Deck 6: Budgeting

Question 1

Top-down versus Bottom-up Budgets
Describe (a)the benefits of top-down budgeting and (b)the benefits of bottom-up budgeting.

Answer 1

Solution to Top-down versus Bottom-up Budgets (15 minutes)
a.Benefits of top-down budgeting include:
-Better for decision control in the sense that the variance from the budget is useful for performance measurement and compensation
-Lower influence costs and less gaming by the people being held accountable for the numbers
-The budgeted numbers are not biased by lower-level managers who are being evaluated based on these numbers (less sandbagging)
-Less time is spent generating these top-down numbers to the extent that lower-level managers spend no time on the process
b.Benefits of bottom-up budgeting include:
-More knowledge assembly of information held by lower level employees
-Participative budgeting provides more employee buy-in and perhaps better acceptance and higher morale
-Better for decision management

Question 2

Different Types of Budgets
The Sticky Company makes a glue that is used to glue the layers of wood veneer together to make plywood.The process for making the glue has been used for many years and the customers are satisfied with the product.The Sticky Company has had very low turnover of personnel and the president and the managers have all been with the company for many years.Although the company appears very stable today,plywood prices are rising and the construction industry is beginning to switch to a cheaper product called chipboard.Chipboard uses a different glue than the glue made by the Sticky Company.
Given the present condition of Sticky Company,should the company use long-term budgets,line-item budgets,budget lapsing,flexible budgets,or zero-based budgeting?

Answer 2

Solution to Different Types of Budgets (15 minutes)
If the market for the glue for plywood was viewed as a stable market,then Sticky Company is likely to use long-term budgets.The managers and employees have all been with the Sticky Company for many years,so there is no need to use line-item budgeting and not much need to transfer information.Therefore,incremental budgeting is probably better than zero-based budgeting.Budget lapsing is generally not used in a profit company.Flexible budgets are probably appropriate because the demand for the product depends on the demand for plywood,which is not controlled by the managers of Sticky Company.
If Sticky Company is facing a transition due to the conversion from plywood to chipboard,the company is likely to change its budgeting.There will be a greater focus on short-term budgets because of increased uncertainty about the long run.Line item and fixed budgets may be used more frequently because more control from central administration may be desired in an attempt to adapt to a new environment.Zero-based budgeting may be instituted to increase information flow.

Question 3

Flexible Budgets
A chair manufacturer has established the following flexible budget for the month. Required:
a.What is the sales price per chair?
b.What is the expected profit if 1,600 chairs are made?

Answer 3

Solution to Flexible Budgets (10 minutes)
a.The sales price per chair can be calculated by dividing the sales dollars by the number of units: $10,000/1,000 units = $10/unit
b.The variable cost per unit can be calculated by dividing the variable costs by the number of units: $5,000/1,000 units = $5/unit
The expected profit of making and selling 1,600 chairs is:

Question 4

Appendix Estimating Production Costs
The Fancy Umbrella Company makes beach umbrellas.The production process requires 3 square meters of plastic sheeting and a metal pole.The plastic sheeting costs $0.50 per square meter and each metal pole costs $1.00.At the beginning of the month,the company has 5,000 square feet of plastic and 1,000 poles in raw materials inventory.The preferred raw material amount at the end of the month is 3,000 square feet of plastic sheeting and 600 poles.The company has 300 finished umbrellas in inventory at the beginning of the month and plans to have 200 finished umbrellas at the end of the month.Sales in the coming month are expected to be 5,000 umbrellas.
Required:
a.How many umbrellas must the company produce to meet demand and have sufficient ending inventory?
b.What is the cost of materials that must be purchased?

Question 5

Appendix Pro-Forma Financial Statements
The Gold Bay Hotel is in the process of developing a master budget and pro-forma financial statements for 1999.The beginning balance sheet for the fiscal year 1999 is estimated to be:
Gold Bay Hotel
Estimated Balance Sheet
1/1/99 During the year the hotel expects to rent 30,000 rooms.Rooms rent for an average of $90 per night.The hotel expects to sell 40,000 meals during the year at an average price of $20 per meal.The variable cost per room rented is $30 and the variable cost per meal is $8.The fixed costs not including depreciation is expected to be $2,000,000.Depreciation is expected to be $500,000.The hotel also expects to refurbish the kitchen at a cost of $200,000,which is capitalized (included in the facility account).Interest of the note payable is expected to be $50,000 and $100,000 of the note payable will be retired during the year.The ending accounts receivable amount is expected to be $40,000 and the ending accounts payable is expected to be $30,000.
Prepare pro-forma financial statements for the end of the year.

Question 6

Appendix Budgeting Direct Materials
The Jung Corporation's budget calls for the following production:
Each unit of production requires three pounds of direct material.The company's policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter's direct material requirements.Compute budgeted direct materials purchases for the third quarter.

Question 7

The Effect of Budgets on Organization
Describe how budgets and budgeting systems help solve the organization problem.Give examples.