Jack Riley, controller in the division of social services for the state, recognizes the importance of the budgetary process for planning, control, and motivational purposes. He believes that a properly implemented participative budgetary process for planning purposes and an evaluation procedure will motivate the managers to improve productivity within their particular departments. Based upon this philosophy, Riley has implemented the following budgetary procedures. • An appropriation target figure is given to each department manager. This amount is the maximum funding that each department can expect to receive in the next year. • Department managers develop their individual budgets within the following spending constraints as directed by the controller’s staff. • Expenditure requests cannot exceed the appropriation target. • All fixed expenditures should be included in the budget. Fixed expenditures would include such items as contracts and salaries at current levels. • All government projects directed by higher authority should be included in the budget in their entirety. • The controller’s staff consolidates the budget requests from the various departments into a master budget submission for the entire division. • Upon final budget approval by the legislature, the controller’s staff allocates the appropriation to the various departments on instructions from the division manager. However, a specified percentage of each department’s appropriation is held back in anticipation of budget cuts and special funding needs. The amount and use of this contingency fund is left to the discretion of the division manager. • Each department is allowed to adjust its budget when necessary to operate within the reduced appropriation level. However, as stated in the original directive, specific projects authorized by higher authority must remain intact. • The final budget is used as the basis of control. Excessive expenditures by account for each department are highlighted on a monthly basis. Department managers are expected to account for all expenditures over budget. Fiscal responsibility is an important factor in the overall performance evaluation of department managers. Riley believes his policy of allowing the department managers to participate in the budgetary process and then holding them accountable for their performance is essential, especially during times of limited resources. He further believes that the department managers will be positively motivated to increase the efficiency and effectiveness of their departments because they have provided input into the initial budgetary process and are required to justify any unfavorable performances. Required: 1. Describe several operational and behavioral benefits that are generally attributed to a participative budgetary process. 2. Identify at least four deficiencies in Jack Riley’s participative policy for planning and performance evaluation purposes. For each deficiency identified, recommend how it can be corrected.
> Refer to the data in the preceding exercise. Draw diagrams depicting the direct-material and direct-labor variances similar to the diagrams in Exhibits 10–2, 10–3 , and 10–4 . Exhibit 10-2: Exhibit 1
> Information taken from Ticonderoga Paper Company’s records for the most recent year is as follows: Direct material used ................................................... $203,000 Direct labor ..................................................
> During April, Dryden Company’s material purchases amounted to 6,500 pounds at a price of $7.40 per pound. Actual costs incurred in the production of 2,000 units were as follows: Direct labor: $118,035 ($18.30 per hour) Direct material: $31,820 ($7.40 per
> Refer to your answer for Exercise 10–31. Set up T-accounts, and post the journal entries to the general ledger.
> MacGyver Corporation manufactures a product called Miracle Goo, which comes in handy for just about anything. The thick tarry substance is sold in six-gallon drums. Two raw materials are used; these are referred to by people in the business as A and B. T
> Metro Fashions, Inc., manufactures women’s blouses of one quality, which are produced in lots to fill each special order. Its customers are department stores in various cities. Metro Fashions sews the particular stores’
> Briefly describe three issues that create special challenges for multinational firms in preparing their budgets.
> List the steps you would go through in developing a budget to meet your college expenses.
> Discuss this comment by a small-town bank president: “Budgeting is a waste of time. I’ve been running this business for 40 years. I don’t need to plan.”
> Why is participative budgeting often an effective management tool?
> Define the term budgetary slack, and briefly describe a problem it can cause.
> Discuss the importance of predictions and assumptions in the budgeting process.
> Pinellas Pillow Company’s planned production for the year just ended was 10,000 units. This production level was achieved, but only 9,000 units were sold. Other data follows: Direct material used ........................................... $80,000 Direct
> How can a company’s board of directors use the budget to influence the future direction of the firm?
> Give three examples of how the city of Boston could use a budget for planning purposes.
> How does e-budgeting make use of the Internet?
> How does activity-based budgeting explain the logic of budgeting?
> What is meant by the term operational budgets? List three operational budgets that would be prepared by Cook County Hospital in Chicago.
> Give an example of how general economic trends would affect sales forecasting in the airline industry
> Draw a flowchart similar to the one in Exhibit 9–1 for a service station. The service station provides automotive maintenance services in addition to selling gasoline and related products. Exhibit 9-1: Sales Sales of Services or Go
> Explain what a master budget is, and list five of its parts.
> Use an example to explain how a budget could be used to allocate resources in a university.
> What are the primary differences in budgeting between manufacturing and nonmanufacturing firms?
> Visit the website for one of the following companies, or a different company of your choosing. Coca-Cola www.cocacola.com Bridgestone www.bridgestonetire.com Motorola www.motorola.com/us/consumers/home Casio www.casio.com Toyota www.toyota.com Xerox Corp
> “We really need to get this new material-handling equipment in operation just after the new year begins. I hope we can finance it largely with cash and marketable securities, but if necessary we can get a short term loan down at MetroBa
> Fit-for-Life Foods Inc., a manufacturer of breakfast cereals and snack bars, has experienced several years of steady growth in sales, profits, and dividends while maintaining a relatively low level of debt. The board of directors has adopted a long-run s
> Vancouver Consulting Associates, a division of Maple Leaf Services Corporation, offers management and computer consulting services to clients throughout Canada and the northwestern United States. The division specializes in website development and other
> Edgeworth Box Corporation manufactures two types of cardboard boxes used in shipping canned food, fruit, and vegetables. The canned food box (type C) and the perishable food box (type P) have the following material and labor requirements. The unit produ
> Condor Corporation manufactures two different types of coils used in electric motors. In the fall of the current year, the controller compiled the following data • Sales forecast for 20x3 (all units to be shipped in 20x3): â€
> Continental Security Systems, Inc. (CSSI), manufactures and sells security systems. The company started by installing photoelectric security systems in offices and has expanded into the private-home market. CSSI has a basic security system that has been
> Dakota Fan, Inc., manufactures an inexpensive household fan that it sells to retailers for $20 per unit. All sales are on account, with 40 percent of sales collected in the month of sale and 60 percent collected in the following month. The data that foll
> School Days Furniture, Inc., manufactures a variety of desks, chairs, tables, and shelf units which are sold to public school systems throughout the midwest. The controller of the company’s Desk Division is currently preparing a budget
> Eastern State University (ESU) is preparing its master budget for the upcoming academic year. Currently, 12,000 students are enrolled on campus; however, the admissions office is forecasting a 5 percent growth in the student body despite a tuition hike t
> Niagra Chemical Company produces three products using three different continuous processes. The products are Yarex, Darol, and Norex. Projected sales in gallons for the three products for the years 20x2 and 20x3 are as follows: • Becau
> Information taken from Collegiate Sporting Goods Company’s records for the most recent year is as follows: Direct material used ..................................................... $272,000 Direct labor ........................................
> Shady Shades, Inc., manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the company’s master budget. In compiling the budget data for 20x1, Demarest has learned that new automated produc
> Sophisticates, Inc., a distributor of jewelry throughout California, is in the process of assembling a cash budget for the first quarter of 20x1. The following information has been extracted from the company’s accounting records: â
> Splendid Stereo, Inc., is a large retailer of stereo equipment. The controller is about to prepare the budget for the first quarter of 20x5. Past experience has indicated that 75 percent of the store’s sales are cash sales. The collecti
> Tanya Williams is the new accounts manager at East Bank of Mississippi. She has just been asked to project how many new bank accounts she will generate during 20x5. The economy of the county in which the bank operates has been growing, and the bank has e
> Village Hardware is a retail hardware store. Information about the store’s operations follows. • November 20x4 sales amounted to $400,000. • Sales are budgeted at $440,000 for December 20x4 and $400,0
> The following information is from White Mountain Furniture Showroom’s financial records. Collections from customers are normally 70 percent in the month of sale, 20 percent in the month following the sale, and 9 percent in the second m
> Alder Company budgets on an annual basis. The following beginning and ending inventory levels (in units) are planned for the next year. Two units of raw material are required to produce each unit of finished product Required: 1. If Alder Company plans t
> Fill in the missing amounts in the following schedules. 2. Accounts payable, 12/31/x0 ................................................ €600,000‡ Purchase of goods and services on account during 20x1 .. 2,400,000 Payme
> Coyote Loco, Inc., a distributor of salsa, has the following historical collection pattern for its credit sales. 70 percent collected in the month of sale. 15 percent collected in the first month after sale. 10 percent collected in the second month after
> San Fernando Fertilizer Company plans to sell 40,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month’s esti
> Sea Star Company manufactures diving masks with a variable cost of $12.50. The masks sell for $17.00. Budgeted fixed manufacturing overhead for the most recent year was $396,000. Actual production was equal to planned production. Required: Under each o
> Three Rivers Dental Associates (TRDA) is a large dental practice in Pittsburgh. The firm’s controller is preparing the budget for the next year. The controller projects a total of 48,000 office visits, to be evenly distributed throughout the year. Eighty
> Jay Rexford, president of Photo Artistry Company, was just concluding a budget meeting with his senior staff. It was November of 20x4, and the group was discussing preparation of the firm’s master budget for 20x5. “I&a
> Triple-F Health Club (Family, Fitness, and Fun) offers tennis, swimming, and other physical fitness facilities to its members. There are four of these clubs in the metropolitan area. Each club has between 1,700 and 2,500 members. Revenue is derived from
> Define the following types of environmental costs: private, social, visible, hidden, monitoring, abatement, and both on-site and off-site remediation.
> What is meant by a product’s grade, as a characteristic of quality? Give an example in the service industry.
> What is the purpose of a budget manual?
> Describe the role of a budget director
> Why do proponents of variable costing prefer variable costing when making pricing decisions?
> Explain the difference between observable and hidden quality costs
> What manager is usually in the best position to influence the direct-material price variance?
> Choose a city or state in the United States (or a Canadian city or province), and use the Internet to explore the annual budget of the governmental unit you selected. For example, you could check out the budget for Los Angeles at www.losangeles.com . Alt
> Explain why some management accountants believe that absorption costing may provide an incentive for managers to overproduce inventory.
> Why do many managers prefer variable costing over absorption costing?
> What is meant by the phrase management by exception?
> List the three parts of a control system, and explain how such a system works.
> Explain how a budget facilitates communication and coordination.
> Briefly explain the difference between absorption costing and variable costing
> List four potential pitfalls in decision making, which represent common errors.
> What is meant by the term contribution margin per unit of scarce resource?
> List and define four types of product quality costs.
> Are allocated joint processing costs relevant when making a decision to sell a joint product at the split-off point or process it further? Why?
> What is meant by the term differential cost analysis?
> How does the existence of excess production capacity affect the decision to accept or reject a special order?
> Give an example of an irrelevant future cost. Why is it irrelevant?
> Explain why the book value of equipment is not a relevant cost.
> Explain what is meant by the term decision model.
> Distinguish between qualitative and quantitative decision analyses.
> Describe the managerial accountant’s role in the decision-making process.
> List the seven steps in the decision-making process
> Visit the website of one of the following companies, or a different company of your choosing. Burger King www.burgerking.com Compaq www.compaq.com Corning www.corning.com Kmart www.kmart.com Kodak www.kodak.com NBC www.nbc.com Required: Read about the
> Explain how the accounting definition of an asset is related to the choice between absorption and variable costing.
> Explain the significance of excess capacity in the transferring division when transfer prices are set using the general transfer-pricing rule.
> How do organizations use pay for performance to motivate managers?
> What is the managerial accountant’s primary objective in designing a responsibility-accounting system?
> Give an example of a gain sharing plan that could be implemented by an airline.
> Define the term manufacturing cycle efficiency.
> List seven areas in which nonfinancial, operational performance measures are receiving increased emphasis in today’s manufacturing environment.
> List and explain three key features of the segmented income statement shown in Exhibit 12–7. Exhibit 12–7: Segment of Company Segment of Oahu Division Aloha Hotels Maul Oahu Walmea Beach Dlamond Head Walkiki Sands
> Why do some managers and accountants choose not to allocate common costs in segmented reports?
> Explain what is meant by a segmented income statement.
> Under what circumstances would it be appropriate to change the Waikiki Sands Hotel from a profit center to an investment center?
> Which is more consistent with cost-volume-profit analysis, variable costing or absorption costing? Why
> Refer to the information given in Case 2 for Huron Chalk Company. Selected information from Huron’s year-end balance sheets for its first two years of operation is as follows: Information in case 2: Huron Chalk Company manufactures sid
> Data Screen Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total co
> What types of organizations use flexible budgets?
> What is the fixed-overhead budget variance?
> Jeffries Company’s only variable-overhead cost is electricity. Does an unfavorable variable-overhead spending variance imply that the company paid more than the anticipated rate per kilowatt-hour
> Explain the advantage of using a flexible budget.
> Distinguish between static and flexible budgets.
> Describe five factors that managers often consider when determining the significance of a variance.
> Refer to Review Question 10–11. Why does an analogous question not arise in the context of the direct-labor variances?
> What manager is generally in the best position to influence the direct-labor efficiency variance?
> What is the interpretation of the direct-labor efficiency variance?
> Why do proponents of absorption costing argue that absorption costing is preferable as the basis for pricing decisions?
