Page 430 - Business Principles and Management

C HAPTER 15 A SSESSMENT

CASE IN POINT

CASE 15-1: The Value of Budgeting
Karen Kline and Joe Kim are both junior accountants in a manufacturing
firm. The head accountant, Brooke Shenker, has asked Karen to prepare
the sales budget for next month’s annual budget meeting. Brooke asked
Joe to construct the cash budget. Neither was happy about the request,
though neither complained directly to the head accountant. Karen did,
however, let her feelings be known to Joe.
Karen: We spend weeks developing these budgets and all the budget com-
mittee does is argue for two days and change our estimates. It
makes me wonder why they ask for our figures in the first place.
Joe: I agree. What’s worse is that the company never comes in on tar-
get with the budget. The collections on customer accounts never
match the budgeted amounts, and it makes me look bad because
it throws the cash budget off. Last year they projected sales to be
$350,000 for the first quarter, and they were only $335,000.
Karen: Maybe if they would ask us to come to the meeting and explain
how we develop the budgets it would save them time and discussion.
Joe: Last year they argued for three days and look what happened.
They were so far off budget that I heard Brooke say a child could
have done a better job forecasting. Budgeting this way is a waste
of time.
Karen: I’ll start on the sales budget tomorrow, but if I were smart my
vacation would begin then, too!

THINK CRITICALLY
1. If Karen and Joe prepared budget figures, why is it necessary for
management to discuss them?
2. How serious is the variance between forecasted and actual sales? Do
you agree with Joe that when budgeted amounts and actual figures
do not agree, the budgeting process is not worthwhile? Explain.
3. How do you believe the company’s budgeting process could be
improved?

CASE 15-2: The Value of a New Business
Anneika Lafferty and her friend Bernie Williams started an Internet busi-
ness 15 months ago selling affordable musical instruments for beginners.
They named it A&B Musical Instruments. Because they live near each
other, Bernie keeps the inventory in his garage and Anneika has the com-
puter system, phones, and office space in her home. Business has not done
as well as they expected, but they are still optimistic. They have learned
from their mistakes and realize that their products are not as popular as
expected. They would like to sell the business and create a different type
of online business. A larger Internet music company wants to buy them
but the $50,000 offered is not nearly what Anneika and Bernie expected,
based on the company’s potential. They quickly reject the offer. The offer

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