ANSWERS TO QUESTIONS (7, 10, 12, 20)
Participative budgeting involves the use of a “bottom-to-top” approach, which requires input
from lower level management during the budgeting process so as to involve employees from
various levels and areas within the company. The potential benefits of this approach are lower-
level managers have more detailed knowledge of the specifics of their job, and thus should
be able to provide better budgetary estimates. In addition, by involving lower-level managers in
the process, it is more likely that they will perceive the budget as being fair and reasonable.
One disadvantage of participative budgeting is that it takes more time, and thus costs more.
Another disadvantage of participative budgeting is that it may enable managers to game the
system through such practices as budgetary slack.
The sales budget is the starting point in preparing the master budget. An inaccurate sales
budget may adversely affect net income. An overly optimistic sales budget may result in
excessive inventories and a very conservative sales budget may lead to inventory shortages.
The required units of production are 165,000 (160,000 + 20,000 = 180,000 – 15,000 = 165,000).
Cash collections are:
January—$500,000 X 45% = $225,000.
February—$500,000 X 50% = $250,000.
March—$500,000 X 5% = $25,000.
SOLUTIONS TO BRIEF EXERCISES (2, 3, 4, 10)
BRIEF EXERCISE 9-2
For the Year Ending December 31, 2011