Budgeting Paper 1

Answer (D) is correct. Budgets serve many roles. They force management to plan ahead, communicate organizational goals throughout the organization, and provide criteria for future performance evaluations.

Answer (D) is correct. An organization must complete its strategic plan before any specific budgeting can begin. The strategic plan lays out the means by which a firm expects to fulfill its stated mission.

Answer (C) is correct. This question is apparently directed toward budgeting. A budget is a realistic plan for the future that is expressed in quantitative terms. It is a planning, control, motivational, and communications tool. A budget promotes goal congruence and coordination among operating units. Unfortunately, a budget does not ensure profitable operations.

Answer (C) is correct. Among other things, the budget is a tool by which management can communicate goals to lower-level employees. It is also a tool for motivating employees to reach those goals. For the budget to function in these communication and motivating roles, top management must be involved in the process. This involvement does not extend to dictating the exact numerical contents of the budget since top management lacks a detailed knowledge of daily operations.

Answer (B) is correct. A budget is a realistic plan for the future expressed in quantitative terms. It is useful for planning, control, motivation, communication, and achieving goal congruence. As a planning tool, a budget forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process. As a control tool, the budget provides a formal benchmark to be used for feedback and performance evaluation. As a communication tool, a budget serves to coordinate activities between management and subordinates and provides management with a means of dealing with uncertainty. Despite its advantages, a budget neither ensures improved cost control nor prevents inefficiencies

Answer (C) is correct. A budget is a realistic plan for the future expressed in quantitative terms. The process of budgeting forces a company to establish goals, determine the resources necessary to achieve those goals, and anticipate future difficulties in their achievement. A budget is also a control tool because it establishes standards and facilitates comparison of actual and budgeted performance. Because a budget establishes standards and accountability, it motivates good performance by highlighting the work of effective managers. Moreover, the nature of the budgeting process fosters communication of goals to company subunits and coordination of their efforts. Budgeting activities by entities within the company must be coordinated because they are interdependent. Thus, the sales budget is a necessary input to the formulation of the production budget. In turn, production requirements must be known before purchases and expense budgets can be developed, and all other budgets must be completed before preparation of the cash budget.

Answer (D) is correct. A budget promotes goal congruence within a company. Departments must coordinate their activities with other interdependent departments in planning and developing the budget.

Answer (D) is correct. A budget is a realistic plan for the future expressed in quantitative terms. It is a planning tool that establishes goals and permits a company to anticipate problems and to plan for decisions. A budget can be a motivator, especially if it sets reasonable standards, has some flexibility, and was prepared with the participation of those affected. A budget is a communication tool because it informs employees about the goals the company is striving to attain and thus enhances goal congruence. A budget is also a means of coordinating the company’s various activities. The company’s overall budget consists of many smaller budgets.

Answer (D) is correct. Information sent to top management is ordinarily more highly aggregated and less timely than that communicated to managers at operational levels. Top managers are concerned with the organization’s overall financial results and long- strategic planning function. Lower-level reports contain more quantitative information of an operational nature, e.g., production data.

Answer (D) is correct. Lack of goal congruence can result when attaining a subunit’s budgetary goal results in disregard of overall company goals. Subunit managers may inflate their budget requests to provide operating leeway and then engage in unnecessary spending to avoid future budget cuts. A budget may encourage exclusive -term standards at the expense of long-term considerations. A manager fearful of not meeting the budget targets may improperly manipulate allocation of expenses. The manager seeking to stay within the budget may disregard employee morale and poor working conditions. Interunit resentment may develop as a result of competition for scarce funds.