Budgeting Paper 20

When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists either revenues are understated or expenses are overstated to which makes it difficult to properly evaluate the performance.

(c) The requirement is to determine the number of kilos of chemical Loire that Mien is planning to purchase in October. The first step is to prepare a production budget for product Nous. Sales 53,000 Increase in ending inventory 6,000 Total units needed 59,000 Next, a purchases budget for raw material Loire should be prepared. Production needs (59,000 × 4) 236,000 Decrease in ending inventory (50,000) Total kilos needed 186,000 Note that the production needs for Loire equal the number of units of Nous to be produced times the number of kilos of Loire needed per unit (4).

(d) The requirement is to identify a characteristic of the master budget. Answer (d) is correct because the master budget is a comprehensive budget that includes both the operating and financial budgets. Answer (a) is incorrect because the master budget does not show actual results. Answer (b) is incorrect because the master budget shows all costs, controllable and uncontrollable. Answer (c) is incorrect because the master budget is not structured for the computation of variances.

(c) The requirement is to define a tactical profit plan. Answer (c) is correct because tactical profit plans have the characteristics of being quantified, detailed and short-term, and assigning responsibilities at all levels. Answer (a) is incorrect because tactical profit plans are quantitative with detailed assigned responsibilities. Answer (b) is incorrect because tactical profit plans are detailed. Answer (d) is incorrect because tactical profit plans are detailed, short-term, quantitative, and include assigned responsibilities at all levels.

(d) The requirement is to identify the budgeting technique that focuses on improving operations. Answer (d) is correct because Kaizen budgeting projects costs on the basis of improvements to be implemented. Answer (a) is incorrect because responsibility budgeting focuses on the ability of the manager to control the cost. Answer (b) is incorrect because activity-based budgeting uses cost drivers to determine budgeted costs. Answer (c) is incorrect because operational budgeting focuses on budgeting operating costs.

(b) The requirement is to identify the item that is part of a financial budget. Answer (b) is correct. The financial budget includes the capital budget, cash budget, and the budgeted statement of cash flows. The operating budget includes the budgeted income statement and supporting budgets. Answers (a), (c), and (d) are incorrect because they are part of the operating budget.

(a) The requirement is to calculate the budgeted cash from collection of accounts receivable. Answer (a) is correct because the amount is equal to July’s collections in September plus August’s collections in September. This amount is $169,800 (36% × $120,000 + 60% × $211,000).

(b) The requirement is to find the total budgeted costs for the seven stores in the coming year. Fixed costs last year were $70,000, and therefore variable costs totaled $430,000. The key is to find the variable costs per store. This is calculated by dividing variable costs ($430,000) by the number of stores last year (five), or, $86,000. Therefore, total costs budgeted in the new year is calculated as follows: Variable cost per store $ 86,000 Number of stores × 7 Total budgeted variable costs 602,000 Add: fixed costs 70,000 Total budgeted costs $672,000

(c) A flexible budget is simply a static budget adjusted for various possible volume levels within the relevant range. A master budget or a flexible budget may be used during both the planning phase, when the budget is prepared, and the controlling phase, when actual results are compared to the budget. A flexible budget may be prepared for any unit for which costs vary with changes in activity level. Flexible budgets provide as much cost control as do master budgets because they are based on costs allowable at different activity levels. In fact, flexible budgets may offer an even greater degree of control because valid guidelines are available to managers even if output deviates from expectations, whereas static budgets supply information regarding only the planned volume.

(c) The requirement is to determine whether a flexible budget is appropriate for a marketing and/or a direct material usage budget. Flexible budgets are used to analyze changes in costs and revenues as changes in activity levels take place. If no changes are expected to occur and thus all amounts in the flexible budget remain constant throughout the relevant range (i.e., all costs are fixed), there is no need for a flexible budget. A marketing budget includes expenses incurred for promotion and sales. Some of these items, such as sales commissions or sample promotional products change with activity level. Direct material usage is directly dependent on activity level. Since a flexible budget would be appropriate for both a marketing and a direct materials usage budget, answer (c) is correct.