9
Profit Chapter Planning
Solutions to Questions
9-1 A budget is a detailed quantitative plan for the acquisition and use of financial and other resources over a given time period. Budgetary control involves the use of budgets to control the actual activities of a firm. 9-2 1. Budgets communicate managements plans throughout the organization. 2. Budgets force managers to think about and plan for the future. 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. 4. The budgeting process can uncover potential bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance. 9-3 Responsibility accounting is a system in which a manager is held responsible for those items of revenues and costsand only those itemsthat the manager can control to a significant extent. Each line item in the budget is made the responsibility of a manager who is then held responsible for differences between budgeted and actual results. 9-4 A master budget represents a summary of all of managements plans and goals for the future, and outlines the way in which these plans are to be accomplished. The master budget is composed of a number of smaller, specific budgets encompassing sales, production, raw materials, direct labor, manufacturing overhead, selling and administrative expenses, and inventories. The master budget generally also contains a budgeted income statement, budgeted balance sheet, and cash budget. 9-5 The level of sales impacts virtually every other aspect of the firms activities. It determines the production budget, cash collections, cash disbursements, and selling and administrative budget that in turn determine the cash budget and budgeted income statement and balance sheet. 9-6 No. Planning and control are different, although related, concepts. Planning involves developing goals and developing budgets to achieve those goals. Control, by contrast, involves the means by which management attempts to ensure that the goals set down at the planning stage are attained. 9-7 The flow of budgeting information moves in two directionsupward and downward. The initial flow should be from the bottom of the organization upward. Each person having responsibility over revenues or costs should prepare the budget data against which his or her subsequent performance will be measured. As the budget data are communicated upward, higher-level managers should review the budgets for consistency with the overall goals of the organization and the plans of other units in the organization. Any issues should be resolved in discussions between the
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individuals who prepared the budgets and their managers. All levels of an organization should participate in the budgeting processnot just top management or the accounting department. Generally, the lower levels will be more familiar with detailed, day-today operating data, and for this reason will have primary responsibility for developing the specifics in the budget. Top levels of management should have a better perspective concerning the companys strategy. 9-8 A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets. This is in contrast to a budget that is imposed from above. The major advantages of a self-imposed budget are: (1) Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued. (2) Budget estimates prepared by frontline managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. (3) Motivation is generally higher when individuals participate in setting their own goals than when the
goals are imposed from above. Selfimposed budgets create commitment. (4) A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. With a self-imposed budget, this excuse is not available. Self-imposed budgets do carry with them the risk of budgetary slack. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack. 9-9 Budgeting can assist a company forecast its workforce staffing needs through direct labor and other budgets. By careful planning through the budget process, a company can often smooth out its activities and avoid erratic hiring and laying off employees. 9-10 No, although this is clearly one of the purposes of the cash budget. The principal purpose is to provide information on probable cash needs during the budget period, so that bank loans and other sources of financing can be anticipated and arranged well in advance.
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Exercise 9-1 (20 minutes) 1. July $ 43,000 378,000 $ 54,000 August September $ Total 43,00 0
May sales: $430,000 10%.... June sales: $540,000 70%, 10%..................... July sales: $600,000 20%, 70%, 10%............ August sales: $900,000 20%, 70%..................... September sales: $500,000 20%.... Total cash collections
432,000 600,000 810,000
120,000 420,000 $60,000 180,000 630,000
100,00 100,000 0 $541,00 $654,00 $1,985,00 0 0 $790,000 0
Notice that even though sales peak in August, cash collections peak in September. This occurs because the bulk of the companys customers pay in the month following sale. The lag in collections that this creates is even more pronounced in some companies. Indeed, it is not unusual for a company to have the least cash available in the months when sales are greatest. 2. Accounts receivable at September 30: From August sales: $900,000 10%............. From September sales: $500,000 (70% + 10%)........................... Total accounts receivable.............................. $90,000 400,000 $490,000
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Exercise 9-2 (10 minutes) Au- Septem July gust ber Quarter Budgeted sales in units....... 30,000 45,000 60,000 135,000 Add desired ending inventory*.................................. 4,500 6,000 5,000 5,000 Total needs.......................... 34,500 51,000 65,000 140,000 Less beginning inventory.... 3,000 4,500 6,000 3,000 Required production............ 31,500 46,500 59,000 137,000 *10% of the following months sales
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Exercise...
12e_GNB_CH09_Solutions_Manual