Management accounting 6th edition ch10 SM PDF

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Management accounting 6th edition solution manual for all exercises and problems at the end of each chapter. uploaded by AHM...

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Chapter 10 Using Budgets to for Planning and Coordination

QUESTIONS 10-1 A budget is a quantitative model of the expected consequences of the organization’s short-term operating activities. A budget typically expresses the expected money inflows and outflows in order to assess whether the planned operations will meet the organization’s financial objectives. 10-2 Flexible resources are those that vary with the activity level of the firm or organization. Those that do not change with the activity level are capacity-related (or committed or fixed resources). 10-3 Yes, a spending plan is a budget since it provides a summary, in financial terms, of the student’s spending intentions. 10-4 In many ways the goal of a family budget is quite similar to the goal of a budget developed for an organization. In these settings, the goal is to help both families and organizations achieve their objectives by allocating their resources wisely. Organizational budgets usually differ from family budgets in sheer size (the dollar amounts proposed), scope (the number of operating units and their goals), and number of iterations (submission and resubmissions of budgets) before the final budget is determined. 10-5 A production plan is an exhibit that identifies proposed production during an interval of time, such as a week or a month. A production plan in a courier company identifies the number of drivers and trucks needed and assigns drivers and trucks to routes. 10-6 Financial budgets represent projected financial results for an organization. Such budgets include a statement of expected cash flows, projected balance sheet, and a projected income statement. These are often called pro forma financial statements. Operating budgets are plans used to guide the operations of the – 393 –

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organization. Such plans include sales, capital spending, production, materials purchasing, labor hiring and training, and administrative and discretionary spending plans. 10-7 You should not jump to the conclusion that the university’s hiring and training plan is likely to be more important because it hires skilled rather than unskilled labor. A number of factors determine the importance of a labor hiring and training plan in any organization. However, the two most important are likely the amount of employee turnover that requires replacement and the amount of ongoing retraining that the organization must provide. If the university has reached relatively stable employment, the labor hiring and training plan would be relatively unimportant since university faculty members are expected to attend to their own training. If the municipality is continuously hiring new employees or retraining existing employees to use equipment, it will have a continuous need for a hiring and training plan. 10-8 The sales plan is based on the demand forecast. The numbers in the demand forecast must not be less than the numbers in the sales plan. Otherwise the sales plan is infeasible because it calls for selling more than customers will buy. 10-9 A demand forecast is an estimate of the number of units that customers would be willing to buy under specified conditions. The intended sales in the sales plan, a crucial component of the master budget process, cannot exceed the numbers in the demand forecast. Thus, the demand forecast is used to develop the sales plan. 10-10 Yes. Employee training does not have a physical relationship with the organization’s activity level. (However, employee training should enhance performance potential, supporting achievement of an organization’s strategy.) 10-11 A capital spending plan summarizes an organization’s plans to acquire or sell longterm capital investments, such as buildings and equipment, that are needed to meet the organization’s objectives. 10-12 A capacity-related expenditure is any expenditure that an organization cannot avoid in the short-run. A payment on a long-term lease is a capacity-related expenditure. 10-13 This is a tricky question. If the cafeteria is committed to preparing a given amount of food for each student in the residence, whether the student shows up for meals or not, the food cost is a capacity-related (fixed) cost. However, if the cafeteria only prepares enough food for students who, on average, actually show up to eat, the food cost is a variable cost. – 394 –

Chapter 10: Using Budgets for Planning and Coordination

10-14 A defining characteristic of a flexible resource is one where you only pay for what you use. Flexible resources can be acquired or disposed of in the short run based on the number of output units. We usually assume that materials costs are variable (flexible) because we can always carry materials until we use them. However, if an organization pays a set amount for materials, no matter how much it uses, the materials cost is a capacity-related (fixed) cost. A store that buys merchandise may consider merchandise, or materials costs, a capacity-related resource because it is unable to carry merchandise indefinitely or return unused merchandise—but this is stretching the idea of a capacity-related resource. 10-15 A line of credit is a short-term financing arrangement made between an organization and a financial institution. A line of credit provides an organization with a ready supply of cash, up to a limit negotiated between the organization and its bank. We can think of a line of credit as a commitment from a financial institution to allow the debtor to borrow money on demand up to a specified maximum amount. 10-16 Planners use budget information for the following purposes: (1) Identify broad resource requirements. This helps develop plans to put needed resources in place. (2) Identify potential problems. This helps to avoid problems or to deal with them systematically. (3) Compare projected operating and financial results to actual results. These comparisons within an organization can be used to evaluate the efficiency of the organization’s operating processes. 10-17 Both what-if and sensitivity analyses use the same model to evaluate future alternatives. However, the approaches differ in their purposes. What-if-analysis is a process that uses a model to predict the results of varying that model’s key parameters or estimates. Sensitivity analysis is the process of selectively varying key estimates of a plan or a budget to identify over what range a decision option is preferred. In this way, sensitivity analysis enables planners to identify estimates critical to the decision under consideration. What-if-analysis relies on that model tested via sensitivity analysis. 10-18 A variance is a difference between an actual amount and a planned (budgeted) amount. The oil pressure warning light comes on in a car when the oil pressure falls outside a specified planned or expected range. 10-19 Analysis of reasons for the variance between actual and estimated job costs can help managers in several ways. If the managerial actions that led to actual costs being lower than the estimated costs are identified, similar cost savings can be – 395 –

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realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in revising standards for future variance analyses and in bidding for jobs in the future. 10-20 A flexible budget presents cost targets or forecasts for the organization’s achieved level of activity. 10-21 The first level of variance analysis for a cost item focuses on the differences between actual and estimated (master budget) costs for the item. The second level of variance analysis decomposes the first-level variances into a flexible budget variance and a planning variance. The flexible budget variance is the difference between actual costs and flexible budget costs, which reflect the volume level achieved, rather than planned. The planning variance is the difference between flexible budget costs and master budget costs. For variable costs, the third level of variance analysis decomposes the flexible budget component of the second level variance into efficiency (use) and price (rate) variances. 10-22 By classifying flexible budget variances into rate (price) and efficiency (quantity) variances, managers can better understand the factors causing those variances and correct the standards or institute changes that help reduce expenses. 10-23 Yes. The labor efficiency variance will likely be favorable because fewer (actual) hours will be required for a job when experienced workers work on the job. The labor rate variance, however, will likely be unfavorable because experienced workers’ wages will be higher than those of less experienced workers. 10-24 The purchase and use of cheaper, lower-quality materials is likely to result in a favorable material price variance, an unfavorable material quantity variance, and an unfavorable labor efficiency variance, but the labor rate variance is not likely to be affected. 10-25 The first step isolates the effect of sales volume differences by computing sales mix variances and sales quantity variances, and the second step isolates the effect of sales price differences by computing sales price variances. 10-26 An appropriation is a planned cash outflow or spending plan. In a government agency, it is an authorized spending limit. An example of an appropriation in a university is an authorization for a faculty to spend a specified amount of money on student entrance scholarships. – 396 –

Chapter 10: Using Budgets for Planning and Coordination

10-27 A periodic budget is a budget that is prepared for a fixed interval of time, usually one year. After the period of time has elapsed, the budget is discarded. 10-28 This is called incremental budgeting because spending allocations for this period are proportional adjustments of last period’s spending allocations. 10-29 This is called zero-based budgeting because each year the charities to which you donate must reestablish their need. 10-30 Critics argue that the traditional budgeting process (1) reflects a top-down approach to organizing that is inconsistent with the need to be flexible and adapt to changing organization circumstances; (2) focuses on controls (such as meeting the target budget) rather than on helping the organization achieve its strategic objectives; and (3) causes resource allocations to be driven by political power in the organization rather than strategic needs. 10-31 The beyond budgeting approach differs in two fundamental ways from traditional budgeting. First, traditional budgets are based on fixed annual plans that tie managers to predetermined actions. In the Beyond Budgeting approach targets are developed based on stretch goals tied to peers, competitors, and key global benchmarks. These targets are reviewed and modified if necessary and managers are more motivated to achieve these goals since the goals represent measures that link directly to the competition rather than an internal artificial goal. Second, the Beyond Budgeting model provides a more decentralized way of managing. Rather than relying on traditional hierarchical and centralized management, managers are much more accountable to their teams and workgroups since the targets directly pertain to what they are doing. This provides everyone with a more direct sense of responsibility and is more motivating.

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EXERCISES 10-32 If the organization solicits the information from the sales force, salespeople will be motivated to understate sales potential in order to set low hurdles for commissionable sales. Other approaches include using estimates based on market surveys conducted by a drug industry association or other research group, and using statistical models to identify a relationship between future sales and current sales or trends in disease. 10-33 The primary purpose of budgets is for planning. Problems are created when budgets are used after the fact for control. For example people whose performance will be compared to the budget targets may understate their potential in order to have achievable targets set. Therefore, tying plans to after-the-fact control compromises the integrity of the information gathering process. Some people have argued that information used for planning should not be used in after the fact control. (Standards for after the fact control could, instead, be based on independent benchmark information or improvements on previous performance.) Some organizations have designed incentive schemes that reward people jointly on their ability to improve performance and to meet budget projections. 10-34 Wages paid to graders are controllable in the short-term if the wages are based purely on the number of hours worked. The wages paid to lecturers who are hired to teach for a semester are controllable in the intermediate-term because there is no commitment to the lecturers beyond the end of the semester. The wages paid to full-time faculty are only controllable in the long-term since most faculty members are on long-term or permanent contracts. Because of the nature of full-time staff teaching contracts, universities are notoriously inflexible as student demands for programs and courses change. 10-35 Many organizations are run by the numbers. In these organizations managers are held accountable for financial results. Therefore, their interest tends to focus on projections of financial results and they judge the desirability of a set of operating strategies based on the financial results projected for those strategies. 10-36 A consulting company is an organization that uses highly trained people to deliver complex and customized products to its customers. This organization might be experiencing a continuous need to hire and train personnel who can provide the services that customers require. A planning process allows this organization to anticipate the type and quantity of skills it will require and will allow it to develop a hiring and training plan that will provide the people it needs at a minimum cost.

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Chapter 10: Using Budgets for Planning and Coordination

10-37 The vegetable canner acquires and packs its products over a very short period of time following the growing seasons. Therefore, inventory levels will be cyclical, building up after the growing season and declining until the end of the next growing season. The organization will have to plan to acquire the funds it needs to meet this need for a cyclical investment in inventory. 10-38 The credit granting policy is an important component of the organization’s selling strategies. Tightening or eliminating credit terms might reduce sales. On the other hand, tightening credit terms should speed cash collections and might decrease the bad debts expense and reduce the opportunity cost of the accounts receivable loans to customers. The organization’s planners must balance the benefits of reduced bad debts expense and the opportunity costs of lending with the profit on lost sales that might result from reducing credit terms. 10-39 A machine shop might accept and complete thousands of small jobs each year. Because of the problems and errors in determining profits from individual small jobs, this organization might want to compare its overall levels of efficiency with those of its competitors by comparing its projected financial results with those of its toughest competitors. Costs that are out of line with those of competitors would be flagged and plans developed to improve the performance of activities that created those costs. 10-40

Units Sales Desired ending inventory Needs Beginning inventory Purchases

40,000 5,000 45,000 6,000 39,000

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10-41 (a) Production Budget

January

February

Sales of G12

50,000

60,000

Desired ending inventorya

15,000

13,500

Needs

65,000

73,500

Beginning inventoryb

12,500

15,000

Production

52,500

58,500

a

b

March 54,000

25% of next month’s sales. For January, 25% × 60,000 = 15,000; for February, 25% × 54,000 = 13,500 25% of current month’s sales. For January, 25% × 50,000 = 12,500; for February, 25% × 60,000 = 15,000

(b) Purchases Budget

January

February

Units to be produced Raw materials needed per unit

52,500 0.5

58,500 0.5

Total production needs

26,250

29,250

2,925

2,025

Total material needs

29,175

31,275

Beginning inventoryb

2,625

2,925

26,550

28,350

Desired ending inventorya

Total material purchases a

10% of next month’s needs. For January, 10% × 29,250 = 2,925; for February, 10% × 20,250 = 2,025 b 10% of current month’s needs. For January, 10% × 26,250 = 2,625; for February, 10% × 29,250 = 2,925

10-42 (a)

Let Q = sales level in units at which the costs are the same with both machines. ($44 × Q) + $32,000 = ($40 × Q) + $40,000 $4Q = 8,000 Q = 2,000 units

(b)

Let R = sales level in dollars at which the use of the new machine results in a 10% profit on sales ratio.

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Chapter 10: Using Budgets for Planning and Coordination

Let Q be the corresponding number of units, so that R = $55 × Q

10-43 The most critical estimates are the demand estimates because they provide the basis upon which all the other plans are based. Other critical estimates are those relating to the consumption of each factor of production (such as raw materials, labor, and machine capacities) by each unit of production since these estimates will play an important role in estimating total resource requirements and estimating costs. 10-44 No. Incremental budgeting does not ensure that resources are best allocated. Some university units (such as departments or colleges) may have major inefficiencies and budgetary slack where other units may have already made process improvements and have few inefficiencies and relatively little budgetary slack. Moreover, some units may be seriously underfunded relative to the trend in demand where other units may be overfunded relative to the trend in demand. 10-45 (a)

Because the quantity purchased differs from the quantity used, the material price variance uses the purchased quantity (PQ) instead of the quantity used (AQ). Material price variance = (AP – SP) × PQ = ($2.50 – 2.20) × 12,000 = $3,600 U

(b)

Material quantity variance = (AQ – SQ) × SP = (10,500 – (20 × 500)) × $2.20 = $1,100 U

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(d)

Direct labor efficiency variance = (AH – SH) × SR = (1,800 – (4 × 500)) × $10 = $2,000 F

10-46 (a) (b)

Direct material quantity variance = (AQ − SQ) × SP = (2,800 − (5 × 500)) × $2 = $600 U

(c)

A favorable labor efficiency variance of $100 for job 822 implies that (AH – 2 × 500) × $10 = –100. Therefore,

(d)

.

An unfavorable labor rate variance of $250 for job 822 implies that (AR – 10) × 990 = 250. Therefore, . Finally, the actual direct labor costs incurred for Job 822 are: (rounded).

10-47 (a)

Material price variance = (AP – SP) × AQ = ($97 – 100) × 40,000 = $120,000 F

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Chapter 10: Using Budgets for Planning and Coordinat...