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CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL QUESTIONS FOR WRITING AND DISCUSSION 1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. 2. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned perform- ance. Budgets are the standards, and they are compared with actual costs and reven- ues to provide feedback. 3. Budgeting forces managers to plan, provides resource 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 all in- dividual area and activity budgets. Operating budgets are concerned with the income-gen- erating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expendit- ures. 5. The sales forecast is a critical input for build- ing the sales budget. It, however, is not ne- cessarily equivalent to the sales budget. Upon receiving the sales forecast, manage- ment may decide that the firm can do better or needs to do better than the forecast is in- dicating. Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increasing advertising). This adjustment then becomes the sales budget. 6. Yes. All budgets essentially are founded on the sales budget. The production budget de- pends on the level of planned sales. The manufacturing budgets, in turn, depend on the production budget. The same is true for the financial budgets since sales is a critical input for budgets in that category. 7. An accounts receivable aging schedule gives the proportion of accounts receivable that are, on average, collected in the months following sale. It is important in creating the cash budget, since the sales on account for past months can be multiplied by the appro- priate percentage to yield the amount of cash expected. 8. If the vice president of sales is a pessimistic individual, one might expect that she or he would underestimate sales for the coming year. In your role as head of the budget pro- cess, you might increase the budgeted sales figure to take out the individual bias. 9. If the factory controller is a particularly op- timistic individual, it is possible that the costs for direct materials, direct labor, and over- head could be underestimated. For ex- ample, an optimistic person might assume that everything will go well, e.g., that there will be no problems in obtaining an adequate supply of materials at the lowest possible price. As head of the budget process, you might allow for somewhat higher costs to more accurately reflect reality. 10.
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This note was uploaded on 01/31/2009 for the course ACCOUNTING ACCT 470 taught by Professor Professorrajkiani during the Spring '08 term at California State University , Monterey Bay.

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