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  1. ch10
    • Student:
    • 1. The master budget for a given accounting period has all the following except:
    • E. It is based on the actual level of sales activity for the period.
    • 2. "Budgetary slack" occurs when:
    • D. In order to "meet" budget objectives, employees ask for resources in excess of what they need.
  2. 3. A master budget is typically prepared for:
    A. A period of one year.
  3. 4. The successful use of a budgeting system generally involves all of the following except which item?
    D. The budgets include "budgetary slack."
  4. 5. All of the following are ways of setting the budget, except:
    B. Two-stage budgeting.
  5. 6. Revision of a completed and approved budget:
    A. Should be conducted whenever actual events differ significantly from those envisioned when the budget was prepared.
  6. 7. The process of planning business actions in the near future and expressing them as formal plans of action is called:
    • A. Budgeting.
    • 8. A plan of dollar amounts to be spent on long-term projects is called a:
    • B. Capital budget.
  7. 9. A plan that shows the cash balance on hand at the beginning of a budget period, expected cash flow from operations, cash flows from investing activities, cash flows from financing activities, and an ending cash balance is called a(n):
    D. Cash budget.
  8. 10. A comprehensive or overall formal plan for a business that includes specific plans for expected sales, the units of product to be produced, the merchandise (or materials) to be purchased, the manufacturing, selling, administrative, and general expense to be incurred, the long-term assets to be purchased, and the amounts of cash to be borrowed or loans to be repaid, as well as a budgeted income statement and balance sheet, is called a:
    A. Master budget.
  9. 11. A plan that states the units or costs of merchandise to be purchased by a retailer or wholesaler during the budget period is called a:
    B. Merchandise purchases budget.
  10. 12. A plan showing the units of goods expected to be sold and the expected revenue from sales is called the:
    • E. Sales budget.
    • 13. The practice of maintaining budgets for the same number of future periods, revising those budgets as each period is completed and adding a new budget each period, is called:
    • D. Rolling budgets (or, rolling financial forecasts).
  11. 14. An accounting statement that presents predicted amounts of the company's assets, liabilities, and stockholders' equity as of the end of the budget period is called a(n):
    • C. Pro forma balance sheet.
    • 15. Which of the following budgets is not a financial budget?
    • A. Sales budget.
  12. 16. Which of the following is not a potential benefit of having a sound budgeting process?
    • E. Lower acceptance rate for capital budgeting projects.
    • 17. Which of the following budgets must be completed before preparing a cash budget?
    • A. Cash receipts budget.
  13. 18. Which of the following statements about budgeting is not true?
    • E. Budgeting eliminates the need for day-to-day monitoring of operations.
    • 19. Which of the following factors is least likely to be considered in preparing a sales budget?
    • D. The cash budget.
  14. 20. Sales forecasts are the first step in the budgeting process of a merchandising firm because:
    • E. Almost all activities of a firm emanate from (i.e., are linked to) estimated sales demand.
    • 21. Sales forecasting by its nature is:
    • D. Somewhat subjective.
  15. 22. Budgeting for production (i.e., units to be produced in an upcoming budget period):
    C. Involves the sales budget and both beginning and ending finished goods inventory amounts.
  16. 23. Maintaining a constant production level in a firm has the advantage of:
    B. Allowing a stable employment level.
  17. 24. The budgeted income statement and budgeted balance sheet benefit a business primarily in terms of the ability of the organization to:
    D. Summarize the impact of the firm's financial and operating activities for an upcoming period.
  18. 25. The focal point in budgeting for a service organization is likely to be:
    C. Human resource (i.e., personnel) planning.
  19. 26. Which of the following is not an alternative approach to traditional budgeting practices?
    • E. Operations budgeting
    • 27. Zero-base budgeting (ZBB) differs from traditional budgeting in terms of its requirement to:
    • A. Justify budgeted operations and associated spending.
  20. 28. A "participative" budget is a(n):
    A. Good two-way communication device.
  21. 29. Unless properly controlled, a "bottom-up" budgeting process can lead to:
    B. Easy budget targets.
  22. 30. Budgeting provides all of the following except:
    • D. An ethical framework for decision-making.
    • 31. Financial budgets include the:
    • A. Pro forma balance sheet.
  23. 32. The effect of increasing the targeted (i.e., desired) ending inventory for a given budget period has the following effect on the production budget for the period:
    A. Increases the required production for the budget period.
  24. 33. The authorization function of budgets is especially important for government and not-for-profit (NFP) entities, where budgeted amounts often serve both as approvals of planned activities (or programs) and as:
    D. Ceilings for expenditures.
  25. 34. Which one of the following is a plan that will allow a manufacturing firm to satisfy its sales goals and have on hand the desired amount of inventory at the end of the budget period?
    D. Production budget.
  26. 35. Which one of the following shows the direct materials required for production and their budgeted cost?
    A. Direct materials usage budget.
  27. 36. Which of the following is not an advantage of using a "highly achievable target" when constructing budgets?
    B. Increasing the risk that managers will engage in "earnings management" behavior.
  28. 37. A negotiated budgeting process is:
    • C. A combination of "top-down" and "bottom-up" approaches to budget preparation.
    • 38. The cash budget does not include:
    • D. All sales revenues.
  29. 39. Which one of the following is a budgeting process that requires managers to prepare budgets based on in-depth reviews of all budget items?
    • E. Zero-base budgeting (ZBB).
    • 40. Which one of the following is a budgeting approach that explicitly demands continuous improvement and that incorporates expected improvements in the resultant budget?
    • D. Kaizen budgeting.
  30. 41. Consistency between goals of the firm and the goals of its employees is referred to as:
    C. Goal congruence.
  31. 42. A significant advantage of using either an activity-based budgeting (ABB) or a time-driven activity-based budgeting (TDABB) system is:
    B. Estimation of the cost of unused capacity, as a by-product of the budgeting process.
  32. 43. Budgets can serve as the standard against which actual performance is measured. When compensation is based on this comparison, the organization is said to use:
    A. Fixed performance contracts.
  33. 44. Critics (e.g., The Beyond Budgeting Roundtable) of traditional budgeting assert that the budgeting process:
    C. Makes too much use of so-called linear compensation plans.
  34. 45. Zero-base budgeting (ZBB):
    • D. Involves rigorous review of each cost item before inclusion in the budget.
    • 46. Wild West Fashion expects the total costs of goods sold to be $30,000 in November and $60,000 in December for one of its young adult suits. Management also wants to have on hand at the end of each month 10 percent of the expected total cost of sales for the following month. What dollar amount of suits should be purchased in November?
    • A. $26,000.
    • B. $27,000.
    • C. $33,000.
    • D. $36,000.
    • E. $60,000.
    • 47. ACEM Hardware purchased 5,000 gallons of paint in March. The store had 1,500 gallons on hand at the beginning of March, and expects to have 1,000 gallons on hand at the end of March. What is the budgeted number of gallons to be sold during March?
    • A. 3,500.
    • B. 4,500.
    • C. 5,000.
    • D. 5,500.
    • E. 7,500.
    • 48. Joe's Mart policy is to have 20% of the next month's sales on hand at the end of the current month. Projected sales for August, September, and October are 25,000 units, 20,000 units, and 30,000 units, respectively. How many units must be purchased in September?
    • A. 16,000.
    • B. 17,000.
    • C. 22,000.
    • D. 26,000.
    • E. 28,000.
    • 49. Cripe Corporation maintains ending inventory for each month at 5% of the following month's sales. It predicted the following sales (in units) for the first four months of the coming year:
  35. How many units should be produced in March?
    • A. 2,810.
    • B. 2,850.
    • C. 2,970.
    • D. 2,990.
    • E. 4,250.
    • 50. LeMinton Company expects the following credit sales for the first five months of the year: January, $25,000; February, $40,000; March, $30,000; April, $36,000, May $40,000. Experience has shown that payment for the credit sales is received as follows: 60% in the month of sale, 25% in the first month after sale, 12% in the second month after sale, and the remainder is uncollectible. How much cash can LeMinton Company expect to collect in March as a result of credit sales?
    • A. $18,000.
    • B. $28,600.
    • C. $30,000.
    • D. $31,000.
    • E. $32,040.
    • 51. The Johann's Professional Service Company expects 70% of sales for cash and 30% on credit. The company collects 80% of its credit sales in the month following sale, 15% in the second month following sale, and 5% are not collected. Expected sales for June, July, and August are $48,000, $54,000, and $44,000, respectively. What are the company's expected total cash receipts in August?
    • A. $45,920.
    • B. $61,400.
    • C. $87,600.
    • D. $50,400
    • E. $15,120
    • 52. Blake Company has $15,000 cash at the beginning of June and anticipates $50,000 in cash receipts and $34,500 in cash disbursements. The company requires a minimum cash balance of $20,000. Any excess cash over the minimum desired balance is used to pay down debts. Blake has an agreement with its bank to borrow as needed or to repay loans as funds become available. As of May 31, the company owes $15,000 to the bank. The balance of the loan on June 30 will be:
    • A. $4,500.
    • B. $9,500.
    • C. $15,000.
    • D. $19,500.
    • E. $25,500.
    • Gorberchev Food Processing expects to have 20,000 units of finished goods inventory on hand on March 31 and reports the following expected sales (in units) for the first four months:
  36. At the end of each month the company desires its finished goods ending inventory to be 20% of the next month's projected sales (in units).
    • 53. The budgeted production (in units) for Gorberchev Food Processing for April should be:
    • A. 112,000.
    • B. 120,000.
    • C. 127,200.
    • D. 128,000.
    • E. 142,000.
    • 54. The budgeted production (in units) for Gorberchev Food Processing for May should be:
    • A. 112,000.
    • B. 134,000.
    • C. 140,000.
    • D. 142,000.
    • E. 146,000.
    • Doanne Food Processing expects to have 36,000 pounds of raw materials inventory on hand on March 31, the end of the current year. The company budgets the following production (in units) for the first four months of the coming year:
  37. At the end of each month the firm desires its ending raw material inventory to be 10% of the next month's production needs. A finished unit requires three pounds of raw materials.
    • 55. Doanne's budgeted purchases for raw materials (in pounds) during April should be:
    • A. 224,000.
    • B. 360,000.
    • C. 363,000.
    • D. 399,000.
    • E. 435,000.
    • 56. Doanne's budgeted purchases (in pounds) for raw materials during June should be:
    • A. 414,000.
    • B. 420,000.
    • C. 426,000.
    • D. 456,000.
    • E. 498,000.
    • 57. Oracle Supply Co. supply forecasts purchases of 15,000 widgets in June. It sells the widget at $12.00 per unit. The company has 1,000 units on hand on June 1. The desired ending inventory of widgets on June 30 is to be 20% lower than the beginning inventory. Total June sales for widgets are anticipated to be (in dollars):
    • A. $177,600.
    • B. $180,000.
    • C. $182,400.
    • D. $189,600.
    • E. $192,000.
    • 58. Salich Manufacturing Corporation has provided the following sales budget information:
  38. Cash sales are normally 40% of total sales and the credit sales are expected to be collected in their entirety in the month following the month of sale. The amount of cash expected to be received from customers in September is:
    • A. $24.000.
    • B. $55,000.
    • C. $57,000.
    • D. $58,000.
    • E. $60,000.
    • 59. Worton Distributing expects its September sales to be 25% higher than its August sales of $150,000.Purchases were $100,000 in August and are expected to be $120,000 in September. All sales are on credit and are expected to be collected as follows: 30% in the month of the sale and 70% in the following month. Purchases are paid 25% in the month of purchase and 75% in the following month. The beginning cash balance on September 1 is $10,000. The ending cash balance on September 30 would be:
    • A. $56,250.
    • B. $56,500.
    • C. $65,250.
    • D. $66,250.
    • E. $76,250.
    • 60. Tony's Fashions forecasts sales of $300,000 for the quarter ended December 31.Its gross profit rate is 20% of sales, and its September 30 inventory is $100,000.If the December 31 inventory is targeted at $40,000, budgeted purchases for the quarter should be:
    • A. $140,000.
    • B. $160,000.
    • C. $180,000.
    • D. $200,000.
    • E. $240,000.
    • Boone Co.'s sales, based on past experience, are 20% cash sales and 80% credit sales. Credit sales are typically collected as follows: 40% in the month of sale, 50% in the month after the sale, and 10% in the second month. On December 31, the accounts receivable balance is $54,000, of which $12,000 is from November sales. Total sales for January and February are budgeted to be $100,000 and $120,000, respectively.
    • 61. What are Boone Co.'s budgeted cash receipts for January?
    • A. $74,200.
    • B. $85,000.
    • C. $87,000.
    • D. $94,200.
    • E. $99,000.
    • 62. What are Boone Co.'s budgeted cash receipts for February?
    • A. $85,400.
    • B. $95,000.
    • C. $106,600.
    • D. $109,400.
    • E. $112,900.
    • Ardel Co. budgeted to sell 200,000 units of Zbox in September. Production of one unit of Zbox required two pounds of aluminum and five pounds of steel powder. The beginning inventory and the desired ending inventory in units are:
  39. 63. How many units of Zbox are to be manufactured by Adel Co. during September?
    • A. 150,000.
    • B. 189,000.
    • C. 200,000.
    • D. 201,000.
    • E. 202,000.
    • 64. How many pounds of aluminum powder does Ardel Co. need to purchase during September if Ardel plans to manufacture 150,000 units of Zbox in September?
    • A. 143,000 pounds.
    • B. 157,000 pounds.
    • C. 286,000 pounds.
    • D. 293,000 pounds.
    • E. 300,000 pounds.
    • 65. How many pounds of steel powder does Ardel Co. need to purchase during September if Ardel plans to manufacture 150,000 units of Zbox in September?
    • A. 725,000 pounds.
    • B. 745,000 pounds.
    • C. 750,000 pounds.
    • D. 755,000 pounds.
    • E. 775,000 pounds.
    • Information pertaining to Yekstop Corp.'s sales revenue is presented below.
  40. 74. The estimated total cash collections by Fresplanade Co. during December from accounts receivable is:
    • A. $113,160.
    • B. $101,400.
    • C. $143,640.
    • D. $125,640.
    • E. $102,420.
    • 75. The estimated total cash collections by Fresplanade Co. during November from collection of accounts receivable is:
    • A. $113,160.
    • B. $101,400.
    • C. $143,640.
    • D. $125,640.
    • E. $102,420.
    • 76. The estimated total cash collections by Fresplanade Co. during October from accounts receivable is:
    • A. $113,160.
    • B. $101,400.
    • C. $143,640.
    • D. $125,640.
    • E. $102,420.
    • 77. The estimated cash collection by Fresplanade Co. during September from credit sales in July, August, and September is:
    • A. $83,160.
    • B. $79,380.
    • C. $87,840.
    • D. $54,000.
    • E. $71,640.
    • 78. The estimated cash collection by Fresplanade Co. during August from July and August credit sales is:
    • A. $83,160.
    • B. $79,380.
    • C. $87,840.
    • D. $54,000.
    • E. $71,640.
    • 79. The estimated cash collections during July from credit sales made in July by Fresplanade Co. is:
    • A. $83,160.
    • B. $79,380.
    • C. $87,840.
    • D. $54,000.
    • E. $71,640.
    • Brownsville Novelty Store prepared the following budget information for the month of May:
    • • Sales are budgeted at $360,000. All sales are on account and a provision for bad debts is made monthly at three percent of sales.
    • • Inventory was $84,000 on April 30 and an increase of $12,000 is planned for May 31.
    • • All inventory is marked to sell at cost plus fifty percent.
    • • Estimated cash disbursements for selling and administrative expenses for the month are $48,000.
    • • Depreciation for May is projected at $6,000.
  41. General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on June 30, the end of the current year. The company has budgeted the following production for the first four months of the coming year:
  42. E. Kaizen budgeting.
    • 106.Which of the following is NOT true regarding the use of linear compensation plans?
    • A. Such plans encourage "gaming" behavior on the part of managers.
    • B. Such plans strongly link managerial compensation to the agreed-upon budget.
    • C. Under such plans, managerial reward is independent of budgetary targets.
    • D. Under such plans, managerial reward is based principally on actual performance.
    • E.Under such plans, managerial reward is based on what managers actually do, not what they do relative to what they say they can do.
    • 107.Which of the following is NOT a characteristic of Kaizen Budgeting?
    • A. These budgets reflect continuous-improvement standards.
    • B. These budgets adjust required resource demands based on targeted efficiency and productivity gains.
    • C. This approach to budgeting can be used in conjunction with both traditional and activity-based budgeting.
    • D. The approach can be used internally, but not for external purposes (e.g., in budgeting supplier costs).
    • E. Cost decreases in the budget are the result of performing the activities more efficiently and with higher quality.
    • 108.Explain benefits of implementing a master budgeting system.
    • 109.Contrast operating budgets and financial budgets. How do these budgets relate to the master budget for a period? What is the culmination of the master budgeting process?
    • 110.1. What is the primary advantage of using practical capacity as the volume level for determining cost allocation rates in an ABC or TDABC system?
    • 2. What is the appropriate accounting treatment for unused capacity costs for a given accounting period?
    • In both activity-based and time-driven activity-based systems we calculate cost-driver rates for support activities (e.g., the cost to ship an item or the cost to process a customer order) and it is asserted that these rates are best determined by dividing budgeted resource costs (for a given cost pool) by the practical capacity of resources supplied.
    • Required:
    • 111.Uncertainty and the Budgeting Process: As indicated in the text, the validity of pro-forma financial statements that are produced as part of the master budgeting process is affected by the accuracy of the forecasted data going into the component budgets. Such data are subject to various levels of uncertainty. For this reason, accountants need to understand ways of dealing with uncertainty in the budgeting process.
    • Required: Define and distinguish among the following ways of handling uncertainty in the budgeting
    • process:
    • 1. What-if analysis (give at least one concrete example)
    • 2. Sensitivity analysis
    • 3. Scenario analysis.
  43. 112.List factors that should be considered in developing a sales forecast for an upcoming budget period.
    • 113.What is zero-base budgeting (ZBB) and how does this approach to budgeting compare to what can be considered "traditional budgeting"? How is ZBB implemented in practice?
    • 114.What is the focus of activity-based budgeting (ABB)? What is the principal advantage of ABB?
    • 115.Contrast the budgeting unit (or focus) under a traditional budgeting system and under an activity-based budgeting (ABB) system.
    • 116.Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers. Management also wants to have $500 in inventory at the end of the month to prepare for the fall season. Beginning inventory in August was $400. What dollar amount of plastic flowers should be purchased to meet the above objectives?
    • 117.Lighting Inc.'s sales budget showed the following projections for the coming year:
  44. Inventory on December 31 of the current year is expected to be 20,000 units. The quantity of finished goods inventory at the end of each quarter was to equal seven percent of the next quarter's budgeted units to be sold.
    • Required: Calculate the units to be produced during the third quarter.
    • 118.Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars. Management also wants to have $300 in inventory at the end of the month to prepare for the summer season. Beginning inventory in May was $200.
    • Required: What dollar amount of flea collars should be purchased to meet the above objectives?
    • 119.Allmakes Software budgeted August purchases of new software at $140,000.The store had software costing $6,000 on hand at the beginning of August, and to cover part of anticipated back-to-school sales in September they expect to have $15,000 of software on hand at the end of August.
    • Required: What was the budgeted cost of goods sold for August?
    • 120.Helen Auger has seen the Centicle Group, a not-for-profit, in-home health care organization, grow during the past ten years to a $500 million revenue, multi-state organization. Helen was promoted to her controller position six months ago, after serving capably in several financial accounting positions at the Centicle Group. At a Budget Review Committee meeting last Friday, several committee members expressed frustration with the pace of the budget development. They described the newly introduced "bottom up" system of participative budgeting as "unwieldy," "slow-paced," and "repetitive." Helen's objective in introducing the participative approach was to involve to a much greater extent lower level supervisors and employees. Helen is meeting with the Budget Review Committee again tomorrow when she plans to explain the advantages of "bottom up" versus "top down" approaches to the budgeting process.
    • Required: Helen has asked you to help her prepare for tomorrow's meeting by preparing the following:
    • 1. A 40 -50 word description of participative budgeting, including some basic advantages of this approach to budgeting.
    • 2. A brief, one-paragraph explanation of the concept of "budget ownership," one of the values that participative ("bottom up") budgeting is said to have.
  45. 121.A business develops a budget for many reasons beyond wanting to know what future profits will be. Comment on the role of a firm's strategic goals in both the master budget and the capital budget.
    • 122.Kurt Helfter graduated with a B.S. degree in Mechanical Engineering and joined Andrew Consulting, a firm specializing in HVAC (heating, ventilation, and air conditioning) for small to medium-size business structures. Kurt is knowledgeable in the use of CAD (computer-assisted design) and was pleased during his initial employment to find Andrew Consulting a leader in the use of CAD software. During Kurt's third year at Andrew, he felt a sense of unease with the firm's slow pace in updating computer hardware and software. Although not directly involved in budgeting for the firm, Kurt has been satisfied with the resources that Andrew provided for his use. Kurt felt the need to detail his concerns in a memo to his superior, in which he requested significant investment in computer resources to "allow us to respond to clients' needs, both in quantity and quality." Kurt was surprised and hurt when he received his superior's response, which suggested that resource allocation in the firm is decided at a higher administrative level. "But all I wanted to do was help keep our firm competitive," Kurt responded to his boss when visiting him about the rejection memo. "Sorry, Kurt," his boss said, "That's how things get done in this firm." Kurt now feels lost, wondering if it's time to look for another job. Does this situation suggest what type of budgeting process the company is using? Is there a problem with individual and company goal congruence in Andrew Consulting? If so, how might Kurt's supervisor have prevented the problem?
    • 123.Discuss the components of each of the following manufacturing cost budgets:
    • 1. Production budget
    • 2. Direct materials purchases budget
    • 3. Direct labor budget
    • 4. Factory overhead budget
    • 5. Cost of goods manufactured budget
    • 6. Cost of goods sold budget.
  46. 124.Ardan Company's sales budget showed the following projections for the coming year:
  47. Inventory on December 31 of the current year is expected to be 3,000 units. The quantity of finished goods inventory at the end of each quarter was to equal five percent of the next quarter's budgeted units to be sold.
    • Required: Calculate the units to be produced during the second quarter.
    • 125.Information pertaining to Yeks Company's budgeted sales revenue for the first quarter of the year is presented below.
  48. Management estimated that four percent of credit sales would be uncollectible. Of the collectible credit sales, 60% would be collected in the month of sale and the remainder in the month following the sale.
    • Required: Calculate total budgeted cash collections in February.
    • 126.The budget committee for Amacom Company, with the help of the district sales manager, projects sales of 80,000 units of its primary product next year. The budget committee and key executives have decided that finished goods inventory should be decreased from the 10,000 units expected at the end of the current year, to 7,000 units at the end of next year. Each unit of finished product requires three units of material MPS15 and six units of material NAV23. At the end of the current year, the inventory of material MPS15 is expected to be 10,000 units and material NAV23 is expected to be 20,000 units. The budget committee believes that these material inventories can be reduced by 80% during the coming year because of the newly installed supply chain system.
    • Required
    • 1. Calculate the number of units Amacom expects to produce during the next year.
    • 2. Compute the number of units that should be purchased of each of the raw materials in order to produce the budgeted units and comply with inventory policy.
  49. 127.Willard Company anticipates that its fixed manufacturing overhead costs will be $50,000 during the next period. Its variable manufacturing overhead is expected to be $8 per unit produced.
    • Required
    • 1. What amount of overhead should be budgeted if the production budget shows that 40,000 units are to be produced?
    • 2. What amount of overhead should be budgeted if the production budget shows that 50,000 units are to be produced?
    • 3. Compute the total overhead cost per unit for requirements 1 and 2.
  50. 128.Uecker Enterprise expects sales of 20,000 units of T1 in September. T1is its most popular high performance desktop model. The sales manager is confident that, between October and December, the total sales will have a 50% growth rate each month from the month before. Each unit requires 40 sets of the Alpha-5 chip. The firm has a policy to maintain inventory at the end of each month equal to 1% of the following month's estimated sales. The same policy applies also to the chips and components required to assemble the finished product.
    • 1. What is the budgeted production (in units) for each of the months September, October, and November?
    • 2. How many sets of Alpha-5 does the company plan to purchase in September and in October?
  51. 129.Enterprise Tax Services (ETS) provides tax planning. The company billed 5,000 hours at $100 per hour for the year just completed. ETS, in planning next year's operations, is focusing on increasing the company's share of the market. It proposes to do that by hiring more tax specialists and by lowering its billing rate by 20% for work done by these new specialists. ETS estimates that revenues generated from existing staff would increase in total by 40% as a result of the new billing policy and that the additional specialists will provide additional billings of 3,000 hours (at the reduced rate) during the coming year.
    • Required: Compute the budgeted revenue amount for next year based on ETS's plans and
    • projections.
    • 130.Transcript Company is preparing a cash budget for February. The company has $150,000 cash at the beginning of February and anticipates total sales of $800,000, consisting of 25% cash sales and 75% credit card sales. The bank charges 3 percent for credit card transactions. The company sets its selling price at 160 percent of the cost of purchases and pays for each month's purchases at the end of the month. Other cash disbursements are $20,000 per month plus 4% of total sales. In addition, a $600,000 note will be due in February for equipment purchased last August. Transcript Company has an agreement with its bank to maintain a cash balance of $100,000.
    • Required: What amount, if any, must the company borrow during February?
    • 131.West Company budgeted the following credit sales during the current year: September, $75,000; October, $108,000; November, $90,000; December, $96,000. Experience has shown that cash from the credit sales is received as follows: 10% in the month of sale, 50% in the first month after sale, 35% in the second month after sale, and 5% is uncollectible. All collections in the month of sale are subject to 2 percent cash discount.
    • Required: How much total cash can West Company expect to collect in November?
    • 132.In preparing a budget for the first three months of the year starting in October, Dubya Company is planning the number of units of merchandise to order each month. The company's policy is to have 40% of the next month's sales on hand at the end of the current month. Projected sales for October, November, and December are 40,000 units, 50,000 units, and 100,000 units, respectively.
    • Required: How many units must be ordered in November?
    • 133.The Shoecraft Company's budgeted sales for January, February, and March of $80,000, $60,000, and $50,000, respectively. Seventy percent of sales are on credit. The company collects 60% of its credit sales in the month following sale, 35% in the second month following sale, and 5% is not collected. Shoecraft mailed all statements to credit customers at the end of the month with a term of 1/30, n/60. What are Shoecraft's expected cash receipts for March?
    • 134.1. How many units should be budgeted for production in June?
    • 2. How many units should be budgeted for production in the second quarter? Papa Joe, Inc., is preparing its budget for the second quarter of the calendar year. The following unit sales data have been forecasted:
  52. Desired ending inventory each month: 30% of next month's estimated sales (in units)
    • Required:
    • 135.Dockille, Inc., is preparing its budget for the second quarter of the calendar year. The following sales data (in units) have been forecasted:
  53. Additional information:
    • Desired ending inventory each month--Finished goods: 30% of next month's sales Desired ending inventory each month--Raw materials: 25% of next month's production needs Number of raw material units required per finished unit: 4
    • Required: How many units of raw materials should be purchased in the 2ndquarter?
    • 136.Olde Corporation is preparing a cash budget for the first two months of the coming year. The following data have been forecasted:
  54. Additional data:
    • (1) Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The collection pattern for credit sales is 80% in the month following the month of sale (of which 75% are collected within 10 days), and 20% in the month thereafter. Total sales in December of the prior year were $1,000,000.
    • (2) Purchases are all on credit, with 40% paid in the month of purchase and the balance the following month.
    • (3) Operating expenses are paid in the month incurred.
    • (4) The firm desires to maintain its cash balance at $150,000 at the end of each month.
    • (5) Loans are used to maintain the minimum cash balance. At the end of each month, interest of 1% per month is paid on the outstanding loan balance as of the beginning of the month. Repayments are made (at the end of the month) whenever the cash balance exceeds $150,000.
  55. Required: Prepare the cash budget, in the form of a statement of cash flow, for February. What is the amount of the loan balance at the end of the month (after loan repayments, if any)?
    • 137.1. Determine the sales volume at which the costs are the same for both machines.
    • 2. What amount of sales, in dollars, for the new machine would produce a 10% profit margin (i.e. ratio of operating profit to sales = 10%)? Grey Company is considering replacing its existing cutting machine with a new machine that, according to the manufacturer, is more efficient in terms of energy consumption—a variable cost of production. In this regard, it would like to do some financial planning, including "what-if" analysis. Budgeted information regarding the two machines is as follows:
  56. Required:
    • 138.As indicated in the text, sensitivity analysis is an important tool for dealing with uncertainty in the budget preparation process. Which estimates, out of all that management has to deal with, do you think are the most critical in terms of developing the master budget for the typical profit-seeking organization?
    • 139.One of the behavioral considerations in implementing a budgeting system has to do with the issue of budgetary slack. What are the positive and negative aspects of building slack into budgets from top management's point of view, and the employee's point of view (i.e., the individual responsible for building slack into the budget)?
    • 140.Omni, Inc. manages a medical-expense reimbursement program for colleges and universities throughout the United States. University employees submit claims for reimbursement of medical expenses from reimbursement accounts established each year by the employees. Omni then processes reimbursement requests, verifies the legitimacy of each request, computes the deductible and co-payment required, determines whether the employee's expense reimbursement account has adequate funds available, and, if applicable, issues a reimbursement check to the eligible employee. Omni employs three different types of clerks who manage these reimbursement accounts: managers, clerical staff-1, and clerical staff-2. The managers are each paid $50,000 per year, clerical staff1 employees are paid $40,000 per year, while clerical staff-2 employees are paid $35,000 per year. Based on prior experience, for every 150,000 claims processed per year, Omni needs to budget for one manager's position, two clerical staff-1 positions, and six clerical staff-2 positions. Last year, Omni processed 2 million reimbursement claims, and employed 14 managers, 30 clerical staff1 employees, and 83 clerical staff-2 employees.
    • Required
    • 1. Based on the data provided, calculate the cost savings or excess staffing costs for Omni during the most recent year. (Assume that the policy of the company is to hire only full-time employees.)
    • 2. What managerial insights are suggested on the basis of your analysis? If you were attempting to judge the processing efficiency of Omni's staff, what additional information might you want to have?
  57. 141.1. The sales manager of the company is fairly confident that a well-done marketing campaign could increase sales volume substantially, perhaps as much as doubling sales from the current position. The president of the company would like to increase operating profits by 50% over those of the most recent month. You are asked to determine how much the company could afford to spend on an intensive marketing campaign, in order to achieve the projected doubling of sales volume?
    • 1. As an alternative to 1 above, assume that the company increases the quality of its raw materials going into the manufacturing of its product. This increase would result in a new variable cost per unit of $3.00. What is the required increase in selling price per unit that would be needed to maintain the same break-even volume as currently exists?
    • 2. As a final alternative, assume that the company has decided to increase the selling price of its product by $1 per unit, with no accompanying marketing and promotion campaign. What is the unit sales volume needed, with the new selling price, for the company to make the same amount of profit as it did last month? The Bambola Doll Company produces a single product: an inexpensive plastic toy doll. This item sells for $4.00 per unit, and has variable costs (manufacturing plus marketing) of $2.50 per unit. Monthly fixed costs amount to approximately $60,000. Last month, sales reached 100,000 units. Management would like to do some financial planning, the end result of which would—it is hoped—be even better future financial performance. As a management accountant you have been asked to construct a planning model and to conduct "what-if" analyses with the model you develop. Management has told you to consider the following options, all of which have the potential to increase the profitability of the company:
  58. A) Increase monthly promotional and advertising costs. B) Increase raw material quality and increase the product selling price. C) Increase the product selling price, with no increase in the raw material costs.
    • Required:
    • 142.Over the years, alternative approaches to traditional budgeting practices have been proposed to facilitate budget preparation and usefulness. First, define what is meant by the term "traditional budgeting." Next, compare and contrast the following alternative budgeting approaches to a traditional budgeting process: Zero Base Budgeting (ZBB); Activity-Based Budgeting (ABB); Time-Driven ABB; and, kaizen budgeting.
    • 143.Compare and contrast traditional budgeting and activity-based budgeting (ABB) along the following dimensions: budgeting unit; primary focus; time orientation; roles of suppliers and customers; and, control objective.
    • 144.As indicated in the text, one of the behavioral issues associated with budgeting deals with the linkage of employee compensation to budgeted performance. In this regard, distinguishbetween so-called fixed performance contracts (i.e., a traditional approach) and the following two recommended alternatives: (1) linear compensation plans, and (2) the use of relative performance (relative improvement) contracts along with "rolling financial forecasts." With respect to the use of fixed performance contracts, define what is meant by the term "gaming the performance indicator." With respect to the use of relative performance contracts, define what is meant by the term "rolling financial forecasts."
    • 145.One of the behavioral considerations associated with the budgeting process relates to the difficulty level embodied in the budget (i.e., how difficult or easy it is to achieve budgeted results).
    • 1. Explain the negative consequences of budgetary targets that are too easy or too difficult to achieve.
    • 2. What is meant by the term "highly achievable (budget) target"?
    • 3. What are the primary advantages of using "highly achievable targets" in terms of budgetary expectations?
  59. 146.Transcript Company is preparing a cash budget for February.
    • • The company has $150,000 cash at the beginning of February and anticipates total sales of $800,000, consisting of 25% cash sales and 75% bank credit-card sales.
    • • The bank charges 3 percent for credit-card deposits.
    • • The firm sets its selling price at 160 percent of the cost of purchases and pays the cost of each month's sales at the end of the month.
    • • Operating expenses are $45,000 per month, of which $25,000 is depreciation expense. Selling expenses (commissions) amount to 4 percent of total sales dollars.
    • • In addition, a $600,000 note will be due in February for equipment purchased last August. In addition to the principal amount, interest for one month (at 12% per annum) will be paid in February.
    • • Transcript Company has an agreement with its bank to maintain a minimum cash balance of $100,000.
  60. Required: Prepare in good form a cash budget that shows the amount, if any, that the company must borrow during February. Separate your budget, at a minimum, into the following categories:
    Beginning Cash Balance Operating Cash Flows (Both Inflows and Outflows) Cash Balance before Financing Effects Financing Activity Ending Cash Balance
  61. 104. B
    • 105. D
    • 106. B
    • 107. D
  62. 6. Budgets provide framework for measuring performance.
    • 5. Budgets provide guidelines for day-to-day operations, clarify duties to be performed, assign responsibility for these duties and gauges for controlling operations.
    • 4. The budgeting process promotes internal communication and coordination.
    • 3. Budgeting assists resource allocation.
    • 2. Budgeting compels each department or division to make plans that are in congruence with the plans of other departments or divisions as well as the objectives of the entire firm.
    • 1. The preparation of budgets forces management to plan ahead and to establish goals and objectives. Feedback: The benefits that can be derived from implementing a master budgeting system include:
    • 108. Answer may vary
    • Feedback: Operating budgets deal with uses of resources in operating activities and with the acquisition of these resources, while financial budgets identify sources and uses of funds for the budgeted operations and the expected operating results for the period. The combination of operating budgets and financial budgets for a period constitutes the master budget for a period. The culmination of the master budgeting process is a set of pro forma financial statements (e.g., budgeted income statement and budgeted balance sheet).
    • 109. Answer may vary
    • 2. Unused capacity costs should NOT be assigned to products produced or customers served during the period. To do so would overestimate the resource demands of these cost objects. Rather, these costs should be assigned to the level (product line, department, or a given manager) within the organization where the decision was made to acquire the capacity in question. Feedback: 1. Beyond logical consistency (the numerator and the denominator of the cost-allocation rates are both consistent—the numerator represents the cost of resources supplied while the denominator represents the capacity of resources supplied), the use of practical capacity facilitates resource capacity planning. How? By allowing us at the end of each period to estimate the cost of unused capacity for each activity or process. This estimate is defined as the difference between the total cost of resources supplied (i.e., the numerator used when the cost-allocation rates under ABC/TDABC were developed) and the cost of resources actually used during the period, where the latter amount is equal to the product of each activity-cost rate (based on practical capacity) and the actual activity units used during the period. Such information allows for a better management of the supply of and demand for capacity-related costs.
    • 110. Answer may vary
    • 3. Scenario analysis: this approach looks at a small number of realistic scenarios (i.e., combinations of planning-model inputs) and the resulting impact of each scenario on a budget of interest (e.g., operating income or cash flow from operations). One commonly recommended approach is to prepare a set of budgets based on a "best case scenario" (regarding budget-model inputs), a "worst-case scenario," and a "most-likely scenario." The best-case scenario would reflect the optimistic (but realistic) values for sales volume, selling price per unit, etc., while the worst-case scenario would reflect just the opposite, that is, the most pessimistic (but realistic) combination of budgeting-model inputs. The range of outcomes for the scenarios examined gives us an idea of how bad or good things might be; the range of possible outcomes (e.g., budgeted operating income) provides a rough measure of risk. Extensions to basic scenario analysis can be accomplished by assigning (subjective) probabilities to each of the various scenarios, or through the use of Monte Carlo Simulation (MCS).
    • 2. Sensitivity analysis: this refers to the process of determining the sensitivity of a given output (e.g., sales budget, in dollars) to changes in one or more underlying components of the model (e.g., selling price per unit). Alternatively, we could examine the sensitivity of a set of pro forma financial statements to various assumptions made in preparing the component or constituent budgets. Ultimately, our goal would be to determine the extent to which a change in the forecasted value of one or more budgetary inputs (e.g., estimated sales forecast, in units) affects individual budgets (e.g., sales budget) and the set of pro forma financial statements ultimately produced by the master budgeting process. The example in the text (Exhibit 10.17) shows estimated operating income at three different levels of estimated sales demand (in units) and three different levels of selling price per unit, when all other budgetary inputs are held constant. The goal of the analysis is to assess whether and to what extent budgeted operating income changes in response to changes in the two sales-related budgetary inputs. Feedback: 1. What-if analysis: this is probably the simplest way to address uncertainty in the budget-preparation process. Essentially, we examine how a change in one or more budgetary items (e.g., forecasted sales, in units) affects another variable or budget of interest (e.g., the production budget). Other questions such as the following could be addressed through What-if analyses: (a) what would be the impact on operating income of a 7% increase in direct material costs for an upcoming period? (b) What would be the impact on operating income of a 7% increase in direct material costs accompanied by a commensurate percentage increase in selling price per unit? (c) What would be the impact on the production budget for a given period if the targeted ending inventory decreased from, say, 30% to 20% of the following month's projected sales? (d) What would be the effect on budgeted operating income (or cash flow from operations) of a reduction in targeted ending inventories (e.g., from 30% to 20% of the following month's projected sales)?
    • 111. Answer may vary 7) Unfilled backorders. 6) Advertising and promotional activities 5) Credit policies 4) Pricing policies 3) Competitor actions and operating plans 2) General economic and industry conditions 1) Current sales levels and trends of sales in the past few years Feedback: Factors that should be considered in sales forecasting include:
    • 112. Answer may vary
  63. Feedback: Zero-base budgeting (ZBB) is a budgeting process that requires managers to prepare budgets from "ground zero" and as such can be compared to a "traditional budgeting" process that is incremental in nature; the primary focus of a traditional budget is on changes to the current operating budget. By contrast, a ZBB process allows no activities or functions to be included in the budget unless managers can justify the need for having them. Zero-base budgeting requires managers or budgeting teams to perform in-depth reviews and analyses of all budget items. A ZBB process encourages managers to be aware of activities or functions that have outlived their usefulness or that have become a waste of resources.
    • 113. Answer may vary Feedback: Activity-based budgeting (ABB) is budgeting process that focuses on costs of activities or cost drivers necessary for production and sales. Proponents of ABB maintain that this budgeting process results in more accurate resource planning: sales/output volume is forecasted, then activity requirements are determined, then spending for resources (activities) is estimated. In this model, planners are better able to budget resource requirements for a given level of output.
    • 114. Answer may vary
  64. 2. The budgeting unit for activity-based budgeting (ABB) is expressed as the cost of performing activities (e.g., executing a purchase order, shipping an order, inspection of a lot, scheduling a production run). Feedback: 1. The budgeting unit for traditional budgeting is expressed as the cost of functional areas/departments or spending categories (e.g., salaries, depreciation, utilities).
    • 115. Answer may vary Feedback: Budgeted purchases = Budgeted cost of goods sold (CGS) + Desired ending inventory -Beginning inventory = $1,000 + $500 -$400 = $1,100
    • 116. Answer may vary
  65. Feedback:
    • 117. Answer may vary
    • Feedback: Required purchases = Estimated sales (at cost) + Desired ending inventory -Beginning inventory = $6,000 + $300 -$200 = $6,100
    • 118. Answer may vary Feedback:
    • 119. Answer may vary
  66. 2. "Budget ownership" develops from a sense that "I helped create this." This sense of owning leads to a better attitude, more effective budget preparation, more realistic budget data, and a heightened understanding of the budget and evaluation processes. Although the participative approach requires more initial employee time, the rewards (more realistic budgets, higher employee motivation, and the general sense of really being involved) can more than offset the higher cost and slower pace in budget development.
    • 6. A sense of "ownership" develops for those involved in the budgeting process.
    • 5. More realistic levels of "slack" are created.
    • 4. Better communication links are created through the participative budgeting process.
    • 3. People who help set their own goals are likely to be more motivated to achieve those goals.
    • 2. People involved in a process feel included.
    • 1. Better data comes from the person who creates the data. Feedback: 1. Participative ("bottom up") budgeting is an approach to the budgeting process that requires an upward flow of information, goal setting and justification. The primary objective is to get employees to "buy into" the final budget because they are truly involved in its preparation. Advantages of participative budgeting include:
    • 120. Answer may vary
    • Feedback: Strategic goals can be either short-term or long-term. If short-term, the master budget should reflect those stated strategic goals in terms of revenue creation or resource allocation. Capital budgets normally reflect long-term strategic goals, for example, expansion of physical facilities or addition of a product line. The master budget should serve as the device that shows how strategic goals can be realized.
    • 121. Answer may vary Communication seems poor in this situation, and the failure of Andrew Consulting management to include all employees in the budgeting process has made this particular situation worse. One significant advantage of participative (bottom up) budgeting is the high level of communication it requires between administrative levels. Kurt's boss has obviously adjusted to the existing budgeting process, which appears to be a "top down" traditional system. He should have let Kurt know how the existing budgeting system operated, and then have served as a conduit for Kurt's suggestions. Feedback: Kurt believed the company would maintain its competitive edge by updating computer hardware and software. His personal goal is now in conflict with what he sees as the company's failure to achieve one of its goals, whether stated or not.
    • 122. Answer may vary
  67. 6. The Cost of Goods Sold Budget shows the budgeted total manufacturing cost associated with forecasted sales volume. It is equal to: Cost of
    • Goods Manufactured + Desired (Targeted) Ending Inventory of Finished Goods -Beginning Inventory of Finished Goods.
    • 5. The Cost of Goods Manufactured Budget shows the budgeted manufacturing cost, broken down in three cost elements (direct materials, direct labor, and manufacturing overhead), for planned production.
    • 4. A factory overhead budget. This schedule uses the overhead base (or driver) to determine the total budgeted factory overhead (broken down into fixed and variable subcategories) for an upcoming period. Typically, line items for individual overhead cost components are included on this schedule.
    • 3. A direct labor budget shows, by labor class (e.g., semiskilled vs. skilled), the labor hours and associated labor cost (based on budgeted wage rates) needed to meet planned production for an upcoming period.
    • 2. A direct materials purchases budget—this schedule shows, in both physical units and in dollars, the amount of materials, parts, and components to be purchased for an upcoming period, as a function of: the amount of direct materials needed to meet planned production; the desired (i.e., targeted) ending inventory of direct materials, and the amount of direct materials on hand at the beginning of the budget period. Feedback: 1. A production budget—this schedule shows the number of units to be produced for an upcoming period, as a function of: the units of finished goods on hand at the beginning of the period, the estimated sales (in units) for the period, the desired (or targeted) finished goods inventory, and shows the number of units to be produced.
    • 123. Answer may vary
  68. Feedback:
    124. Answer may vary
  69. Feedback:
    • 125. Answer may vary Feedback:
    • 126. Answer may vary
  70. 3. Overhead cost per unit when 40,000 units are produced: $370,000 ÷ 40,000 units = $9.25 per unit; Overhead cost per unit when 50,000 units are produced: $450,000 ÷ 50,000 units = $9 per unit. In other words, the cost per unit has decreased because spreading the fixed costs ($50,000) over a greater number of units in (2) relative to (1).
    • 2. Budgeted overhead if 50,000 units are produced = Budgeted Fixed Overhead + Budgeted Variable Overhead = $50,000 + ($8 x 50,000) = $450,000 Feedback: 1. Budgeted overhead if 40,000 units are produced = Budgeted Fixed Overhead + Budgeted Variable Overhead = $50,000 + ($8/unit × 40,000 units) = $370,000
    • 127. Answer may vary
  71. Feedback:
    • 128. Answer may vary
    • 3. Total budgeted revenue = $700,000 + $240,000 = $940,000
    • 2. Budgeted revenue from new staff = (3,000 hours × [80% × $100/hour]) = $240,000 Feedback: 1. Budgeted revenue from existing staff = 1.40 × (5,000 × $100) = $700,000
    • 129. Answer may vary
  72. Feedback:
    130. Answer may vary
  73. Feedback:
    131. Answer may vary
  74. Feedback:
    • 132. Answer may vary Feedback:
    • 133. Answer may vary
  75. Feedback:
    134. Answer may vary
  76. Feedback:
    • 135. Answer may vary Feedback:
    • 136. Answer may vary
  77. R = $55Q = $55/unit × 4,211 units = $231,605 Q = [$40,000 ÷ $9.50/unit] = 4,211 units $15Q -$5.5Q = $40,000 [($55 -$40)/unit × Q] -$40,000 = (10%) × $55Q CM -FC = pre-tax (operating) profit The basic profit equation is: Then, given a sales price of $55 per unit, we have: X = $55Q Let Q = required sales volume in units to earn targeted profit Let X = required sales level (in dollars) to earn targeted profit
    • 2. Required sales level, in dollars, to generate a target pre-tax profit of 10% on sales, under the new machine: X = $8,000 ÷ 4 = 2,000 units per month (the so-called break-even volume) 4X = $8,000 $32,000 + $44X = $40,000 + $40X Setting the two equations equal, we have: Feedback: 1. Total cost equation (per month), existing machine: TC = $32,000 + $44X, where X = outputTotal cost equation (per month), new machine: TC = $40,000 + $40X, where X = output
    • 137. Answer may vary
    • Other critical estimates are those relating to the consumption of each factor of production (such as raw materials, labor, and machine capacities) by each unit of production since these estimates will play an important role in estimating total resource requirements and estimating costs. Feedback: The most critical estimates are the estimates related to sales demand. These estimates provide the basis upon which all, or at least most of, the other plans in the master budget are based. In this sense, it is the "cornerstone" of the master budgeting process.
    • 138. Answer may vary
    • From top management's point of view, employees who build in slack are either using unnecessary resources to achieve a goal that should have been achievable with fewer resources, or they are understating their performance capabilities (e.g., intentionally underestimating sales demand or overstating the cost of planned production). Thus, the organization is either not running as efficiently as it can, or is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that employees build in slack to relieve job pressure. If burnout of employees has been occurring in the organization then perhaps senior management may be more forgiving and view some slack building as necessary to keep their employees from quitting. Top Management's Point of View: From the employee's perspective, there are probably two benefits from building slack into the budget. First, the employee may be able to obtain excess resources to achieve desired goals. Consequently, this may reduce pressure on the employee and reduce job anxiety. Second, senior management may lower their work expectations of the employee. This may also lead to lower pressure on the employee to perform. Either way, the end result is a reduction in job-related stress for the employee. However, if incentives are graduated in such a way that achieving higher and higher goals provides the employee with more and more compensation in the form of bonuses, then the employee may lose income by selecting lower goals. Feedback: Employee's Perspective:
    • 139. Answer may vary
  78. Note, however, that processing cost is but one important performance dimension. In assessing employee performance, quality, processing speed, accuracy, and other nonfinancial performance indicators might be monitored as part of the on-going control process.
    • 2. The issue is why the clerical group is employing more people than it should for the workload it faces. There are various reasons for this result, including training inefficiencies, continued growth requiring more people, an inappropriate standard, overestimating requirements when hiring took place, and processing inefficiencies. The report from the manager of this unit should identify the amount of the excess spending, its cause, and what will be done to correct the variance. The actual cost to this group was $4,805,000 = (14 × $50,000) + (30 × $40,000) + (83 × $35,000). Therefore, during the past year there was an excess labor-related claims-processing cost of $225,000 (= $4,805,000 -$4,580,000) created by having 3 more senior clerks than budgeted and 3 more junior clerks than budgeted. Under the assumption that Omni hires only full-time people, it must round up to a full employee. Thus, the budgeted number of people for last year's actual volume of claims processed is: 14 managers, 27 clerical staff-1, and 80 clerical staff-2. The total cost of this group would be $4,580,000 = (14 × $50,000) + (27 × $40,000) + (80 × $35,000). c) Clerical Staff-2: 80.00 = ((2,000,000 ÷ 150,000) × 6) b) Clerical Staff-1: 26.67 = ((2,000,000 ÷ 150,000) × 2) a) Managers: 13.33 = ((2,000,000 ÷ 150,000) × 1) Feedback: 1. With 2,000,000 medical claims, Omni should employ the following staff (at budgeted processing capabilities):
    • 140. Answer may vary
    • Therefore: [(($5.00 -$2.50)/unit) × X] -$60,000/month = $90,000/month, and, X = 60,000 units Existing operating profit per month (part 1 above) = $90,000
    • 3. Again, let X = required sales volume (to earn the same profit as the company earned last year, assuming only an increase in the selling price per unit) In other words, if everything else is held constant, the company must increase its selling price by the same dollar increase as the increase in its variable cost per unit if it wants to maintain the same profit level (including a profit level of $0, the break-even point). [(sp -$3.00)/unit × 40,000 units] -$60,000 = $0\ sp = $4.50 per doll (i.e., an increase of $0.50 per unit) Now, let sp = the required selling price per unit. Thus, X = 40,000 units per month [($4.00 -$2.50)/unit × X] -$60,000 = $0
    • 2. Let X = required units to break-even. In the current situation, we have: [($4.00 -$2.50)/unit × 200,000 units)] -$(60,000 + X) = $135,000 and, X = $105,000 Let X = the maximum amount that can be spent on advertising. If sales volume doubles, then new volume = 2 × 100,000 units = 200,000 units per month. Then, Next month's profit target = $90,000 × 1.50 = $135,000
    • = $150,000 -$60,000 = $90,000 Existing profit level = CM -FC = [($4.00 -$2.50)/unit × 100,000 units] -$60,000 Feedback: 1. Target profit level (coming month) = 150% × existing operating profit per month
    • 141. Answer may vary
    • 5. Kaizen budgeting: under this approach, the budget incorporates continuous-improvement expectations. That is, successive budgets adjust resource demands and resource consumption based on targeted efficiency and productivity gains. Note that such budgets can be used both internally as well as externally (e.g., in conjunction with suppliers).
    • 4. Time-driven activity-based budgeting (TDABB): as indicated in Chapter 5, TDABC is a modern extension (actually, a simplification) of traditional ABC. TDABC allocates most support (indirect) costs not on the basis of unit-level, batch-level, and product-level cost drivers by on the basis of time-based equations. That is, resource consumption for each indirect/support cost pool is viewed as a function of time. As with activity-based budgeting (ABB), TDABB works backwards from forecasted sales volume and sales mix to estimate resource spending needed to support production and sales plans. That is, the organization estimates resource requirements in each process/department that would occur IF the production and sales forecasts for the upcoming period were realized. Advocates of TDABC posit that TDABB streamlines, potentially in a significant way, the budget-preparation process.
    • 3. Activity-based budgeting (ABB): ABB is based on cost information generated by a traditional activity-based cost (ABC) system, that is, a system that relies on a framework of cost drivers classified as unit-level, batch-level, customer-sustaining, and product-sustaining level. ABB essentially works backwards from planned sales (volume and mix) forecasts for an upcoming period to determine budgeted support activities needed to support those plans. Finally, the cost of resources needed to perform this expected set of activities is budgeted. In short, ABB focuses on the activities and associated support resources (costs) needed to satisfy the projected level of customer demand for an upcoming period.
    • 2. Zero-base budgeting (ZBB):as implied by its name, ZBB requires budgeting each period from a zero starting point, i.e., from a zero base (hence the name ZBB). This practice can be compared to traditional budgets that in many cases are "incremental in nature" (e.g., "last year's amount, plus 5%"). ZBB specifies that no activities or functions can be included in the budget unless specifically justified. ZBB requires budgeting teams to perform in-depth reviews of all budget items. Feedback: 1. Traditional budgeting:a traditional budgeting process is incremental in nature, i.e., starts with the information from the most recent budget. Such budgetary amounts are then adjusted (upwards or downwards), usually by some percentage amount. This process inherently assumes that most, if not all, current activities and functions will continue into the budget period. As such, the primary focus in a typical budgeting process is on changes to the current operating budget.
  79. 142. Answer may vary Feedback:
    143. Answer may vary
  80. (b) Relative Performance (Relative Improvement) Contracts—under this plan managers would be rewarded for how their respective business units perform relative to some appropriate benchmark performance, not relative to a fixed budget target. To complement the use of relative performance contracts, some recommend the use of "rolling financial forecasts" rather than a traditional master annual master budget (as described in the text). Such forecasts provide a constant planning horizon but more important are disassociated from performance evaluation and control. The overall intent is to motivate and allow employees to adapt to changing environments (including newly identified competitive threats)
    (a) Linear Compensation Plans—the idea here is essentially to sever the relationship between budgets and managerial compensation. In such a situation, managerial reward is a linear function of actual performance, and not a function of actual performance relative to budgets: the greater the actual performance, the greater the managerial reward. Put another way, such a plan rewards individuals for what they actually do, not what they do relative to what they say they can do. Given criticisms of so-called "fixed performance contracts," at least two alternative plans have been introduced: Feedback: Under a "traditional model" employee reward/compensation is linked to budgetary performance, that is, comparison of actual results to budgeted results (where budgeted results are determined along the lines discussed in Chapter 10). This type of compensation/reward plan is sometimes referred to as a "fixed performance contract" because actual performance (ales, operating income, net income, return on sales, return on investment, etc.) is compared to a fixed (budgeted) target. Experience shows that such an incentive model can have undesirable consequences (e.g., it may encourage managers to submit biased information in their budgets, that is,excessive amounts of‘budgetaryslack"). Another dysfunctional consequence of using fixed performance contracts is that such contracts may encourage managers to game the performance indicator, that is, to take actions that make the performance indicator look better but that do not increase the value of the firm.
  81. 144. Answer may vary
  82. • Enhancing the usefulness of a budget as a planning and coordinating tool
    • • Improving the predictability of earnings or operating results
    • • Allowing effective and efficient managers greater operating flexibility or violate corporate ethical standards
    • • Reducing the risk that managers will engage in harmful "earnings management" practices
    • • Decreasing the cost of organizational control
    • • Maintaining managers' confidence in the budget
    • • Increasing managers' commitment to achieving the budget target
  83. 3. Based on the research by Merchant and Manzoni (1989) and Merchant (1990), the following behavioral benefits are associated with the use of "highly achievable budgetary targets," particularly when accompanied by extra rewards for performances exceeding the target.
    • 2. The notion of a "highly achievable" is an attempt to specify or operationalize what is meant by a "challenging yet attainable" budget target. One set of researchers has indicated that such budgets are those that are achievable by most managers 80%-90% of the time. Feedback: 1. The issue of the "difficulty level" of the budget target relates to the motivational/incentive effects of the budget. An overly easy ("loose") budget may fail to encourage employees to give their best efforts. On the other hand, a budget target that is very difficult to achieve (i.e., one that is overly "tight") may discourage managers from even trying to attain it. Man would agree, therefore, that budget targets should be somewhere near these two extremes, i.e., challenging yet attainable.
    • 145. Answer may vary
  84. Feedback:
    146. Answer may vary
  85. ch10 Summary
    Category # of Questions AACSB: Analytic 1 Blocher -Chapter 10 156 Difficulty: 1 Easy 74 Difficulty: 2 Medium 63 Difficulty: 3 Hard 9 Learning Objective: 10-01 Describe the role of budgets in the overall management process 8 Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process 5 Learning Objective: 10-03 Outline the budgeting process 2 Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules 81 Learning Objective: 10-05 Deal with uncertainty in the budgeting process 12 Learning Objective: 10-06 Identify unique characteristics of budgeting for service companies 3 Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting; time-16 driven activity-based budgeting; and kaizen budgeting) Learning Objective: 10-08 Discuss various behavioral considerations in budgeting 19 Topic: Service 5 Topic: Strategy 5

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