© The McGraw-Hill Companies, Inc., 2006. All rights reserved.Solutions Manual, Chapter 9 491
Solutions to Questions
A budget is a detailed plan outlining theacquisition and use of financial and other re-sources over a given time period. As such, itrepresents a plan for the future expressed informal quantitative terms. Budgetary controlinvolves the use of budgets to control the
activities of a firm.
1. Budgets provide a means of communicat-ing management’s plans throughout the organi-zation.2. Budgets force managers to think aboutand plan for the future.3. The budgeting process provides a meansof allocating resources to those parts of the or-ganization where they can be used most effec-tively.4. The budgeting process can uncover po-tential bottlenecks before they occur.5. Budgets coordinate the activities of theentire organization. Budgeting helps to ensurethat everyone in the organization is pulling inthe same direction.6. Budgets define goals and objectives thatcan serve as benchmarks for evaluating subse-quent performance.
Responsibility accounting is a system inwhich a manager is held responsible for thoseitems of revenues and costs—and only thoseitems—that the manager can control to a signifi-cant extent. Each line item in the budget ismade the responsibility of a manager who isthen held responsible for differences betweenbudgeted and actual results.
A master budget represents a summaryof all of management’s plans and goals for thefuture, and outlines the way in which theseplans are to be accomplished. The masterbudget is composed of a number of smaller,specific budgets encompassing sales, produc-tion, raw materials, direct labor, manufacturingoverhead, selling and administrative expenses,and inventories. The master budget generallyalso contains a budgeted income statement,budgeted balance sheet, and cash budget.
The level of sales impacts virtually everyother aspect of the firm’s activities. It deter-mines the production budgets, cash collections,cash disbursements, and selling and administra-tive budgets that in turn determine the cashbudget and budgeted income statement andbalance sheet.
No. Planning and control are different,although related, concepts. Planning involvesdeveloping objectives and formulating steps toachieve those objectives. Control, by contrast,involves the means by which management en-sures that the objectives set down at the plan-ning stage are attained.
The flow of information moves in twodirections—upward and downward. The initialflow should be from the bottom of the organiza-tion upward. Each person having responsibilityover revenues or costs should prepare thebudget data against which his or her subsequentperformance will be measured. As the budgetdata are communicated upward, higher-levelmanagers should review the budgets for consis-tency with the overall goals of the organizationand the plans of other units in the organization. Any issues should be resolved in discussionsbetween the individuals who prepared thebudgets and their managers. All levels of an organization should par-ticipate in the budgeting process—not just topmanagement or the accounting department.Generally, the lower levels will be more familiarwith detailed, day-to-day operating data, and for