Page 903 - Accounting Principles (A Business Perspective)

23. Budgeting for planning and control

b. USD 360,000.
c. USD 240,000.
d. USD 276,000.

Production costs (including USD 30,000 of fixed costs) are budgeted at USD 150,000 for an expected output of
100,000 units. Actual output was 90,000 units, while actual costs were USD 142,500. What is the budget variance
and is it favorable or unfavorable?
a. USD 5,500 unfavorable.
b. USD 6,500 favorable.
c. USD 6,500 unfavorable.
d. USD 4,500 unfavorable.

Now turn to “Answers to self-test” at the end of the chapter to check your answers.
Questions

➢ What are three purposes of budgeting?
➢ What are the purposes of a master, planned operating, and financial budget?
➢ How does the management by exception concept relate to budgeting?
➢ What are five basic principles which, if followed, should improve the probability of preparing a
meaningful budget? Why is each important?
➢ What is the difference between an imposed budget and a participatory budget?

➢ Define and explain a budget variance.
➢ What are the two major budgets in the master budget? Which should be prepared first? Why?
➢ Distinguish between a master budget and a responsibility budget.
➢ The budget established at the beginning of a given period carried an item for supplies expense in the
amount of USD 40,000. At the end of the period, the supplies used amounted to USD 44,000. Can it
be concluded from these data that there was an inefficient use of supplies or that care was not
exercised in purchasing the supplies?
➢ Management must make certain assumptions about the business environment when preparing a
budget. What areas should be considered?

➢ Why is budgeted performance better than past performance as a basis for judging actual results?
➢ Describe the concepts of just-in-time inventory systems and zero-base budgeting.
➢ Real world question Refer to the financial statements for a publicly traded company. An industry
analyst has asked you to forecast sales for each of the next five years (after the current year). Assume
sales increase each year by the same percentage. That is, the percentage increase for next year is
expected to be the same as it was last year. What is your estimate of sales in each of the next five
years?

➢ Real world question Refer to your forecasts of sales for the company in the previous question.
Evaluate the simple forecasting method you were asked to use in that question. What additional
factors should be used in forecasting sales?

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