Profit Planning and Budgeting

Topics: Variable cost, Budget, Costs Pages: 31 (5710 words) Published: October 16, 2011


Questions, Exercises, Problems, and Cases: Answers and Solutions

9.1See text or glossary at the end of the book.

9.2A cost center is a responsibility center in which management is responsible only for costs. In a profit center, management is responsible for both costs and revenues.

9.3An investment center is a responsibility center in which management is responsible for managing costs, revenues, and assets. A profit center is not responsible for assets.

9.4Input/output relationships are not well defined in discretionary cost centers. Evaluation of such centers from accounting data is difficult and requires managerial judgment.

9.5a.Program or course director; possibly the instructor.

b.Manager of the print department.

c.Dean of the business school.

d.Dean of the business school and/or finance department chairperson.

9.6General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, safety concerns, and income levels affect the extent to which the general public travels by air.

9.7The sales manager's reward is based on sales dollars; it isn't surprising the sales manager is concerned with revenues. If the company is concerned about profits, their commission should be based on a percentage of the profits generated by their sales as an incentive for the sales force to sell more high-profit items.

9.8The flexible budget and master budget serve two different purposes. The master budget is a planning device, while the flexible budget is a control device. The master budget is the benchmark, or goal, based on all the information available at the time of preparation. It gives the profit goal for the 9.8 continued.

upcoming period, based on an estimated level of activity. Although the firm may aim for that estimated level of activity, it may achieve above or below it. The flexible budget is then used to determine what revenues and costs should have been, given the actual activity level attained for the period. The use of a flexible budget allows managers to separate volume variances from those due to differences in unit selling prices, unit variable costs, and fixed costs from the master budget.

9.9Every firm has a constraining factor that determines the level of activity. For most firms the constraining factor is the anticipated level of sales. Once the level of sales is estimated, the production, marketing, and administration costs can be forecast. If a firm can sell all that it makes, then the constraining factor would be production, and one would start the budgeting process with the production budget.

9.10The master budget profit equals the flexible budget profit when the budgeted level of sales volume equals the actual level of sales volume.

9.11There is no difference between these two methods. In both cases the variances due to sales volume changes are calculated.

9.12Behavioral studies indicate that when the budget is an upper limit on expenditures, employees will have a strong incentive to create budget slack. Thus, in a governmental setting we would expect a strong incentive to overestimate costs to provide a cushion for future expenditures.

9.13In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal...
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