Chapter 7 Solutions - Answers to Questions 1 Budgets are...

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Answers to Questions 1. Budgets are useful for large companies with complex activities as well as small companies. Budgets act as a vehicle for communication by formalizing management’s plans in a document that communicates company objectives. The benefits associated with this kind of planning apply to all sizes of companies operating at all levels of complexity. 2. The budget represents the companywide plans stated in financial terms as to how to coordinate operating activities to accomplish goals and objectives. Accordingly, its success depends upon the combined effort of all of the parties involved. A committee that includes representatives from all pertinent departments is necessary to formulate the master budget. 3. The three levels of planning are as follows: (1) Strategic planning – the long-run planning activities that address issues such as overall company goals and objectives. (2) Capital budgeting – the intermediate financial planning activities of the entire company that concern investments, product selection, and desired profitability. (3) Operations budgeting – the short-run financial planning for the company’s different departments that culminates in the formation of a master budget. 4. The span of time is the primary factor that distinguishes the three levels of planning from each other. Strategic planning involves long-range decisions; capital budgeting is associated with intermediate-range plans; and operational budgeting is concerned with short-range plans. 5. The perpetual budget has the advantage of keeping management involved in the budget process. Too often budgets are prepared and forgotten. The perpetual budget forces management to maintain a constant focus on the company’s goals and objectives.
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6. The primary advantages associated with budgeting are as follows: Planning – formalizes management’s plans in a document that communicates company objectives. Coordination – forces departments to coordinate their activities in a manner that ensures the attainment of the objectives of the whole company. Performance measurement – represents specific, quantitative standards that can be used to evaluate performance. Corrective action – acts as an early warning system that promotes corrective action. 7. Budgeted amounts represent management’s expectations regarding how the firm as a whole and individual departments within the firm should perform. By comparing actual performance with the expected performance (i.e., the budgeted amounts), managers can be effectively evaluated. 8. Mr. Shilov’s failure with budgets seems to stem from his misunderstanding of the human element. He states that “he made budgets.” Experience shows that, in general, employees are more willing to accept budget standards if they participate in the budgeting process. Further, Mr. Shilov appears to have used the budget as a tool for punishment – a basis for reprimanding employees. As a result, employees would resent the budget and would be unmotivated to
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Chapter 7 Solutions - Answers to Questions 1 Budgets are...

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