MULTIPLE CHOICE QUESTIONS

1. Generally speaking, budgets are not used to:

A. identify a company's most profitable products.
B. evaluate performance.
C. create a plan of action.
D. assist in te control of profit and operations.
!. facilitate communication and coordinate activities.
Ans"er: A #$: 1 %ype: &C
'. (ic of te follo"ing coices correctly denotes managerial functions tat are commonly
associated "it budgeting)
*lanning
*erformance
!valuation
Coordination
of Activities
A. +es +es ,o
B. +es +es +es
C. +es ,o ,o
D. +es ,o +es
!. ,o +es ,o
Ans"er: B #$: 1 %ype: &C
-. A formal budget program "ill almost al"ays result in:
A. iger sales.
B. more cas inflo"s tan cas outflo"s.
C. decreased e.penses.
D. improved profits.
!. a detailed plan against "ic actual results can be compared.
Ans"er: ! #$: 1 %ype: &C, ,
/. A budget serves as a bencmark against "ic:
A. actual results can be compared.
B. allocated results can be compared.
C. actual results become inconse0uential.
D. allocated results become inconse0uential.
!. cas balances can be compared to e.pense totals.
Ans"er: A #$: 1 %ype: &C
Hilton, Managerial Accounting, Seventh Edition 234
1. %e compreensive set of budgets tat serves as a company's overall financial plan is commonly
kno"n as:
A. an integrated budget.
B. a pro2forma budget.
C. a master budget.
D. a financial budget.
!. a rolling budget.
Ans"er: C #$: 1 %ype: &C
3. A company's plan for te ac0uisition of long2lived assets, suc as buildings and e0uipment, is
commonly called a:
A. pro2forma budget.
B. master budget.
C. financial budget.
D. profit plan.
!. capital budget.
Ans"er: ! #$: 1 %ype: &C
4. (ilson Corporation is budgeting its e0uipment needs on an on2going basis, "it a ne" 0uarter
being added to te budget as te current 0uarter is completed. %is type of budget is most
commonly kno"n as a:
A. capital budget.
B. rolling budget.
C. revised budget.
D. pro2forma budget.
!. financial budget.
Ans"er: B #$: 1 %ype: &C
5. An organi6ation's budgets "ill often be prepared to cover:
A. one mont.
B. one 0uarter.
C. one year.
D. periods longer tan one year.
!. all of te above.
Ans"er: ! #$: 1 %ype: &C
7. A manufacturing firm "ould begin preparation of its master budget by constructing a:
A. sales budget.
B. production budget.
C. cas budget.
D. capital budget.
!. set of pro2forma financial statements.
Ans"er: A #$: 1, / %ype: &C
Hilton, Managerial Accounting, Seventh Edition 235
18. (ic of te follo"ing budgets is based on many oter master2budget components)
A. Direct labor budget.
B. $veread budget.
C. 9ales budget.
D. Cas budget.
!. 9elling and administrative e.pense budget.
Ans"er: D #$: 1, / %ype: ,
11. %e budgeted income statement, budgeted balance seet, and budgeted statement of cas flo"s
comprise:
A. te final portion of te master budget.
B. te depiction of an organi6ation's overall actual financial results.
C. te first step of te master budget.
D. te portion of te master budget prepared after te sales forecast and before te remainder of
te operational budgets.
!. te second step of te master budget.
Ans"er: A #$: 1, / %ype: &C
1'. (ic of te follo"ing budgets is prepared at te end of te budget2construction cycle)
A. 9ales budget.
B. *roduction budget.
C. Budgeted financial statements.
D. Cas budget.
!. $veread budget.
Ans"er: C #$: 1, / %ype: ,
1-. (ic of te follo"ing "ould depict te logical order for preparing :1; a production budget, :'; a
cas budget, :-; a sales budget, and :/; a direct2labor budget)
A. 12-2/2'.
B. '2-212/.
C. '212-2/.
D. -212/2'.
!. -212'2/.
Ans"er: D #$: 1, / %ype: ,
Chapter 9 236
1/. %e master budget contains te follo"ing components, among oters: :1; direct2material budget,
:'; budgeted balance seet, :-; production budget, and :/; cas budget. (ic of tese
components "ould be prepared first and "ic "ould be prepared last)
<irst #ast
A. 1 /
B. 1 '
C. - /
D. - '
!. / 1
Ans"er: D #$: 1, / %ype: ,
11. A company's sales forecast "ould likely consider all of te follo"ing factors e.cept:
A. political and legal events.
B. advertising and pricing policies.
C. general economic and industry trends.
D. top management's attitude to"ard decentrali6ed operating structures.
!. competition.
Ans"er: D #$: 1 %ype: &C
13. (ic of te follo"ing "ould be considered "en preparing a company's sales forecast)
Anticipated
Advertising
Campaigns
General
!conomic
%rends
!.pected
Competitive
Actions
A. +es +es ,o
B. +es ,o +es
C. +es ,o ,o
D. +es +es +es
!. ,o ,o +es
Ans"er: D #$: 1 %ype: &C
14. (ic of te follo"ing statements best describes te relationsip bet"een te sales2forecasting
process and te master2budgeting process)
A. %e sales forecast is typically completed after completion of te master budget.
B. %e sales forecast is typically completed appro.imately alf"ay troug te master2budget
process.
C. %e sales forecast is typically completed before te master budget and as no impact on te
master budget.
D. %e sales forecast is typically completed before te master budget and as little impact on te
master budget.
!. %e sales forecast is typically completed before te master budget and as significant impact
on te master budget.
Ans"er: ! #$: 1 %ype: ,
Hilton, Managerial Accounting, Seventh Edition 237
15. (ic of te follo"ing organi6ations is not likely to use budgets)
A. =anufacturing firms.
B. =ercandising firms.
C. <irms in service industries.
D. ,onprofit organi6ations.
!. ,one of te above, as all are likely to use budgets.
Ans"er: ! #$: ' %ype: &C
17. Activity2based budgeting:
A. begins "it a forecast of products and services to be produced, and customers served.
B. ends "it a forecast of products and services to be produced, and customers served.
C. parallels te flo" of analysis tat is associated "it activity2based costing.
D. reverses te flo" of analysis tat is associated "it activity2based costing.
!. is best described by coices >A> and >D> above.
Ans"er: ! #$: - %ype: &C
'8. A company tat uses activity2based budgeting performs te follo"ing:
1?*lans activities for te budget period.
'?<orecasts te demand for products and services as "ell as te customers to be served.
-?Budgets te resources necessary to carry out activities.
(ic of te follo"ing denotes te proper order of te preceding activities)
A. 12'2-.
B. '212-.
C. '2-21.
D. -212'.
!. -2'21.
Ans"er: B #$: - %ype: &C
'1. 9anta <e Corporation as a igly automated production facility. (ic of te follo"ing
correctly so"s te t"o factors tat "ould likely ave te most direct influence on te company's
manufacturing overead budget)
A. 9ales volume and labor ours.
B. Contribution margin and cas payments.
C. *roduction volume and management @udgment.
D. #abor ours and management @udgment.
!. =anagement @udgment and indirect labor cost.
Ans"er: C #$: / %ype: ,
Chapter 9 238
''. =ay *roduction Company, "ic uses activity2based budgeting, is in te process of preparing a
manufacturing overead budget. (ic of te follo"ing "ould likely appear on tat budget)
A. Batc2level costs: *roduction setup.
B. Anit2level costs: Depreciation.
C. Anit2level costs: =aintenance.
D. *roduct2level costs: Bnsurance and property ta.es.
!. <acility and general operations2level costs: Bndirect material.
Ans"er: A #$: / %ype: ,
'-. <ast%ec, "ic sells electronics in retail outlets and on te Bnternet, uses activity2based budgeting
in te preparation of its selling, general, and administrative e.pense budget. (ic of te
follo"ing costs "ould te company likely classify as a unit2level e.pense on its budget)
A. =edia advertising.
B. &etail outlet sales commissions.
C. 9alaries of "eb2site maintenance personnel.
D. Administrative salaries.
!. 9alary of sales manager employed at store no. '-.
Ans"er: B #$: / %ype: ,
'/. (ic of te follo"ing "ould ave no effect, eiter direct or indirect, on an organi6ation's cas
budget)
A. 9ales revenues.
B. $utlays for professional labor.
C. Advertising e.penditures.
D. &a" material purcases.
!. ,one of te above, as all of tese items "ould ave some influence.
Ans"er: ! #$: / %ype: ,
'1. Atlanta 9porting Goods sells bicycles trougout te souteastern Anited 9tates. %e follo"ing
data "ere taken from te most recent 0uarterly sales forecast:
!nd2of2=ont
!.pected 9ales %arget Bnventory
April 1,488 units '88 units
=ay 1,518 units '48 units
Cune ',888 units -18 units
$n te basis of te information presented, o" many bicycles sould te company purcase in
=ay)
A. 1,458.
B. 1,7'8.
C. ',818.
D. ',1'8.
!. 9ome oter amount.
Ans"er: B #$: / %ype: A
Hilton, Managerial Accounting, Seventh Edition 239
'3. 9"anson plans to sell 18,888 units of a particular product during Culy, and e.pects sales to
increase at te rate of 18D per mont during te remainder of te year. %e Cune -8 and
9eptember -8 ending inventories are anticipated to be 1,188 units and 718 units, respectively. $n
te basis of tis information, o" many units sould 9"anson purcase for te 0uarter ended
9eptember -8)
A. -1,518.
B. -',118.
C. -',718.
D. --,'18.
!. 9ome oter amount.
Ans"er: C #$: / %ype: A, ,
'4. +ork Corporation plans to sell /1,888 units of its single product in =arc. %e company as
',588 units in its =arc 1 finised2goods inventory and anticipates aving ',/88 completed units
in inventory on =arc -1. $n te basis of tis information, o" many units does +ork plan to
produce during =arc)
A. /8,388.
B. /1,/88.
C. /-,588.
D. /3,'88.
!. 9ome oter amount.
Ans"er: A #$: / %ype: A
'5. Coleman, Bnc., anticipates sales of 18,888 units, /5,888 units, and 11,888 units in Culy, August,
and 9eptember, respectively. Company policy is to maintain an ending finised2goods inventory
e0ual to /8D of te follo"ing mont's sales. $n te basis of tis information, o" many units
"ould te company plan to produce in August)
A. /3,588.
B. /7,'88.
C. /7,588.
D. 1','88.
!. 9ome oter amount.
Ans"er: B #$: / %ype: A
Chapter 9 24
'7. %elcer E Company ad -,888 units in finised2goods inventory on December -1. %e follo"ing
data are available for te upcoming year:
Canuary <ebruary
Anits to be produced 7,/88 18,'88
Desired ending finised2goods inventory ',188 ',188
%e number of units te company e.pects to sell in Canuary is:
A. 3,788.
B. 5,788.
C. 7,/88.
D. 7,788.
!. 11,788.
Ans"er: D #$: / %ype: A
-8. %ide"ater plans to sell 51,888 units of product no. 47/ in =ay, and eac of tese units re0uires
tree units of ra" material. *ertinent data follo".
*roduct ,o. 47/ &a" =aterial
Actual =ay 1 inventory 11,888 units '7,888 units
Desired =ay -1 inventory 14,888 units '8,888 units
$n te basis of te information presented, o" many units of ra" material sould %ide"ater
purcase for use in =ay production)
A. ''5,888.
B. '/3,888.
C. '3/,888.
D. '5',888.
!. 9ome oter amount.
Ans"er: C #$: / %ype: A
-1. An e.amination of 9ort CorporationFs inventory accounts revealed te follo"ing information:
&a" materials, Cune 1: /3,888 units
&a" materials, Cune -8: 11,888 units
*urcases of ra" materials during Cune: 151,888 units
9ortFs finised product re0uires four units of ra" materials. $n te basis of tis information,
o" many finised products "ere manufactured during Cune)
A. /1,888.
B. /4,188.
C. 14,418.
D. 48,188.
!. 9ome oter amount.
Ans"er: A #$: / %ype: A
Hilton, Managerial Accounting, Seventh Edition 24!
-'. ,guyen plans to sell /8,888 units of product no. 41 in Cune, and eac of tese units re0uires five
s0uare feet of ra" material. *ertinent data follo".
*roduct ,o. 41 &a" =aterial
Actual Cune 1 inventory 1,188 15,888 s0uare feet
!stimated Cune -8 inventory /,-88 ) s0uare feet
Bf te company purcases '81,888 s0uare feet of ra" material during te mont, te estimated
ra"2material inventory on Cune -8 "ould be:
A. 11,888 s0uare feet.
B. 1-,888 s0uare feet.
C. '-,888 s0uare feet.
D. '1,888 s0uare feet.
!. some oter amount.
Ans"er: D #$: / %ype: A
Ase te follo"ing to ans"er 0uestions --2-/:
,ort"est manufactures a product re0uiring 8.1 ounces of platinum per unit. %e cost of platinum is
appro.imately G-38 per ounceH te company maintains an ending platinum inventory e0ual to 18D of te
follo"ing mont's production usage. %e follo"ing data "ere taken from te most recent 0uarterly
production budget:
Culy August 9eptember
*lanned production in units 1,888 1,188 758
--. %e cost of platinum to be purcased to support August production is:
A. G171,5/8.
B. G175,888.
C. G'88,138.
D. G-71,358.
!. 9ome oter amount.
Ans"er: A #$: / %ype: A
-/. Bf it takes t"o direct labor ours to produce eac unit and ,ort"est's cost per labor our is G11,
direct labor cost for August "ould be budgeted at:
A. G13,188.
B. G-1,'88.
C. G--,888.
D. G-/,588.
!. 9ome oter amount.
Ans"er: C #$: / %ype: A
Chapter 9 242
-1. Ano makes all sales on account, sub@ect to te follo"ing collection pattern: -8D are collected in
te mont of saleH 38D are collected in te first mont after saleH and 18D are collected in te
second mont after sale. Bf sales for $ctober, ,ovember, and December "ere G48,888, G58,888,
and G38,888, respectively, "at "ere te firm's budgeted collections for December)
A. G15,888.
B. G33,888.
C. G4-,888.
D. G4/,888.
!. 9ome oter amount.
Ans"er: C #$: / %ype: A
-3. Iern's makes all sales on account, sub@ect to te follo"ing collection pattern: '8D are collected in
te mont of saleH 48D are collected in te first mont after saleH and 18D are collected in te
second mont after sale. Bf sales for $ctober, ,ovember, and December "ere G48,888, G38,888,
and G18,888, respectively, "at "as te budgeted receivables balance on December -1)
A. G/8,888.
B. G/3,888.
C. G/7,888.
D. G17,888.
!. 9ome oter amount.
Ans"er: B #$: / %ype: A
-4. Drago makes all sales on account, sub@ect to te follo"ing collection pattern: -8D are collected
in te mont of saleH 38D are collected in te first mont after saleH and 18D are collected in te
second mont after sale. Bf sales for Cune Culy, and August "ere G1'8,888, G138,888, and
G''8,888, respectively, "at "ere te firmFs budgeted collections for August and te companyFs
budgeted receivables balance on August -1)
August
Collections
August -1
&eceivables Balance
A. G13',888 G15',888
B. G14/,888 G148,888
C. G178,888 G11/,888
D. G'3',888 G 5',888
!. 9ome oter combination of figures not listed above.
Ans"er: B #$: / %ype: A
Hilton, Managerial Accounting, Seventh Edition 243
-5. Diego makes all purcases on account, sub@ect to te follo"ing payment pattern:
*aid in te mont of purcase: -8D
*aid in te first mont follo"ing purcase: 38D
*aid in te second mont follo"ing purcase: 18D
Bf purcases for Canuary, <ebruary, and =arc "ere G'88,888, G158,888, and G'-8,888,
respectively, "at "ere te firm's budgeted payments in =arc)
A. G37,888.
B. G1-5,888.
C. G144,888.
D. G174,888.
!. 9ome oter amount.
Ans"er: D #$: / %ype: A
-7. Brooklyn makes all purcases on account, sub@ect to te follo"ing payment pattern:
*aid in te mont of purcase: -8D
*aid in te first mont follo"ing purcase: 31D
*aid in te second mont follo"ing purcase: 1D
Bf purcases for April, =ay, and Cune "ere G'88,888, G138,888, and G'18,888, respectively, "at
"as te firm's budgeted payables balance on Cune -8)
A. G141,888.
B. G147,888.
C. G15-,888.
D. G157,888.
!. 9ome oter amount.
Ans"er: C #$: / %ype: A
Chapter 9 244
/8. (olfe, Bnc., began operations on Canuary 1 of te current year "it a G1',888 cas balance. <orty
percent of sales are collected in te mont of saleH 38D are collected in te mont follo"ing sale.
9imilarly, '8D of purcases are paid in te mont of purcase, and 58D are paid in te mont
follo"ing purcase. %e follo"ing data apply to Canuary and <ebruary:
Canuary <ebruary
9ales G-1,888 G11,888
*urcases -8,888 /8,888
$perating e.penses 4,888 7,888
Bf operating e.penses are paid in te mont incurred and include montly depreciation carges of
G',188, determine te cange in (olfe's cas balance during <ebruary.
A. G',888 increase.
B. G/,188 increase.
C. G1,888 increase.
D. G4,188 increase.
!. 9ome oter amount.
Ans"er: B #$: / %ype: A
Ase te follo"ing to ans"er 0uestions /12/-:
%e Grainger Company's budgeted income statement reflects te follo"ing amounts:
9ales *urcases !.penses
Canuary G1'8,888 G45,888 G'/,888
<ebruary 118,888 33,888 '/,'88
=arc 1'1,888 51,'18 '4,888
April 1-8,888 5/,188 '5,388
9ales are collected 18D in te mont of sale, -8D in te mont follo"ing sale, and 17D in te second
mont follo"ing sale. $ne percent of sales is uncollectible and e.pensed at te end of te year.
Grainger pays for all purcases in te mont follo"ing purcase and takes advantage of a -D discount.
%e follo"ing balances are as of Canuary 1:
Cas G55,888
Accounts receivableJ 15,888
Accounts payable 4',888
J$f tis balance, G-1,888 "ill be collected in Canuary and te remaining amount "ill be collected
in <ebruary.
%e montly e.pense figures include G1,888 of depreciation. %e e.penses are paid in te mont
incurred.
Hilton, Managerial Accounting, Seventh Edition 245
/1. Grainger's e.pected cas balance at te end of Canuary is:
A. G54,888.
B. G57,138.
C. G7',888.
D. G7/,138.
!. G11-,138.
Ans"er: D #$: / %ype: A
/'. Grainger's budgeted cas receipts in <ebruary are:
A. G71,888.
B. G71,888.
C. G11-,878.
D. G11-,3/8.
!. G11/,888.
Ans"er: ! #$: / %ype: A
/-. Grainger's budgeted cas payments in <ebruary are:
A. G41,338.
B. G7/,538.
C. G74,'88.
D. G77,538.
!. G18','88.
Ans"er: B #$: / %ype: A
//. !nd2of2period figures for accounts receivable and payables to suppliers "ould be found on te:
A. cas budget.
B. budgeted scedule of cost of goods manufactured.
C. budgeted income statement.
D. budgeted balance seet.
!. budgeted statement of cas flo"s.
Ans"er: D #$: / %ype: &C
/1. (ic of te follo"ing statements about financial planning models :<*=s; is :are; false)
A. <*=s e.press a company's financial and operating relationsips in matematical terms.
B. <*=s allo" a user to e.plore te impact of canges in variables.
C. <*=s are commonly kno"n as >"at2if> models.
D. <*=s ave become less popular in recent years because of computers and spreadseets.
!. 9tatements >C> and >D> are bot false.
Ans"er: D #$: 1 %ype: &C
Chapter 9 246
/3. Consider te follo"ing statements about budget administration:
B.&egardless of si6e, te budgeting process is a very formal process in all organi6ations.
BB.%e budget manual is prepared to communicate budget procedures and deadlines to employees
trougout an organi6ation.
BBB.!ffective internal control procedures re0uire tat te budget director be an individual oter
tan te controller.
(ic of te above statements is :are; true)
A. B only.
B. BB only.
C. BBB only.
D. B and BB.
!. B and BBB.
Ans"er: B #$: 3 %ype: ,
/4. (ic of te follo"ing statements concerning te budget director is false)
A. %e budget director is often te organi6ation's controller.
B. %e budget director as te responsibility of specifying te process by "ic budget data "ill
be gatered.
C. %e budget director collects information and participates in preparing te master budget.
D. %e budget director communicates budget procedures and deadlines to employees trougout
te organi6ation.
!. %e budget director usually as te autority to give final approval to te master budget.
Ans"er: ! #$: 3 %ype: &C
/5. !2budgeting:
A. often uses speciali6ed soft"are to streamline te budgeting process.
B. is an Bnternet2based budgeting procedure.
C. re0uires significant net"ork security provisions.
D. is becoming more commonplace as businesses e.pand teir operations trougout te "orld.
!. possesses all of te above attributes.
Ans"er: ! #$: 3 %ype: &C
Hilton, Managerial Accounting, Seventh Edition 247
/7. Consider te follo"ing statements about 6ero2base budgeting:
B.%e budget for virtually every activity in an organi6ation is initially set to te level tat e.isted
during te previous year.
BB.%e budget forces management to retink eac pase of an organi6ation's operations before
resources are allocated.
BBB.%o receive funding for te upcoming period, individual activities must be @ustified in terms of
continued usefulness to te organi6ation.
(ic of te above statements is :are; true)
A. BB only.
B. BBB only.
C. B and BB.
D. BB and BBB.
!. B, BB, and BBB.
Ans"er: D #$: 3 %ype: &C
18. Consider te follo"ing statements about companies tat are involved "it international
operations:
B.Budgeting for tese firms is often very involved because of fluctuating values in foreign
currencies.
BB.=ultinational firms may encounter yperinflationary economies.
BBB.9uc organi6ations often face canging la"s and political climates tat affect business activity.
(ic of te above statements is :are; true)
A. B only.
B. BBB only.
C. B and BB.
D. BB and BBB.
!. B, BB, and BBB.
Ans"er: ! #$: 3 %ype: &C
11. %e budgeting tecni0ue tat focuses on different pases of a product suc as planning and
concept design, testing, manufacturing, and distribution and customer service is kno"n as:
A. cas2flo" budgeting.
B. 6ero2base budgeting.
C. base budgeting.
D. compreensive budgeting.
!. life2cycle budgeting.
Ans"er: ! #$: 4 %ype: &C
Chapter 9 248
1'. Consider te follo"ing statements about budgeting and a product's life cycle:
B.Budgets sould focus on costs tat are incurred only after a product as been introduced to te
marketplace.
BB.#ife2cycle costs "ould include tose related to product planning, preliminary design, detailed
design and testing, production, and distribution and customer service.
BBB.(en a life cycle is sort, companies must make certain tat before a commitment is made to
a product, te product's life2cycle costs are covered.
(ic of te above statements is :are; true)
A. B only.
B. BB only.
C. B and BB.
D. BB and BBB.
!. B, BB, and BBB.
Ans"er: D #$: 4 %ype: &C
1-. %e difference bet"een te revenue or cost pro@ection tat a person provides, and a realistic
estimate of te revenue or cost, is called:
A. passing te buck.
B. budgetary slack.
C. false budgeting.
D. participative budgeting.
!. resource allocation processing.
Ans"er: B #$: 5 %ype: &C
1/. Bf a manager builds slack into a budget, o" "ould tat manager andle estimates of revenues
and e.penses)
&evenues !.penses
A. Anderestimate Anderestimate
B. Anderestimate $verestimate
C. $verestimate Anderestimate
D. $verestimate $verestimate
!. !stimate correctly !stimate correctly
Ans"er: B #$: 5 %ype: &C
Hilton, Managerial Accounting, Seventh Edition 249
11 %e follo"ing events took place "en =anagers A, B, and C "ere preparing budgets for te
upcoming period:
B.=anager A increased property ta. e.penditures by 'D "en se "as informed of a recent rate
ike by local autorities.
BB.=anager B reduced sales revenues by /D "en informed of recent aggressive actions by a ne"
competitor.
BBB.=anager C, "o supervises employees "it "idely varying skill levels, used te igest "age
rate in te department "en preparing te labor budget.
Assuming tat te percentage amounts given are reasonable, "ic of te preceding cases is :are;
an e.ample of building slack in budgets)
A. B only.
B. BB only.
C. BBB only.
D. B and BB.
!. BB and BBB.
Ans"er: C #$: 5 %ype: ,
13. Consider te follo"ing statements about budgetary slack:
B.=anagers build slack into a budget so tat tey stand a greater cance of receiving favorable
performance evaluations.
BB.Budgetary slack is used by managers to guard against uncertainty and unforeseen events.
BBB.Budgetary slack is used by managers to guard against dollar cuts by top management in te
resource allocation process.
(ic of te above statements is :are; true)
A. B only.
B. BB only.
C. B and BB.
D. BB and BBB.
!. B, BB, and BBB.
Ans"er: ! #$: 5 %ype: &C
14. (en an organi6ation involves its many employees in te budgeting process in a meaningful
"ay, te organi6ation is said to be using:
A. budgetary slack.
B. participative budgeting.
C. budget padding.
D. imposed budgeting.
!. employee2based budgeting.
Ans"er: B #$: 5 %ype: &C
Chapter 9 25
15. (ic of te follo"ing outcomes is :are; sometimes associated "it participative budgeting)
A. !mployees make little effort to acieve budgetary goals.
B. Budget preparation time can be some"at lengty.
C. %e problem of budget padding may arise.
D. <inancial modeling becomes muc more difficult to undertake.
!. Budget preparation time can be some"at lengty and budget padding may arise.
Ans"er: ! #$: 5 %ype: &C
17. Company A uses a eavily participative budgeting approac "ereas at Company B, top
management develops all budgets and imposes tem on lo"er2level personnel. (ic of te
follo"ing statements is false)
A. A's employees "ill likely be more motivated to acieve budgetary goals tan te employees
of Company B.
B. B's employees may be some"at disencanted because altoug tey "ill be evaluated
against a budget, tey really ad little say in budget development.
C. Budget padding "ill likely be a greater problem at Company B.
D. Budget preparation time "ill likely be longer at Company A.
!. !tical issues are more likely to arise at Company A, especially "en te budget is used as a
basis for performance appraisal.
Ans"er: C #$: 5 %ype: ,
EXERCISES
Revenue and Labor BudgetingUniversit Setting
38. Iirginia 9tate Aniversity :I9A; is preparing its master budget for te upcoming academic year.
Currently, 1',888 students are enrolled on campusH o"ever, te admissions office is forecasting
a 1D gro"t in te student body despite a tuition ike to G58 per credit our. %e follo"ing
additional information as been gatered from an e.amination of university records and
conversations "it university officials:
I9A is planning to a"ard 118 tuition2free scolarsips.
%e average class as -8 students, and te typical student takes 11 credit ours eac semester.
!ac class is tree credit ours.
!ac faculty member teaces five classes during te academic year.
&e0uired:
A.Compute te budgeted tuition revenue for te upcoming academic year.
B.Determine te number of faculty members needed to cover classes.
C.Bn preparing te university's master budget, sould te administration begin "it a forecast of
students or a forecast of faculty members) Briefly e.plain.
#$: / %ype: A, ,
Hilton, Managerial Accounting, Seventh Edition 25!
Ans"er:
A. %otal student body: 1',888 K :1',888 . 1D; L 1',388H
%uition2paying students: 1',388 2 118 L 1',/18H
<orecasted tuition revenue: 1',/18 students . -8 credit ours . G58 L G'7,558,888
B. !ac student generates 18 >enrollments> per year :11 credit ours . ' semesters M - credit
ours per class;. %us, 1'3,888 >enrollments> :1',388 students . 18; must be covered.
Classes to be taugt: 1'3,888 M -8 students per class L /,'88 classesH
<aculty needed: /,'88 classes M 1 classes per professor L 5/8 faculty
C. %e university sould begin "it a forecast of te number of students. (ile te number of
faculty may be a key driver for a variety of e.penditures, te number of faculty is igly
dependent on te number of students. 9tudents :and tuition revenue; are akin to sales?te
starting point in te budgeting process.
Produ!tion Budget
31. %rifty Corporation as e.perienced a number of out2of2stock situations "it respect to its
finised2goods inventories. Bnventory at te end of =ay, for e.ample, "as only /8 units?an all2
time lo".
=anagement desires to implement a policy "ereby finised2goods inventory is 48D of te
follo"ing mont's sales. Budgeted sales for Cune, Culy, and August are e.pected to be /,188
units, 1,188 units, and /,788 units, respectively.
&e0uired:
Determine te number of units tat %rifty must produce in Cune and Culy.
#$: / %ype: A
Ans"er:
Budgeted sales in Cune :units; /,188
Add: Desired ending finised2goods inventory :1,188 . 48D; -,148
%otal finised units needed 5,848
#ess: Beginning finised2goods inventory /8
,umber of units to be produced in Cune 5,8-8
Budgeted sales in Culy :units; 1,188
Add: Desired ending finised2goods inventory :/,788 . 48D; -,/-8
%otal finised units needed 5,1-8
#ess: Beginning finised2goods inventory -,148
,umber of units to be produced in Culy /,738
Chapter 9 252
"ire!t#Materia$ Pur!%ases Budget
3'. %urbo =anufacturing plans to produce '8,888 units, '/,888 units, and -8,888 units, respectively,
in $ctober, ,ovember, and December. !ac of tese units re0uires four units of part no. 547,
"ic te company can purcase for G4 eac. %urbo as -1,888 units of part no. 547 in stock on
9eptember -8.
&e0uired:
*repare a direct2material purcases budget for $ctober and ,ovember if management desires to
maintain an ending ra"2material inventory e0ual to /8D of te follo"ing mont's production
usage.
#$: / %ype: A
Ans"er:
$ctober ,ovember
*lanned production '8,888 '/,888
Anits of part no. 547 . / . /
Anits of part no. 547 used in production 58,888 73,888
Add: Desired ending inventoryJ -5,/88 /5,888
%otal units of part no. 547 needed 115,/88 1//,888
#ess: Beginning inventory of part no. 547 -1,888 -5,/88
Anits of part no. 547 to be purcased 5-,/88 181,388
Cost per unit . G4 . G4
Cost of direct material purcases
J$ctober: '/,888 . / . /8DH ,ovember: -8,888 . / .
/8D
G15-,588 G4-7,'88
Hilton, Managerial Accounting, Seventh Edition 253
Produ!tion and "ire!t#Materia$ Pur!%ases Budgets
3-. 9cot Company plans to sell /88,888 units of finised product in Culy '8.1. =anagement :1;
anticipates a gro"t rate in sales of 1D per mont tereafter and :'; desires a montly ending
finised2goods inventory :in units; of 58D of te follo"ing mont's estimated sales. %ere are
-88,888 completed units in te Cune -8, '8.1 inventory.
!ac unit of finised product re0uires four pounds of direct material at a cost of G1.18 per pound.
%ere are 1,388,888 pounds of direct material in inventory on Cune -8, '8.1.
&e0uired:
A. *repare a production budget for te 0uarter ended 9eptember -8, '8.1. ,ote: <or bot part
>A> and part >B> of tis problem, prepare your budget on a 0uarterly :not montly; basis.
B. Bndependent of your ans"er to part >A,> assume tat 9cot plans to produce 1,'88,888 units of
finised product for te 0uarter ended 9eptember -8. Bf te firm desires to stock direct
materials at te end of tis period e0ual to '1D of current production usage, compute te cost
of direct material purcases for te 0uarter.
#$: / %ype: A
Ans"er:
A. *ro@ected sales:
Culy /88,888
August :/88,888 . 1.81; /'8,888
9eptember :/'8,888 . 1.81; //1,888
Nuarterly total 1,'31,888
%otal 0uarterly sales 1,'31,888
Add: Desired 7O-8 inventory :/3-,818J . 58D; -48,//8
%otal units needed 1,3-1,//8
#ess: 3O-8 inventory -88,888
%otal 0uarterly production re0uirement 1,--1,//8
J$ctober sales: //1,888 . 1.81 L /3-,818
B. =aterial to be used in production :1,'88,888 . / pounds; /,588,888
Add: Desired 7O-8 inventory :/,588,888 . '1D; 1,'88,888
Direct materials needed 3,888,888
#ess: 3O-8 inventory 1,388,888
*ounds to be purcased during te 0uarter /,/88,888
Direct material cost per pound . G1.18
%otal 0uarterly cost of purcases G3,388,888
Chapter 9 254
Budget Lin&ages' Produ!tion( Materia$s( Labor( Ba$an!e S%eet
3/. Atlantic Corporation assembles bicycles by purcasing frames, "eels, and oter parts from
various suppliers. Consider te follo"ing data:
%e company plans to sell '1,888 bicycles during eac mont of te year's first 0uarter.
A revie" of te accounting records disclosed a finised2goods inventory of 1,/88 bicycles on
Canuary 1 and an e.pected finised2goods inventory of 1,518 bicycles on Canuary -1.
Atlantic as /,-88 "eels in inventory on Canuary 1, a level tat is e.pected to drop by 1D at
mont2end.
Assembly time totals -8 minutes per bicycle, and "orkers are paid G1/ per our.
Atlantic accounts for employee benefits as a component of direct labor cost. *ension and
insurance costs average G' per our :total;H additionally, te company pays 9ocial 9ecurity
ta.es tat amount to 5D of gross "ages earned.
&e0uired:
A. Po" many bicycles does Atlantic e.pect to produce :i.e., assemble; in Canuary)
B. Po" many "eels must be purcased to satisfy production needs)
C. Compute Atlantic's total direct labor cost.
D. Briefly e.plain o" te company's purcasing activity "ould affect te end2of2period balance
seet.
#$: / %ype: A, ,
Ans"er:
A. <inised2goods inventory is e.pected to increase by /18 units :1,518 2 1,/88;. %us, te
company "ill assemble '1,/18 bicycles :'1,888 K /18;.
B. Atlantic's production "ill re0uire 18,788 "eels :'1,/18 . ';. Given tat inventory "ill
drop by '11 units :/,-88 . 1D;, te company must purcase 18,351 "eels :18,788 2 '11;.
C. Assembly time: '1,/18 bicycles . -8O38 L 1',4'1 ours
#abor cost:
(ages: 1',4'1 ours . G1/ G145,118
*ension and insurance: 1',4'1 ours . G' '1,/18
9ocial 9ecurity ta.es: G145,118 . 5D 1/,'1'
%otal G'14,51'
D. *urcasing activity "ould likely affect te balance seet in several "ays. Atlantic's Cas
account "ould decrease and any end2of2period obligations to suppliers "ould be disclosed
as accounts payable. Bn addition, te "eels on and at te end of te period "ould affect
ra"2material inventories, and te cost of "eels ac0uired and used "ould influence te
ending inventory of bicycles.
Hilton, Managerial Accounting, Seventh Edition 255
Produ!tion( Materia$s( and Labor Budgets
31. Cacobs manufactures t"o products: A and B. %e firm predicts a sales volume of 18,888 units for
product A and ending finised2goods inventory of ',888 units. %ese numbers for product B are
1',888 and -,888, respectively. Cacobs currently as 4,888 units of A in inventory and 7,888 units
of B.
%e follo"ing ra" materials are re0uired to manufacture tese products:
&e0uired for *roduct
&a" =aterial Cost per *ound A B
Q G'.88 ' pounds
+ '.18 1 pound 1 pound
R 1.'1 - pounds
*roduct A re0uires tree ours of cutting time and t"o ours of finising timeH B re0uires one
our and tree ours, respectively. %e direct labor rate for cutting is G18 per our and G15 per
our for finising.
&e0uired:
A. *repare a production budget in units.
B. *repare a materials usage budget in pounds and dollars.
C. *repare a direct labor budget in ours and dollars for product A.
#$: / %ype: A
Ans"er:
A. A B
9ales volume in units 18,888 1',888
Add: !nding finised2goods inventory ',888 -,888
%otal units re0uired 1',888 11,888
#ess: Beginning finised2goods inventory 4,888 7,888
%otal units to be produced 1,888 3,888
B. &a" =aterial Asage A B
Q: ' pounds . 1,888 18,888
+: 1 pound . 1,888H 1 pound . 3,888 1,888 3,888
R: - pounds . 3,888 15,888
Q: 18,888 pounds . G'.88 G'8,888
+: :1,888 K 3,888; pounds . G'.18 '4,188
R: 15,888 pounds . G1.'1 '',188
%otal cost G48,888
Chapter 9 256
C. Cutting
*roduction in units 1,888
Direct labor ours per unit . -
Asage in direct labor ours 11,888
Direct labor rate . G18
Direct labor cost G118,888
<inising
*roduction in units 1,888
Direct labor ours per unit . '
Asage in direct labor ours 18,888
Direct labor rate . G15
Direct labor cost G158,888
%otal budgeted direct labor cost G--8,888
Cas% Co$$e!tions
33. %ara Company as te follo"ing istorical collection pattern for its credit sales:
48D collected in mont of sale
11D collected in te first mont after sale
18D collected in te second mont after sale
/D collected in te tird mont after sale
1D uncollectible
Budgeted credit sales for te last si. monts of te year follo".
Culy G-8,888
August -1,888
9eptember /8,888
$ctober /1,888
,ovember 18,888
December /',188
&e0uired:
A. Calculate te estimated total cas collections during $ctober.
B. Calculate te estimated total cas collections during te year's fourt 0uarter.
#$: / %ype: A
Hilton, Managerial Accounting, Seventh Edition 257
Ans"er:
A. =ont of 9ale $ctober Collections
Culy G-8,888 . /D L G 1,'88
August G-1,888 . 18D L -,188
9eptember G/8,888 . 11D L 3,888
$ctober G/1,888 . 48D L -1,188
%otal G/','88
B. Credit Amount Collected
=ont of 9ale 9ales $ctober ,ovember December
Culy G -8,888 G 1,'88
August -1,888 -,188 G 1,/88
9eptember /8,888 3,888 /,888 G 1,388
$ctober /1,888 -1,188 3,418 /,188
,ovember 18,888 -1,888 4,188
December /',188 '7,418
%otal G'/',188 G/','88 G/4,118 G/-,-18
%otal collections in te fourt 0uarter G1-',488
Cas% In)$o*s and Cas% Manage+ent
34. %e accounting records of Backspace, Bnc., revealed an accounts receivable balance of G171,888
on Canuary 1, '8.3. <orty percent of te company's sales are for cas, and te remaining 38D are
on account. $f te credit sales, -8D are collected in te mont of sale and 48D are collected in
te follo"ing mont. %otal sales in Canuary and <ebruary are e.pected to amount to G188,888
and G1-8,888, respectively.
Assume tat in te latter alf of '8.3, Backspace ired a ne" sales manager "o aggressively
tried to ma.imi6e te company's market sare. 9e implemented a compensation system for te
sales force tat "as 188D commission based, "it te commission calculated on te basis of
gross sales dollars. 9ales volume increased dramatically in a very sort period of time, and te
sales and collection patterns canged, as follo"s:
Cas sales: '8D
Credit sales: 58D
Collected in te mont of sale 11D
Collected in te mont follo"ing sale 41D
Ancollectible 18D
Chapter 9 258
&e0uired:
A. Compute te company's cas inflo"s for Canuary and <ebruary, '8.3.
B. Determine te outstanding receivables balance at te end of <ebruary.
C. Compare te sales and collection patterns before and after te arrival of te ne" sales
manager. Pave tings improved or deteriorated) !.plain.
D. $n te basis of te information presented, determine "at likely caused te improvement or
deterioration in collection patterns.
#$: / %ype: A, ,
Ans"er:
A. Canuary: Accounts receivable :G171,888; K Canuary cas sales :G188,888 . /8D;
K Canuary credit sales collected in Canuary :G188,888 . 38D . -8D; L G/51,888
<ebruary: Canuary credit sales collected in <ebruary :G188,888 . 38D . 48D; K
<ebruary cas sales :G1-8,888 . /8D; K <ebruary credit sales collected in <ebruary
:G1-8,888 . 38D . -8D; L G114,/88
B. 9ince credit sales are collected over t"o monts, 48D of <ebruary's credit sales are still
outstanding: G1-8,888 . 38D . 48D L G''',388
C. Altoug sales ave increased, te credit and collection patterns ave deteriorated. $ne of
te company's likely ob@ectives is to accelerate cas inflo"s. ,otice tat in percentage terms,
cas sales ave declined :/8D vs. '8D;H credit customers no" take longer to pay as @udged
by collections in te mont of sale :-8D vs. 11D;H and ig levels of uncollectibles ave
arisen :8D vs. 18D;.
D. %e data reveal tat total sales increased as did te percentage of sales made on credit. Bt
appears tat te sales manager's empasis on market sare may ave led to sales being made
to poor credit risks Sas @udged by te ig rate of uncollectibles and reduced percentages of
sales being settled in te mont of sale :bot cas and credit;T. %ese actions may ave been
triggered by a commission system based on gross sales, tus >encouraging> employees to
increase sales despite te credit "ortiness and profitability of te customer.
Hilton, Managerial Accounting, Seventh Edition 259
Cas% Budgeting
35. &enson Corporation, a "olesaler, provided te follo"ing information:
=ont
=ercandise
*urcases 9ales
Canuary G1/',888 G14',888
<ebruary 1/5,888 133,888
=arc 1-3,888 131,888
April 11/,888 145,888
=ay 138,888 133,888
Customers pay 38D of teir balances in te mont of sale, -8D in te mont follo"ing sale, and
18D in te second mont follo"ing sale. %e company pays all invoices in te mont follo"ing
purcase and takes advantage of a -D discount on all amounts due. Cas payments for operating
e.penses in =ay "ill be G117,188H &enson's cas balance on =ay 1 "as G1'4,588.
&e0uired:
Determine te follo"ing:
A. !.pected cas collections during =ay.
B. !.pected cas disbursements during =ay.
C. !.pected cas balance on =ay -1.
#$: / %ype: A
Ans"er:
A. =ont 9ales *ercent Collections
=arc G131,888 18D G 13,188
April 145,888 -8D 1-,/88
=ay 133,888 38D 77,388
%otal G137,188
B. April purcases to be paid in =ay G11/,888
#ess: -D cas discount /,3'8
,et amount G1/7,-58
Add: Cas payments for e.penses 117,188
%otal e.pected cas disbursements G'35,558
C. Balance, =ay 1 G1'4,588
Add: !.pected collections 137,188
9ubtotal G'74,-88
#ess: !.pected payments '35,558
!.pected balance, =ay -1 G '5,/'8
Chapter 9 26
Inter,retation o) Budget "ata
37. 9tiles !nterprises reported te follo"ing cas collections in Culy and August from credit sales:
Culy August
<rom Cune receivables G --,888
<rom Culy sales 181,888 G /1,888
<rom August sales 135,888
%e company sells a single product for G'8, and all sales are collected over a t"o2mont period.
&e0uired:
A. Determine te number of units tat "ere sold in Culy.
B. Determine te percent of credit sales collected in te mont of sale and te percent of sales
collected in te mont follo"ing sale.
C. Po" many units "ere sold in August)
D. Determine te accounts receivable balance as of August -1.
#$: / %ype: A, ,
Ans"er:
A. Culy sales: G181,888 K G/1,888 L G118,888H G118,888 M G'8 L 4,188 units
B. Culy sales collected in Culy: G181,888 M G118,888 L 48D
9eventy percent of credit sales are collected in te mont of saleH te remaining -8D are
collected in te mont follo"ing sale.
C. 9eventy percent of August sales "ere collected in AugustH tus, total August sales L
G135,888 M 8.48, or G'/8,888. August sales in units: G'/8,888 M G'8 L 1',888
D. G'/8,888 2 G135,888 L G4',888
Hilton, Managerial Accounting, Seventh Edition 26!
Cas% and t%e Budgeting Pro!ess
48. 9erman Company provides services in te retail flooring industry. %e follo"ing information is
available for '8.1:
%"enty percent of te firmFs services are for cas and te remaining 58D are on account. $f
te credit services, /8D are collected in te mont tat te service is provided, "it te
remaining 38D collected in te follo"ing mont.
9ervices provided in Canuary are e.pected to total G'18,888 and gro" at te rate of 1D per
mont tereafter.
CanuaryFs cas collections are e.pected to be G'/8,/88, and mont2end receivables are
forecast at G1'8,888.
=ontly cas operating costs and depreciation during te first 0uarter of te year are
appro.imated at G'18,888 and G11,888, respectively.
9ermanFs December -1, '8./ balance seet revealed accounts payable balances of G'5,888.
%is amount is related to te companyFs operating costs and is e.pected to gro" to G-3,888
by te end of '8.1Fs first 0uarter. All operating costs are paid "itin -8 days of incurrence.
Company policy re0uires tat a G'8,888 minimum cas balance be maintained, and
9ermanFs '8./ year2end balance seet so"ed tat te firm "as in compliance "it policy
by aving cas of G'-,888.
&e0uired:
A. Determine te sales revenue earned tat "ill appear on te income statement for te 0uarter
ended =arc -1, '8.1.
B. Compute te companyFs first20uarter cas collections.
C. Compute te cas balance tat "ould appear on te =arc -1, '8.1 balance seet.
D. (at are some possible actions te company could pursue if, at any time during te 0uarter, it
finds tat te cas balance as fallen belo" te stated minimum.
#$: / %ype: A, ,
Ans"er:
A. %e income statement "ill report revenues earned of G455,1'1 SG'18,888 K :G'18,888 . 1.81
L G'3',188; K :G'3',188 . 1.81 L G'41,3'1;T.
B. Collections for te first 0uarter total G433,''1 :G'/8,/88 K G'13,188 K G'37,-'1;:
Canuary:
Given G'/8,/88
<ebruary:
Canuary receivables G1'8,888
<ebruary cas services: G'3',188 . '8D 1',188
<ebruary credit services: G'3',188 . 58D .
/8D
5/,888 G'13,188
=arc:
<ebruary credit services: G'3',188 . 58D .
38D
G1'3,888
=arc cas services: G'41,3'1 . '8D 11,1'1
=arc credit services: G'41,3'1 . 58D . /8D 55,'88 G'37,-'1
Chapter 9 262
Hilton, Managerial Accounting, Seventh Edition 263
C. %e ending cas balance is G/4,''1: G'-,888 :Canuary 1 balance; K G433,''1 :collections; 2
G'5,888 :December payables; 2 G418,888 :montly cas e.penses . -; K G-3,888 :=arc
payables;.
D. 9everal possible actions include securing a sort2term loan or line of credit, "orking "it
clients in an attempt to accelerate inflo"s, and "orking "it vendors to temporarily delay
payments. %e goal is to ave added funds on and so tat operations continue smootly and
are not disrupted because of sporadic or ongoing sortages.
Budgeted In!o+e State+ent- Partia$ Ba$an!e S%eet
41. %e follo"ing information relates to D<( Corporation:
All sales are on account and are budgeted as follo"s: <ebruary, G-18,888H =arc,
G-38,888H and April, G/88,888. D<( collects 48D of its sales in te mont of sale and -8D
in te follo"ing mont.
Cost of goods sold averages 38D of sales. *urcases total 31D of te follo"ing
mont's sales and are paid in te mont follo"ing ac0uisition.
Cas operating e.penses total G38,888 per mont and are paid "en incurred.
=ontly depreciation amounts to G15,888.
9elected amounts taken from te Canuary -1 balance seet "ere: accounts receivable,
G111,888H plant and e0uipment :net;, G184,888H and retained earnings, G51,888.
&e0uired:
A. *repare a budgeted income statement tat summari6es activity for te t"o monts ended
=arc -1, '8.1.
B. Compute te amounts tat "ould appear on te =arc -1 balance seet for accounts
receivable, plant and e0uipment :net;, and retained earnings.
#$: / %ype: A
Ans"er:
A. Bncome 9tatement for te %"o =onts !nded =arc -1, '8.1
9ales revenue :G-18,888 K G-38,888; G418,888
Cost of goods sold :G418,888 . 38D; /'3,888
Gross margin G'5/,888
$perating e.penses:
Cas operating e.penses :G38,888 . '; G1'8,888
Depreciation :G15,888 . '; -3,888 113,888
,et income G1'5,888
B. Accounts receivable: G111,888 2 G111,888 K G-18,888 2 :G-18,888 . 48D; K G-38,888 2
:G-18,888 . -8D; 2 :G-38,888 . 48D; L G185,888
*lant and e0uipment :net;: G184,888 2 G15,888 2 G15,888 L G41,888
&etained earnings: G51,888 K G1'5,888 L G'1-,888
Chapter 9 264
"ISCUSSION QUESTIONS
Pur,oses o) Budgeting Sste+s
4'. Discuss te importance of budgeting and identify five purposes of budgeting systems.
#$: 1 %ype: &C
Ans"er:
Budgets aid in determining o" to ac0uire resources, and "en and o" tese resources sould
be used. Bn plain and simple terms, a formal budgeting program is a key ingredient to effective
management. %e five purposes of budgeting are to:
1. develop a plan of action.
'. facilitate communication of te plan and coordinate various vie"s "itin an
organi6ation.
-. allocate limited resources effectively and efficiently.
/. serve as a bencmark to control profit and operations.
1. evaluate performance and provide incentives to managers.
Sa$es .ore!ast
4-. #ist several factors tat an organi6ation migt consider "en developing a sales forecast.
#$: 1 %ype: &C
Ans"er:
*ast sales levels and economic trends for te firm as "ell as for te industry as a
"ole
General conditions in te economy suc as gro"t or decline, recession or boom, etc.
!.ternal forces suc as "eater or potential strikes
*olitical or legal factors suc as litigation or ne" legislation
*ricing policies of te organi6ation
Advertising and promotion plans
Competitors' actions
*otential for ne" product lines
=arket researc studies
Hilton, Managerial Accounting, Seventh Edition 265
Budgetar S$a!&
4/. %ara *ineno, ne"2accounts manager at !ast Bank of Clarion, as been asked to pro@ect o" many
ne" accounts se "ill open during '8.'. %e local economy as been gro"ing, and te bank as
e.perienced a 18D increase in te number of ne" accounts over eac of te past five years. Bn
'8.1, te bank ad 18,888 accounts.
%ara is paid a salary, plus a bonus of G'8 for every ne" account above te budgeted amount.
%us, if te annual budget calls for 1,888 ne" accounts, and 1,858 ne" accounts are obtained, er
bonus "ill be G1,388 :58 . G'8;.
*ineno believes tat te local economy "ill continue to gro" at te same rate in '8.' as it as in
recent years. 9e decided to submit a pro@ection of 488 ne" accounts for '8.'.
&e0uired:
+our consulting firm as been ired by te bank president to make recommendations for
improving te bank's operation. (rite a memorandum to te president defining and e.plaining
te negative conse0uences of budgetary slack. Also discuss te bank's bonus system for te ne"2
accounts manager and o" te bonus program tends to encourage budgetary slack.
#$: 5 %ype: &C
Ans"er:
=emorandum
Date: %oday
%o: *resident, !ast Bank of Clarion
<rom: B.=. 9tudent and Associates
9ub@ect: Budgetary slack
Budgetary slack is te difference bet"een a budget estimate tat a person provides and a realistic
determination of te amount. %e practice of creating budgetary slack is called padding te
budget. %e primary negative conse0uence of slack is tat it undermines te credibility and
usefulness of te budget as a planning and control tool. (en a budget includes slack, te
amounts in te budget no longer portray a realistic vie" of future operations.
%e bank's bonus system for te ne"2accounts manager tends to encourage budgetary slack.
9ince te manager's bonus is determined by te number of ne" accounts opened in e.cess of te
budgeted number, tere is an incentive for te manager to understate er activity pro@ections.
%ere is evidence of tis beavior, as a 18D increase over te bank's current 18,888 accounts
"ould be 1,888 ne" accounts in '8.'. %ara's pro@ection, o"ever, is only 488.
Chapter 9 266
Parti!i,ative Budgeting
41. Cames Corporation, ead0uartered in Cicago, as a manufacturing plant in Dallas. *lant
managers desire to participate in te company's budget efforts, "ic, for te past 18 years, ave
been andled solely by top e.ecutives in Cicago. Dallas managers feel tat by becoming
involved, tey can make great strides in terms of improving operating performance of teir aging
facility.
&e0uired:
Briefly discuss tis situation, focusing on te benefits and problems of letting Dallas managers
participate in te company's budgetary efforts.
#$: 5 %ype: &C, ,
Ans"er:
*articipative budgets "ill make te plant managers feel tat teir opinions are valued by top
management and, generally speaking, te plant managers "ill ave a better attitude about trying
to acieve te budget. Additionally, it is possible in tis case tat te participative approac "ill
result in a more realistic budget document. Cicago personnel may be too far removed from
daily activities in Dallas to get an accurate picture of on2going operations.
$n te negative side, a participative budget may take longer to prepare and may lead to some
local in2figting "en compared "it one tat is imposed from corporate ead0uarters. Also,
participative budgets may ave some padding or slack, as te Dallas managers are faced "it an
aging facility. %is facility may be inefficient and, "it teir participation, managers may bend
te numbers a bit to improve appearance.
Hilton, Managerial Accounting, Seventh Edition 267