Participative Budget

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Managerial Accounting – In Class Notes – Chapter 9

1. How does a budget relate to the three management functions (planning, directing/motivating, and control)?

▪ Planning – Budget is management’s plan for a specific period expressed in financial terms. ▪ Directing – Budget is primary way to communicate agreed-upon objectives to all parts of company ▪ Motivating – Budget may inspire higher levels of performance or discourage additional effort ▪ Control – Budget is an important basis for performance evaluation once adopted, it also assesses success of company’s operations

2. What are the benefits of budgeting?

1. Requires all levels of management to plan ahead.
2. Provides definite objectives for evaluating performance at each level of responsibility. 3. Creates an early warning system for potential problems (control). 4. Motivates personnel throughout the organization to meet planned objectives. 5. Facilities coordination of activities within the organization. 6. Results in greater management awareness of entity’s overall operations and their relationship to external factors such as the economy.

3. How does budgeting differ from long-range planning?

Budget more detail oriented and focused on short term goals – (vs. long term goals and strategies to achieve)

4. What is participative budgeting? What are the advantages and disadvantages?

Each level of management participates in budgeting process. Advantages:
← More accurate budget estimates since low level managers have more detailed knowledge of their areas ← Perceived as fair due to involvement of lower level management Disadvantages:

← Time consuming and costly
← May foster budgetary “gaming” through budgetary slack

5. What is a master budget?

Set of interrelated budgets that constituting management’s plan of action.

6. What are the components of the master budget and how are they related?

Sales budget drives production budget which drives operating budgets (DM, DL, and MOH budgets), selling & administrative budget, budgeted income statement, and financial budgets (capital expenditure, cash budget, and balance sheet).

7. How does management make its sales forecast?

Previous market share, Anticipated advertising and promotion, General economic conditions, Industry trends, Market research studies, Price changes, Technological developments, Managerial Accounting – In Class Notes – Chapter 9

1. How does a budget relate to the three management functions (planning, directing/motivating, and control)?

2. What are the benefits of budgeting?

3. How does budgeting differ from long-range planning?

4. What is participative budgeting? What are the advantages and disadvantages?

5. What is a master budget?

6. What are the components of the master budget and how are they related?

7. How does management make its sales forecast?

Managerial Accounting – In Class Problems – Chapter 9

1. K2 produces and sells snowboards. Its estimated quarterly sales for 2006 are as follows:

QuarterSales in Units
1. 350,000
2. 250,000
3. 50,000
4. 400,000

K2 expects a 12/31/05 inventory of 100,000 snowboards. Management likes to keep an ending inventory of 30% of next quarter’s sales and estimated 1st quarter sales in 2007 are 400,000 units). Prepare a quarterly production budget for 2006.

2. Zoo Doo Company produces and sells sculpted manure/fertilizer with the marketing slogan “You’re going to love this crap.” Zoo Doo’s quarterly production budget for 2006 shows required production of 25,000 bags in the 1st quarter, 50,000 bags in 2nd, 40,000 bags in the 3rd, and 30,000 bags in the 4th. Each bag requires 50 pounds of manure...
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