Solutions_CH 08 - CHAPTER 8 BUDGETING FOR PLANNING AND...

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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 per- formance. Budgets are standards, and they are compared with actual costs and reven- ues to provide feedback. 3. The planning and control functions of budgeting can benefit all organizations re- gardless of size. All organizations need to determine what their goals are and how best to attain those goals. This is the planning function of budgeting. In addition, organiza- tions can compare what actually happens with what was planned to see if the plans are unfolding as anticipated. This is the con- trol function of budgeting. 4. 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. 5. A master budget is the collection of all indi- vidual area and activity budgets. Operating budgets are concerned with the income- generating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures. 6. The sales forecast is a critical input for building the sales budget. However, it is not necessarily equivalent to the sales budget. Upon receiving the sales forecast, manage- ment may decide that the firm can do better than the forecast indicates. Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increas- ing advertising). This adjusted forecast then becomes the sales budget. 7. Yes. All budgets are founded on the sales budget. Before a production budget can be created, it must have the 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. 8. For a merchandising firm, the production budget is replaced by a merchandise pur- chases budget. Merchandising firms also lack direct materials and direct labor budgets. All other budgets are essentially the same. For a service firm (for-profit), the sales budget doubles as the production budget, and there is no finished goods in- ventory budget. The rest of the budgets have counterparts. 9. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. For per- formance reporting, it is necessary to com- pare the actual costs for the actual level of activity with the budgeted costs for the actu- al level of activity. A flexible budget provides the means to compute the budgeted costs for the actual level of activity, after the fact. 10.
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Solutions_CH 08 - CHAPTER 8 BUDGETING FOR PLANNING AND...

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