Question Bank for the End-term Question 6-1: What are the four elements of the budgeting cycle?

Answer The budgeting cycle includes the following elements: a. Planning the performance of the company as a whole as well as planning the performance of its subunits. Management agrees on what is expected. b. Providing a frame of reference, a set of specific expectations against which actual results can be compared. c. Investigating variations from plans. If necessary, corrective action follows investigation. d. Planning again, in light of feedback and changed conditions. Question 6-2: Define master budget. Answer The master budget expresses managements operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period. Question 6-3: Strategy, plans, and budgets are unrelated to one another. Do you agree? Explain. Answer Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans. Question 6-4: Budgeted performance is a better criterion than past performance for judging managers. Do you agree? Explain. Answer We agree that budgeted performance is a better criterion than past performance for judging managers, because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets. Question 6-5: Production managers and marketing managers are like oil and water. They just dont mix. How can a budget assist in reducing battles between these two areas? Answer Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: Communication. Marketing could share information about seasonal demand with production. Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer. Question 6-6: Budgets meet the cost benefit test. They force managers to act differently Do you agree? Explain. Answer In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test. Question 6-7: Define rolling budget. Give an example. Answer A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2011 is superseded by a four-quarter rolling budget for April 2011 to March 2012, and so on.

Question 6-8: Outline the steps in preparing an operating budget. Answer The steps in preparing an operating budget are as follows: 1. Prepare the sales/revenues budget 2. Prepare the production budget (in units) 3. Prepare the direct material usage budget and direct material purchases budget 4. Prepare the direct manufacturing labor budget 5. Prepare the manufacturing overhead budget 6. Prepare the ending inventories budget 7. Prepare the cost of goods sold budget 8. Prepare the nonmanufacturing costs budget 9. Prepare the budgeted income statement Question 6-9: The sales forecast is the cornerstone for budgeting. Why? Answer The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales. Question 6-11: Define kaizen budgeting. Answer Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers. Much of the cost reduction arises from many small improvements rather than large one time improvements. Most of the improvements come from employee suggestions. Many companies like Toyota in Japan, GE in USA use Kaizen Budgeting to reduce costs and create a culture where employee suggestions are valued, recognized, and rewarded. Question 6-13: Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior. Answer The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the managers behavior. For example, if a revenue cent er is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise. Question 6-14: What are some additional considerations that arise when budgeting in multinational companies? Answer Budgeting in multinational companies may involve budgeting in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareholders, by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates, and where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations. In developing budgets for operations in different countries, they must also have good understanding of political, legal and economic issues in those countries. Question 6-15: Cash budgets must be prepared before the operating income budget . Do you agree? Explain. Answer No. Cash budgets and operating income budgets must be prepared simultaneously. In preparing their operating income budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the companys operating income goals.

Question 7-1: What is the relationship between management by exception and variance analysis? Answer Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely an area is not operating as expected. Question 7-3: Distinguish between a favorable variance and an unfavorable variance. Answer A favorable variancedenoted Fis a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variancedenoted Uis a variance that has the effect of decreasing operating income relative to the budgeted amount. Question 7-4: What is the key difference between a static budget and a flexible budget. Answer The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period. Question 7-6: Describe the steps in developing a flexible budget. Answer The steps in developing a flexible budget are: Step 1: Identify the actual quantity of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs. Question 11-14: Describe the three steps in solving a linear programming problem. Answer The three steps in solving a linear programming problem are (i) Determine the objective function. (ii) Specify the constraints. (iii) Compute the optimal solution. Question 12-6: What is the target cost per unit? Answer A target cost per unit is the estimated long-run cost per unit of a product (or service) that, when sold at the target price, enables the company to achieve the targeted operating income per unit. Question 12-7: Describe value engineering and its role in target costing. Answer Value engineering is a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costs while satisfying customer needs. Value engineering via improvement in product and process designs is a principal technique that companies use to achieve target cost per unit. Value engineering in short, breaks down every component to its core and keeps only the parts that are integral to functionality, safety, or what a customer will pay for. A company can have a basic, step-up, and premium addition, but everything must be appropriated. Value engineering aims to reduce nonvalue-added costs and also seeks to reduce value-added costs by achieving greater efficiency in value-added activities. Question 12-8: Give two examples of a value-added cost and two examples of a nonvalue-added cost. Answer A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service. Examples are costs of materials, direct labor, tools, and machinery. A nonvalue-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service. Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown maintenance.

Long Question/Answers Q1: DEFINE MASTER BUDGET AND EXPLAIN HOW ONE CAN BUILD THE MASTER BUDGET? Answer: The master budget expresses managements operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. A master budget can be divided into: o Operating budgets, which outline the income-generating activities of a firm (sales, production, purchase, administration and marketing). The outcome of the operating budgets is a budgeted income statement. o Financial budgets, which outline the inflows and outflows of cash and the financial position. The outcome of the financial budgets includes a cash budget, capital expenditure budget and a budgeted balance sheet. Procedure for making master budget: The president or CEO calls a meeting of the management team to determine the Corporate Strategy. The budget coordinator/ committee (normally accounting people) have to prepare the budget; normally the budget coordinator takes following steps: 1. Review the long term plans, short term plans and policy guidelines about the future plans/ strategy. 2. Ask/help marketing department for revenue projections. The sales forecast is the basis for all of the other operating budgets and most of the financial budgets. Thus, it is important to have accurate sales forecasts. 3. Ask/help other departments (Production/ Operations, Purchase, Administration, Finance, Human Resources, IT, and Marketing) to write a plan for the upcoming activities of their departments; particularly ask for any capital expenditure requirements. 4. Review the last budget and actual financial results, the previous years expenditure level can be taken as a base. 5. Gather the budget of various departments and make the budgeted income statement. 6. Make cash budget, capital expenditure budget and budgeted balance sheet. 7. Schedule a budget review meeting and take the approval of the budget committee. 8. Present it before the board of director or top management. After approval of the Master Budget, various functional budgets are sent to the concerned departments, so that, they can plan their working according to their budgets.

Q2: DEFINE BUDGET AND LIST SOURCES OF DATA FOR BUDGETING. Answer: A budget (from old French baguette, purse) is the quantitative expression of a managements plan for the future where we list of all planned expenses and revenues. The primary sources of data that are used to create budgets include: 1. Historical Data Based on their knowledge of coming events, managers can use historical data from similar previous situations to predict costs. 2. Sales Forecasts The accuracy of the sales forecast can be improved by: o Considering the principal budget factor like general economic climate, low demand of the product, shortage of raw material, plant capacity, shortage of skilled labour, shortage of efficient managers, shortage of funds, competition, advertising, and pricing policies. o Using formal approaches, such as time-series analysis, correlation analysis, econometric modeling, and industry analysis. 3. Forecasting Other Variables o Costs and cash-related items are critical. o Many of the same factors considered in sales forecasting apply to cost forecasting.

Q3: DEFINE TARGET COSTING? DESCRIBE THE FEATURES OF TARGET COSTING. Answer: Target costing is a systematic approach to determining the cost at which a proposed product with specified functionality and quality must be produced, to generate a desired level of profitability at its anticipated selling price. Working backward from the sales price, companies establish an acceptable target profit and calculate the target cost as follows: Target Price - Target profit = Target Cost The main features/ practices followed in Target Costing are: Step 1 2 3 4 5 Description Develop a product that statistics the needs of potential customers. Choose a target price based on customer's perceived value for the product and the prices competitors charge. Derive a target cost by subtracting the desired profit margin from the target price. Estimate the actual cost of the product. If estimated actual cost exceeds the target cost, investigate ways of driving down the actual cost to the target cost.