1. (TCO 7) The first step in creating the master budget is the sales budget.

Describe this budget

and the information it includes. Why is the accuracy of the sales budget important? (Points : 20)

Sales budget comprises of quantity to be sold and the dollar value of quantity to be sold. If the
sales budget is not determined, then the other budget cannot be made. In deciding sales budget,
the demand and available capacity are the important factors, if company has capacity of 50000
units, but in market the demand is only for 30000 units, then the sales would be 30000 units, not
the 50000 units, therefore if master budget is made considering the available capacity, then it
would be wrong, as company will not be able to sell those quantities, therefore the sales budget
to be set first.

2. (TCO 9) Understanding how costs behave can help managers plan operations and choose
between various courses of action.
Part (a) Identify and describe the three types of cost behavior, including examples of each.
Part
Fixed, variable and semi variable are three behaviors. The fixed cost remain constant in total and
is not affected by change in volume of activity for a specific range, for example, rent of a factory
is $20000 with a production capacity of 50000 units, it means that if company produces 20000
units or 30000 units, the rent will remain the same. The variable cost varies in total with change
in volume of activity, for example, each shirt need 2 meters of cloth @$20 per meter, it means
that the cost of cloth for each shirt is $40 and for two shirts, it will be $80 and so on. The semi
variable cost has some portion fixed and some portion variable. For example, the utility bill, in
which a certain amount is to be paid on monthly basis, whether the utility is used or not, while
another cost is to be paid according to the usage of utility. For example, if monthly rent for a
telephone bill is $50 and the call charges is 50 cents per minute and in a month 100 minutes are
used then the telephone bill will be $50 for monthly charges and $50 for call charges, the total
bill will be $100, which is neither fixed nor variable.

Part (b) As a manager, which cost behavior would you prefer and why? (Points : 20)
I would prefer the variable cost as it will incur if activity is to be done, otherwise not, therefore
it makes the decision process easier. If a selling price covers the variable cost, the the order
should be accepted, this type of decision can be taken easily by using variable cost.

3. (TCO 6) Yappy Company is considering a capital investment of $320,000 in additional

equipment. The new equipment is expected to have a useful life of 8 years with no salvage
value. Depreciation is computed by the straight-line method. During the life of the investment,
annual net income and cash inflows are expected to be $25,000 and $65,000, respectively.
Yappy requires a 10% return on all new investments.

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