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CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL DISCUSSION QUESTIONS 1. Budgets are the quantitative expressions of appropriate percentage to yield the amount plans. Budgets are used to translate the of cash expected. goals and strategies of an organization into 8. If the vice pre
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  CHAPTER 8BUDGETING FOR PLANNING AND CONTROL  DISCUSSION QUESTIONS 1. Budgets are the quantitative expressions of plans. Budgets are used to translate thegoals and strategies of an organization intooperational terms. 2. Control is the process of setting standards,receiving feedback on actual performance,and taking corrective action whenever actual performance deviates from plannedperformance. Budgets are the standards,and they are compared with actual costsand revenues to provide feedback. 3. Budgeting forces managers to plan, providesresource information for decision making,sets benchmarks for control and evaluation,and improves the functions of communication and coordination. 4. The master budget is the collection of allindividual area and activity budgets.perating budgets are concerned with theincome!generating activities of a firm. inancial budgets are concerned with theinflows and outflows of cash and withplanned capital expenditures. 5. The sales forecast is a critical input for building the sales budget. #t, however, is notnecessarily equivalent to the sales budget.$pon receiving the sales forecast,management may decide that the firm cando better or needs to do better than theforecast is indicating. Consequently, actionsmay be taken to increase the sales potentialfor the coming year %e.g., increasingadvertising&. This ad'ustment then becomesthe sales budget. 6. (es. )ll budgets essentially are founded onthe sales budget. The production budgetdepends on the level of planned sales. Themanufacturing budgets, in turn, depend onthe production budget. The same is true for the financial budgets since sales is a criticalinput for budgets in that category. 7.  )n accounts receivable aging schedule givesthe proportion of accounts receivable thatare, on average, collected in the monthsfollowing sale. #t is important in creating thecash budget, since the sales on account for past months can be multiplied by theappropriate percentage to yield the amountof cash expected. 8. #f the vice president of sales is a pessimisticindividual, one might expect that she or hewould underestimate sales for the comingyear. #n your role as head of the budgetprocess, you might increase the budgetedsales figure to take out the individual bias. 9. #f the factory controller is a particularlyoptimistic individual, it is possible that thecosts for direct materials, direct labor, andoverhead could be underestimated. or example, an optimistic person mightassume that everything will go well %e.g.,that there will be no problems in obtainingan adequate supply of materials at thelowest possible price&. )s head of thebudget process, you might allow for somewhat higher costs to more accuratelyreflect reality. 10. The learning curve is the relationshipbetween unit costs of production andincreasing number of units. )s time goeson, the number of units produced in a timeperiod will increase and the cost per unit willdecrease. The budgets affected will be thedirect materials purchases budget, the directlabor budget, and the overhead budget. 11. *mall firms often do not engage in acomprehensive master budgeting process.%+ersonally, we believe that is a mistake. Thebudgeting process helps management morefully understand the business and helps themto plan for the coming year.& ven smallbusinesses create cash budgets, however,because cash flow is critically important. or example, it is possible to have positiveoperating income, but negative cash flow%e.g., if sales on account are high, butcustomers are slow to pay&. -egative cashflow could put a company out of business inshort order. 12. The master budget has been criticized for the following reasons it does not recognizethe interdependencies among departments,it is static, and it is results rather thanprocess oriented. These criticisms are 8-1 © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.  especially apparent when companies are in acompetitive, dynamic environment. /henthe environment changes slowly, if at all, themaster budget would do a good 'ob of bothplanning and control. 13.  ) static budget is one that is not ad'usted for changes in activity. $sing a static budget for control can be a real problem. or example,suppose that the master %static& budget isbased on the production and sale of 011,111 units, but that only 21,111 units areactually produced and sold. urther supposethat the budgeted variable cost of goodssold was 34,111,111, and that the actualvariable cost of goods sold was 30,521,111.#t looks as if the company spent less thanexpected for variable manufacturing costs.6owever, the budgeted variable cost was341 per unit %34,111,1117011,111&, and theactual variable cost per unit is 340 per unit%30,521,111721,111&. -ot ad'usting thebudget for changes in activity level canmislead managers about efficiency. 14.  ) flexible budget is %0& a budget for variouslevels of activity or %4& a budget for the actuallevel of activity. The first type of flexiblebudget is used for planning and sensitivityanalysis. The second type of budget is usedfor control, since the actual costs of theactual level of activity can be compared withthe planned costs for the actual level of activity. 15. The activity!based budget starts with output,determines the activities necessary tocreate that output, and then determines theresources necessary to support theactivities. This differs from the traditionalmaster budgeting process in that the master budget leaps directly from output toresources. *ome of the resource levels areassumed to be fixed. This makes themindependent of volume changes and hidesthe drivers that actually do affect the fixedresources. )s a result, the budget formatdoes not support the creation of value andthe thinking that would go into determiningthe sources of waste. 8-2 © 2015 Cengage Learning. All Rights Reserved. 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A/!()  ) ## *$*)#$.   T+($ ($ # % %+# '*)')*%( @ #$(!# # (  ( # %! +('+ ($ 20/#!'# % @ %+# #&% /#!($ $*)#$. C! #!$% # E&#!'($# 8.3 1.D(!#'% *%#!(*)$ /!'+*$#$ #% @! /!*'%('# *))$P)( ) '+)!(# /* #)$* *!F#!*!U (%$ /!'#...............................................5850062400D(!#'% *%#!(*)$ /#!  (%................................ 0.7 0.7D(!#'% *%#!(*)$ @! /!'%( ................4095043680D#$(!# # (  ( # %!;............................. 8736 11760T%*) ###...............................................4968655440L#$$ B#( (  ( # %!;;.......................... 8190 8736D(!#'% *%#!(*)$ /!'+*$#$.......................4149646704;D#$(!# # (  ( # %! = 0.20  #&%  %+$ /!'%( ##$ * *! # (  ( # %! = 0.20  43680 = 8736 F#!*! # (  ( # %! = 0.20  >84000  0.7 $. .? = 11760;;B#( (  ( # %! @! * *! #*)$ # (  ( # %! @! D#'##! = 0.20  40950 = 8190
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