Sales in December were $60,000
(2) Budgeted Sales for January, February, March and April are
(3) Sales are collected at a rate of 30% for cash, and 70% on credit. All payments on credit sales are collected in the month following the sale. $42,000 is the balance in accounts receivable at December 31, 2005. The beginning cash balance is $10,000 with no loans outstanding.
(4) Beginning inventory at January 1, 2006 is $12,600
(5) The companies gross profit rate is 40%
(6) Monthly expenses are budgeted as follows:
(a) Shipping is 5% of sales
(b) Depreciation $2,000 per month
(c) Other expenses 6% of sales
(d) Salaries and Wages are fixed at $9,000 per month
(e) Advertising is $4,500
(7) In January, the company expects to purchase equipment of $11,000 and in February they expect to purchase equipment of $3,000 and $4,000 in March $4,000
(8) At the end of each month, inventory on hand should equal 30% of the following month's sales needs, stated at cost.
(9) December cash purchases for inventory were $36,600. We pay for inventory ½ in the current month and ½ in the month following (therefore we will pay $18,300 in January for December purchases).
(10) The company is required by its loan covenants to maintain a cash balance of $10,000. Further, it has an open line of credit with the bank. To reduce banking transaction cost, borrowing must be done at the beginning of a month and all repayments must be made at the end of a month. Finally, loans and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of repayment of principal. The annual interest rate is 6%.
Answer:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
72. What are some of the
behavioral issues that can arise when performance is evaluated by comparing
actual results to the budget?
Answer:
Budgets affect virtually everyone in an
organization. If the company uses participative budgeting, there is the belief
that most people will perform better and try harder to achieve the goals
because they had been consulted in setting the goals. As good as this seems,
participation can bring about its own set of problems. With so many individuals
involved, the process can become slowed down with too much vacillation and
delays. If there are significant or irreconcilable disagreements, they can be
exacerbated by the participative process.
The other problem of participation relates to padding and slack. When a manager is being evaluated on how well he meets or beats the budget, there is a temptation to pad the budget—to understate revenues or overstate expenses. The participative process needs to provide good incentives to reduce this tendency, However, monetary rewards can still foster the problem.
There is another area where behavioral problems might arise—manipulation of the actual results. The shifting of year-end revenues or expenses can be used as ways to show improved performance.
The other problem of participation relates to padding and slack. When a manager is being evaluated on how well he meets or beats the budget, there is a temptation to pad the budget—to understate revenues or overstate expenses. The participative process needs to provide good incentives to reduce this tendency, However, monetary rewards can still foster the problem.
There is another area where behavioral problems might arise—manipulation of the actual results. The shifting of year-end revenues or expenses can be used as ways to show improved performance.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 5
73. The sales revenue budget is
the starting point for the master budget. Because of its importance,
forecasting the sales for the coming budget period is crucial.
Required:
(1) List at least five factors that are considered when forecasting sales.
(2) Briefly describe the two specific forecasting models discussed in the text: the Delphi method and econometric models.
Required:
(1) List at least five factors that are considered when forecasting sales.
(2) Briefly describe the two specific forecasting models discussed in the text: the Delphi method and econometric models.
Answer:
(1)(a) Past sales levels and trend for
the specific firm and its industry
(b) General economic trends
(c) Economic trends in the firm's industry
(d) Other factors expected to affect sales in the industry
(e) Political and legal events
(f) Intended pricing policy of the firm
(g) Planned advertising and product promotion
(h) Expected actions of competitors
(i) New products contemplated by the firm or other firms
(j) Market research studies
(2) The Delphi technique: members of the forecasting group prepare individual forecasts which are submitted anonymously with each member of the group having copies of all the submissions. The results are discussed by the group in order to deal with differences among the individual forecasts. After this discussion, the members of the group again prepare individual forecasts which are distributed anonymously and then discussed. This process continues until the group converges on a single best estimate for the coming year.
Econometric models enter past sales data into a regression model to obtain a statistical estimate of factors affecting sales. Supporters of these models feel that many relevant predictors can be included and manipulation of the assumed values of the predictors makes it possible to examine a variety of hypothetical conditions and relate them to the sales forecast.
(b) General economic trends
(c) Economic trends in the firm's industry
(d) Other factors expected to affect sales in the industry
(e) Political and legal events
(f) Intended pricing policy of the firm
(g) Planned advertising and product promotion
(h) Expected actions of competitors
(i) New products contemplated by the firm or other firms
(j) Market research studies
(2) The Delphi technique: members of the forecasting group prepare individual forecasts which are submitted anonymously with each member of the group having copies of all the submissions. The results are discussed by the group in order to deal with differences among the individual forecasts. After this discussion, the members of the group again prepare individual forecasts which are distributed anonymously and then discussed. This process continues until the group converges on a single best estimate for the coming year.
Econometric models enter past sales data into a regression model to obtain a statistical estimate of factors affecting sales. Supporters of these models feel that many relevant predictors can be included and manipulation of the assumed values of the predictors makes it possible to examine a variety of hypothetical conditions and relate them to the sales forecast.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
74. Briefly describe zero-base
budgeting and contrast it with base budgeting.
Answer:
Zero-base budgeting sets the budget for
virtually every activity in the organization to zero. If the activity wants to
receive funding during the coming budget year, the activity must be justified
in terms of its continued usefulness, e.g., every project in a R&D
department would have to justify itself for continued funding. It makes
management rethink each phase of an organization's operations before allocating
resources.
Base budgeting is a less extreme, but similar, approach. Each department's initial budget is set using a base package which is basically the minimal resources for the subunit to exist at an absolute minimal level. Any increases above the base package come from decisions to fund an incremental package which describes the resources needed to add various activities to the base package. The decision to approve the incremental package would be justified on the basis of costs and benefits of the activities involved. This approach also makes management take an evaluative, questioning attitude toward each of the organization's programs.
Base budgeting is a less extreme, but similar, approach. Each department's initial budget is set using a base package which is basically the minimal resources for the subunit to exist at an absolute minimal level. Any increases above the base package come from decisions to fund an incremental package which describes the resources needed to add various activities to the base package. The decision to approve the incremental package would be justified on the basis of costs and benefits of the activities involved. This approach also makes management take an evaluative, questioning attitude toward each of the organization's programs.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
75. [Appendix] John, Stuart, Mills
Company uses 10,000 units of material X per year. The material costs $100 per
unit. The cost of placing an order is $160 and the cost of carrying a unit in
inventory for a year is $20.
Required: (1) Prepare a tabular analysis to find the economic order quantity using the table format below.
(2) Find the EOQ using the formula approach.
(3) What might cause the answers as to the optimal order to quantity to differ between 1 and 2?
Required: (1) Prepare a tabular analysis to find the economic order quantity using the table format below.
(2) Find the EOQ using the formula approach.
(3) What might cause the answers as to the optimal order to quantity to differ between 1 and 2?
Answer:
(2) EOQ =
units(3) There is a strong possibility that the exact number of orders to place would not come up in the tabular approach.
AACSB: Analytic
AICPA BB: Critical Thinking
Difficulty: Medium
Learning Objective: 7
76. [Appendix] Compare and
contrast the EOQ model with just-in-time purchasing.
Answer:
The EOQ model tries to balance the cost
of ordering against the cost of storing inventory and seeks to minimize the
total cost of ordering and holding purchased inventory. JIT wants to keep all
inventories as low as possible with the idea of reducing holding costs as lows
as possible. The ordering cost is held down by reducing the number of vendors,
negotiating long-term supply agreements, making less frequent payments, and
eliminating inspections.
Both the EOQ model and JIT share the concept that inventory should be purchased or produced in small quantities, and inventories should be kept to the absolute minimum. However, their basic philosophies are different. The EOQ model believes some inventory is necessary as well as a buffer stock and optimizes the order quantity to balance the ordering against the carrying costs. JIT considers inefficiency and waste of storing inventory to be a part of holding costs not considered under the EOQ model so inventory should be minimized or eliminated.
Also, the EOQ model provides a constant order quantity while JIT generally has order sizes that vary in size depending on needs.
Both the EOQ model and JIT share the concept that inventory should be purchased or produced in small quantities, and inventories should be kept to the absolute minimum. However, their basic philosophies are different. The EOQ model believes some inventory is necessary as well as a buffer stock and optimizes the order quantity to balance the ordering against the carrying costs. JIT considers inefficiency and waste of storing inventory to be a part of holding costs not considered under the EOQ model so inventory should be minimized or eliminated.
Also, the EOQ model provides a constant order quantity while JIT generally has order sizes that vary in size depending on needs.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 7
77. Dierberg Company is a fast
growing company with monthly sales for the current year estimated at a
relatively steady upward trend. Past history has shown that all sales are
collected within two months with negligible uncollectibles. The product for a
given month is purchased partially in the month before sale and the rest during
the month of sale and is paid for over a two month period. Property and income
taxes are paid quarterly while other expenses are paid as incurred. The company
has a desired ending cash balance for each month of $150,000 and, when
necessary borrows to meet shortfalls and invests overages.
The success of the company has been sudden and Ms. Hatley, the controller, is concerned about meeting the goals of the company without getting into serious short-term financial difficulties. As a result, she has been very conscientious about preparing the cash budget and keeping it up-to-date as conditions warrant.
Required: Why is cash budgeting important for a rapidly expanding firm such as Dierberg Company?
The success of the company has been sudden and Ms. Hatley, the controller, is concerned about meeting the goals of the company without getting into serious short-term financial difficulties. As a result, she has been very conscientious about preparing the cash budget and keeping it up-to-date as conditions warrant.
Required: Why is cash budgeting important for a rapidly expanding firm such as Dierberg Company?
Answer:
In any firm, but especially a rapidly
expanding firm, there are timing differences between payments of cash and
receipts of cash. This is especially true for increasing product purchases
which precede the increasing sales and are paid for frequently before the cash
has been received from the sales. If trends in receipts and disbursements are
not monitored, the firm could find itself with a growing short-term debt to
both meet bills and the minimum desired cash balance.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
78. Adair Company has been busy
over the first few years of its existence in penetrating its market and gaining
a respectable market share. To facilitate this, Mr. Adair, the CEO, and his
controller, Mr. Brown, have been developing the annual master budgets. To date
this approach has worked well.
Adair has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Horwitz, has suggested to Mr. Adair that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Adair agreed to readily. Mr. Horwitz explained to Adair's departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process.
Required:
(1) What benefits will accrue to Adair under this new budgeting system?
(2) What behavioral issues might arise for departmental managers and for production workers.
(3) What is the most probable long-term reaction of Adair's people to the participative budget system.
Adair has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Horwitz, has suggested to Mr. Adair that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Adair agreed to readily. Mr. Horwitz explained to Adair's departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process.
Required:
(1) What benefits will accrue to Adair under this new budgeting system?
(2) What behavioral issues might arise for departmental managers and for production workers.
(3) What is the most probable long-term reaction of Adair's people to the participative budget system.
Answer:
(1) There will be improved
communication and coordination between departments; problems might be identified
sooner since the managers are closer to the action; and accountability and
performance evaluation should be easier to do.
(2) Departmental managers will face some positive points in that they are more likely to be motivated to work with a budget they had a hand in developing. They also should accept the results of the performance evaluation and accountability more readily. Unfortunately, there may be tendencies to pad the budget before the fact or manipulate the figures after the fact in order to look better for the evaluation, especially if there are monetary rewards involved.
Production workers will have some similar reactions depending on the degree of their involvement in the process. If they consider the budget fair, they will work with it; if not, they might sabotage it.
(3) If there is a perception that the process has worked well, all involved will be motivated to continue with the process. If there is a feeling that things have not worked well or evaluations have been unfair, they will not work with the process.
(2) Departmental managers will face some positive points in that they are more likely to be motivated to work with a budget they had a hand in developing. They also should accept the results of the performance evaluation and accountability more readily. Unfortunately, there may be tendencies to pad the budget before the fact or manipulate the figures after the fact in order to look better for the evaluation, especially if there are monetary rewards involved.
Production workers will have some similar reactions depending on the degree of their involvement in the process. If they consider the budget fair, they will work with it; if not, they might sabotage it.
(3) If there is a perception that the process has worked well, all involved will be motivated to continue with the process. If there is a feeling that things have not worked well or evaluations have been unfair, they will not work with the process.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 5
79. Kessler and Son is a small
business that, after struggling for a while, has taken off. Mr. Kessler Jr. has
been attending various seminars to improve his business knowledge and has
brought back several new ideas to see if they can be implemented in the
company. One idea that he felt was very urgent to implement was for his father
and him and others in managerial positions to sit down and develop a strategic
plan and a budget process for the company. This had not been done when the
company started so he would have to do some persuading to get the others
accepting and involved. One other thing he had learned at one of his seminars
was that something like this had to be accepted at the top before others would
accept it.
Required: What kinds of issues should Mr. Kessler bring up to get his idea accepted?
Required: What kinds of issues should Mr. Kessler bring up to get his idea accepted?
Answer:
Most companies have a set of goals
which involve them in periodic exercises of strategic planning. Mr. Kessler
needs to have a few of these in mind, e.g., market share, new products. Once
the long-range strategic plans have been developed, more detailed plans are
necessary for the current period. The most common of these is the master budget
which is the quantification of the strategic plan for the current period. It
specifies how the organization will acquire and use resources during a
particular time period. Since this is an expanding business, the importance of the
budget needs to be stressed and participation in the process by at least the
top level managers.
A budget system has five main purposes:
(a) Planning—the individuals in the organization are forced to plan ahead.
(b) Facilitating communication and coordination—each manager must be aware of the plans made by other managers and the budgeting process pull together each of the individual plans.
(c) Allocating resources—the budget helps allocate the scarce resources of the organization among the competing uses.
(d) Managing financial and operational performance—although plans change, the budget acts as a benchmark against which to compare actual results.
(e) Evaluating performance and providing incentives—comparing actual results with budgeted results helps manager evaluate the performance of individuals, departments, divisions, sales territories, or entire companies.
A budget system has five main purposes:
(a) Planning—the individuals in the organization are forced to plan ahead.
(b) Facilitating communication and coordination—each manager must be aware of the plans made by other managers and the budgeting process pull together each of the individual plans.
(c) Allocating resources—the budget helps allocate the scarce resources of the organization among the competing uses.
(d) Managing financial and operational performance—although plans change, the budget acts as a benchmark against which to compare actual results.
(e) Evaluating performance and providing incentives—comparing actual results with budgeted results helps manager evaluate the performance of individuals, departments, divisions, sales territories, or entire companies.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 1
Learning Objective: 2
80. Ms. Alvarez, head of the
Research and Development Department of Armco Company, is preparing the budget
for her department for the next year. As part of her preparation, she started
to look over the various projects in process and was surprised to see the
number of projects that were still being funded although they were not moving
forward. Since it was very difficult for her to go to a person and say their
pet project would no longer be funded because it was going nowhere, she was
looking for a more objective way to handle the issue. She had heard about
zero-based budgeting and was considering adopting it, with her boss' approval.
Required: What kind of information should Ms. Alvarez bring to her boss to help win approval for her to change how she develops her budget? Also bring in the idea of base budgeting.
Required: What kind of information should Ms. Alvarez bring to her boss to help win approval for her to change how she develops her budget? Also bring in the idea of base budgeting.
Answer:
Zero-base budgeting sets the budget for
every project in the department to zero. If the project wants to receive
funding during the coming budget year, the project must be justified in terms
of its continued progress and the usefulness of its final result. It makes
management rethink each phase of a department's operations before allocating
resources to it.
Base budgeting is a less extreme, but similar, approach. The project's initial budget is set using a base package which is basically the minimal resources for it to exist at an absolute minimal level. Any increases above the base package come from decisions to fund an incremental package which describes the resources needed to add various activities to the base package. The decision to approve the incremental package would be justified on the basis of costs and benefits of the activities involved. This approach also makes management take an evaluative, questioning attitude toward each of the department's programs.
Base budgeting is a less extreme, but similar, approach. The project's initial budget is set using a base package which is basically the minimal resources for it to exist at an absolute minimal level. Any increases above the base package come from decisions to fund an incremental package which describes the resources needed to add various activities to the base package. The decision to approve the incremental package would be justified on the basis of costs and benefits of the activities involved. This approach also makes management take an evaluative, questioning attitude toward each of the department's programs.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Hard
Learning Objective: 3
81. Discuss budgeting, its role in
strategic planning and the five purposes of budgeting systems.
Answer:
Most companies have a set of goals
which involve them in periodic exercises of strategic planning. Once the
long-range strategic plans have been developed, more detailed plans are
necessary for the current period. The most common of these is the master budget
which is the quantification of the strategic plan for the current period. It
specifies how the organization will acquire and use resources during a
particular time period.
A budget system has five main purposes:
(a) Planning—the individuals in the organization are forced to plan ahead.
(b) Facilitating communication and coordination—each manager must be aware of the plans made by other managers and how the budgeting process will pull together each of the individual plans.
(c) Allocating resources—the budget helps allocate the scarce resources of the organization among the competing uses.
(d) Managing financial and operational performance—although plans change, the budget acts as a benchmark against which to compare actual results.
(e) Evaluating performance and providing incentives—comparing actual results with budgeted results helps manager evaluate the performance of individuals, departments, divisions, sales territories, or entire companies.
A budget system has five main purposes:
(a) Planning—the individuals in the organization are forced to plan ahead.
(b) Facilitating communication and coordination—each manager must be aware of the plans made by other managers and how the budgeting process will pull together each of the individual plans.
(c) Allocating resources—the budget helps allocate the scarce resources of the organization among the competing uses.
(d) Managing financial and operational performance—although plans change, the budget acts as a benchmark against which to compare actual results.
(e) Evaluating performance and providing incentives—comparing actual results with budgeted results helps manager evaluate the performance of individuals, departments, divisions, sales territories, or entire companies.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 1
Learning Objective: 2
82. Moore Inc. manufactures a
product that uses three different materials in the following amounts: 3 pounds
of material A per unit at $2.00 per pound; 2 pints of material B per unit at
$1.00 per pint; and 1 container at $15 per container. The company has 1,500
pounds of A, 1,200 pints of B and 500 containers on hand September 30 and wants
an ending inventory equal to 120 percent of beginning inventory. The company
expects to sell 3,000 containers of this product in October. Purchases of
material are paid for in the month of purchase.
Required: How much materials have to be purchased in October and at what Cost?
Required: How much materials have to be purchased in October and at what Cost?
Answer:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: 3
83. [Appendix] Ms. Marx, the
purchasing agent for ESM Company has been dealing with placing orders for
materials where the quantities have been developed using an EOQ model. Since
the amount of each order is known as well as the timing of the order, her main
tasks relate to finding a supplier who can get the material to the company on
time and with the appropriate quality. The price paid can vary somewhat if she
has to start dealing with a new supplier or the existing supplier raises the
price.
The Company has been discussing the possibility of moving to a JIT purchasing system. Ms Marx has heard of JIT but does not know how it might impact her job.
Required: Explain briefly to Ms. Marx what a JIT purchasing system entails and its potential effect on her job.
The Company has been discussing the possibility of moving to a JIT purchasing system. Ms Marx has heard of JIT but does not know how it might impact her job.
Required: Explain briefly to Ms. Marx what a JIT purchasing system entails and its potential effect on her job.
Answer:
JIT purchasing requires the finding of
a few reliable suppliers willing to deliver small amounts frequently, to
provide units without defects, to be able to handle orders of varying amounts,
and to sign a long term contract locking in a price and payment schedule. This
initial task is one that purchasing would be involved in as a part of a team
effort since it involves more than she has had to deal with before.
Subsequently, if the company and supplier use EDI, her function could be
reduced severely. Otherwise, her job could be simpler in that all she would
have to do is contact the suppliers when there is an order to be placed.
AACSB: Analytic, Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Decision Making
Difficulty: Medium
Learning Objective: 7
