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Unformatted text preview: CHAPTER 18 DISCUSSION QUESTIONS 1. The first general purpose of budgeting is to allow individuals or companies to devel- op a plan to achieve a specific goal. The second purpose is to allow ongoing com- parison between the plan and actual results in order to better control operations or activities. 2. Strategic planning is the macro-level, long- range planning of firms in which manage- ment evaluates resources, weaknesses, constraints, and competition and decides how, where, and when to operate. At the strategic planning level, firms decide which products to sell, how to market their products, and how they will respond to demands of government and consumer groups, competition, and so on. Capital budgeting is planning for the acquisition of property, plant, and equipment that will help management reach the goals outlined at the strategic planning level. Capital budgeting involves making decisions such as which assets to purchase and whether to lease or buy. Operations budgeting, or simply budgeting, is the planning of operations for the coming period. This type of budgeting is usually rather short term. 3. The advantages of a top-down budget are: a. Top management, who knows the stra- tegic direction of a firm, makes budget- ing decisions. b. Top management has no special in- terest to protect and so can be object- ive. c. Top management, which involves a rel- atively small group of people, can make more efficient decisions. The advantages of a bottom-up budget are: a. More people participate in the budgets preparations and, therefore, buy into and support the budget. b. People are better motivated by a budget they help prepare. c. Lower-level managers are closer to customers and technology and, sup- posedly, have better information and may make better decisions. 4. One year is the typical budget horizon be- cause it corresponds to the period over which performance must be measured for tax and financial reporting purposes. Since management will be evaluating its perform- ance over a one-year period, it is conveni- ent to have a budget that covers the same period. In practice, although a one-year period is typical for a master budget, many detailed budgets are prepared on a quarterly, monthly, or even a weekly or daily basis. 5. The accuracy of the entire master budget depends on a reliable sales forecast be- cause all production, inventory, and ex- pense levels are budgeted to meet projected sales. If the sales forecast is inaccurate, all other budgets will be wrong. 6. The sequence of schedules used in preparing a master budget for a manufac- turing firm is: (1) sales (revenues) forecast, (2) production budget, (3) direct materials budget, (4) direct labor budget, (5) manu- facturing overhead budget, (6) budgeted product cost sheet, (7) selling and administrative expense budget, and (8) cash budget. Once these budgets are com- pleted, projected or pro-forma financial statements can be prepared....
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This note was uploaded on 04/28/2008 for the course ACCT 2301 taught by Professor Conn during the Spring '08 term at St. Edwards.
- Spring '08
- Budget Planning