98. Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per
unit equal $3.20. The company expects short-term fixed costs to be $7,200 for the coming month,
at the projected sales level of 20,000 units. Management is considering several alternative
actions designed to improve operating results. In conjunction with this, they have created a
profit-planning (that is, a CVP) model, which can be used to evaluate different scenarios.
Capital One’s management believes that a 10% reduction in the selling price will increase sales
volume by 10%. If this plan is implemented, then operating profit should:
99. A
budgeting
system
that has, in effect, a budget for a set number of periods (that is, a
constant planning horizon) at all times is called a(n):
100. All of the following represent alternative approaches to the traditional budget-preparation
process except which one of the following?
101. Which one of the following is not a way to deal with uncertainty in the budgeting
process?
102. The proper treatment of the cost of unused capacity, as identified through the use of an
activity-based budgeting (ABB) system, is to charge the amount to:
103. The type of compensation plan that focuses on the difference between actual
performance (sales, operating income, etc.) and budgeted performance refers to:
104. The act of encouraging non-value-adding actions on the part of management in order to
improve indicated performance is referred to as:
105. The practice of managers knowingly including a higher amount of expenditures (or lower
amount of revenue) in the budget than they actually believe will occur is called:
106. Which of the following is not true regarding the use of
linear
compensation
plans
?
107. Which of the following is not a characteristic of Kaizen budgeting?
108. Explain benefits of implementing a master budgeting system.
The benefits that can be derived from implementing a master budgeting system include:
109. Contrast
operating
budgets
and
financial
budgets
. How do these budgets relate to the
master budget for a period? What is the culmination of the master budgeting process?
110. In both activity-based cost (ABC) systems and time-driven activity-based cost (TDABC)
systems we calculate cost-driver rates for support activities (for example, the cost to ship an
item or the cost to process a customer order) and it is asserted that these rates are best
determined by dividing budgeted resource costs (for a given cost pool) by the practical capacity
of resources supplied.
Required:
1. What is the primary advantage of using practical capacity as the volume level for determining
cost allocation rates in an ABC or TDABC system?
2. What is the appropriate accounting treatment for unused capacity costs for a given accounting
period?
111. Uncertainty and the Budgeting Process: As indicated in the text, the validity of pro-forma
financial statements that are produced as part of the master budgeting process is affected by the
accuracy of the forecasted data going into the component budgets. Such data are subject to
various levels of uncertainty. For this reason, accountants need to understand ways of dealing
with uncertainty in the budgeting process.
Required:
Define and distinguish among the following ways of handling uncertainty in the budgeting
process:
1. What-if analysis (give at least one concrete example)
2. Sensitivity analysis
3. Scenario analysis.
112. List factors that should be considered in developing a sales forecast for an upcoming
budget period.
113. What is zero-base budgeting (ZBB) and how does this approach to budgeting compare to
what can be considered “traditional budgeting”? How is ZBB implemented in practice?
114. What is the focus of activity-based budgeting (ABB)? What is the principal advantage of
ABB?
115. Contrast the budgeting unit (or focus) under a traditional budgeting system and under an
activity-based budgeting (ABB) system.
116. Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers.
Management also wants to have $500 in inventory at the end of the month to prepare for the fall
season. Beginning inventory in August was $400. What dollar amount of plastic flowers should be
purchased to meet the above objectives?
117. Lighting Inc.’s sales budget showed the following projections, by quarter, for the coming
year:
Quarter Units
First 100,000
Second 120,000
Third 140,000
Fourth 160,000
Total 520,000
Inventory on December 31 of the current year (that is, at the beginning of the coming year) is
expected to be 20,000 units. The quantity of finished goods inventory at the end of each quarter
was to equal seven percent of the next quarter’s budgeted units to be sold.
Required:
Calculate the units to be produced during the third quarter.
118. Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars.
Management also wants to have $300 in inventory at the end of the month to prepare for the
summer season. Beginning inventory in May was $200.
Required:
What dollar amount of flea collars should be purchased to meet the above objectives?
119. Allmakes Software budgeted August purchases of new software at $140,000.The store
had software costing $6,000 on hand at the beginning of August, and to cover part of anticipated
back-to-school sales in September they expect to have $15,000 of software on hand at the end of
August.
Required:
What was the budgeted cost of goods sold for August?
120. Helen Auger has seen the Centicle Group, a not–for-profit, in-home health care
organization, grow during the past 10 years to a $500 million revenue, multi-state organization.
Helen was promoted to her controller position six months ago, after serving capably in several
financial accounting positions at the Centicle Group.
At a Budget Review Committee meeting last Friday, several committee members expressed
frustration with the pace of the budget development. They described the newly introduced
“bottom up” system of participative budgeting as “unwieldy,” “slow-paced,” and “repetitive.”
Helen’s objective in introducing the participative approach was to involve to a much greater
extent lower level supervisors and employees. Helen is meeting with the Budget Review
Committee again tomorrow when she plans to explain the advantages of “bottom up” versus “top
down” approaches to the budgeting process.
Required:
Helen has asked you to help her prepare for tomorrow’s meeting by preparing the following:
1. A 40-50 word description of
participative
budgeting
, including some basic advantages of this
approach to budgeting.
2. A brief, one-paragraph explanation of the concept of “budget ownership,” one of the values
that participative (“bottom up”) budgeting is said to have.