Chapter 6

Define rolling budget. Give an example.

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 A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling budget for April 2017 to March 2018, and so on.

What are some additional considerations that arise when budgeting in multinational companies?

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

Explain why cash budgets are important

Cash budgets are significantly important for cash planning and control, especially to avoid having idle cash and unexpected cash deficiencies. The cash budget can help managers to not only identify the periods of idle cash and periods of cash shortage but also to determine necessary cash balances in line with their needs in any given period during the budget year. It allows managers to make appropriate decisions in terms of either using excess cash or financing from outside to achieve the company's goals.

Responsibility centers. Elmhurst Corporation is considering changes to its responsibility accounting system. Which of the following statements is/are correct for a responsibility accounting system. I. In a cost center, managers are responsible for controlling costs but not revenue. II. The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. III. To be effective, a good responsibility accounting system must help managers to plan and to control. IV. Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. 1. I and II only are correct. 2. II and III only are correct. 3. I, II, and III are correct. 4. I, II and IV are correct.

Choice "3" is correct. The question asks which of a series of statements is/are correct for a responsibility accounting system. "None of the above" is not an available option, and neither is "All of the above." Statement I says that, in a cost center, managers are responsible for controlling costs but not revenue. Statement I is correct. Statement II says that the idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. Statement II is correct. Statement III says that, to be effective, a good responsibility accounting system must help managers to plan and control. Planning without control and control without planning is not effective. Statement III is correct. Statement IV says that costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. Costs that are allocated are normally not controllable by the responsibility

Which of the following statements is correct regarding the drivers of operating and financial budgets? a. The sales budget will drive the cost of goods sold budget. b. The cost of goods sold budget will drive the units of production budget. c. The production budget will drive the selling and administrative expense budget. d. The cash budget will drive the production and selling and administrative expense budgets

Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of the master budget, which includes both operating and financial budgets. The sales budget will drive the production budget, which in turn drives budgets for direct materials, direct labor, and factory overhead. All three of these budgets combine to form the cost of goods sold budget

Which of the following statements is correct regarding the components of the master budget? a. The cash budget is used to create the capital budget. b. Operating budgets are used to create cash budgets. c. The manufacturing overhead budget is used to create the production budget. d. The cost of goods sold budget is used to create the selling and administrative expense budget

Choice "b" is correct. All of the operating budgets (like the sales budget, production budget, selling and administrative expense budget, etc.) are used to create financial budgets like the cash budget and the proforma financial statements. Of course, after cash budgets have been formulated, companies use this information to also adjust the operating budget.

Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks' cash budget for year 2. She has information on each of the following items: I. Wages due to workers accrued as of December 31, year 1. II. Limits on a line of credit that may be used to fund Jenks' operations in year 2. III. The balance in accounts payable as of December 31, year 1, from credit purchases made in year 1. Which of the items above should Jacobs take into account when building the cash budget for year 2? a. I, II b. I, III c. II, III d. I, II, III

Choice "d" is correct. All of the elements listed should be considered when building the cash budget. Accrued wages will be factored into the determination of cash disbursements in year 2, which is part of the cash budget. Financing budgets, a component of the cash budget, cover how a company will fund its current operations. One of the methods the company may use is a line of credit, which will have limits as to how much cash a company can access at a given time. The accounts payable balance is important as well, as eventually vendors must be paid in cash in year 2 for credit purchases made by the company in year 1

Describe how nonoutput-based cost drivers can be incorporated into budgeting

Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of parts, number of batches, and number of new products can be used with ABB

How can sensitivity analysis be used to increase the benefits of budgeting?

Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with changes in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior

The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager's behavior. For example, if a revenue center 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

What is the key emphasis in Kaizen budgeting?

The key emphasis in Kaizen budgeting is continuous improvement, resulting in cost reductions, during the budget period

Define master budget

The master budget expresses management's 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.

Outline the steps in preparing an operating budget

The steps in preparing an operating budget are as follows: 1. Prepare the 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

What is the usual starting point for the operating budget?

Usually, a revenues budget is the starting point for the operating budget because the forecasted level of unit sales or revenues has a major impact on the production capacity, the inventory levels planned, and determines all of the costs required to support the budgeted revenues

List five the key questions which must be considered by managers for developing successful strategies.

What are our main objectives? How can we create value for our customers and differentiate ourselves from our competitors? Where is our market and who are our customers? What is the best organizational and financial structure for us? What are the alternative strategies and opportunities and their relevant risks?

"Budgets provide a framework for evaluating performance and improving learning." Do you agree? Explain.

Yes, budgets can help a company's managers to measure and evaluate actual performance against predicted performance. When actual outcomes differ from budgeted or planned results, it prompts managers to investigate and find out the reason(s) for the variance(s). This exercise leads to an improved learning for future budgeting

Budgets can promote coordination and communication among subunits within the company." Do you agree? Explain

Yes, budgets can promote coordination and communication among all aspects of production or service and all departments in a company. Budgets can provide a communication mechanism that seamlessly links all subunits and their employees, helping them understand their individual goals or objectives of the company. This understanding can facilitate coordination among individual departments within the company

"Budgets motivate managers and other employees to the company's goals." Do you agree? Explain

Yes, budgets create goals as well as challenges for managers and employees, and motivate them to improve their performances and to achieve their goals. Managers and employees regard not meeting their budgets as a failure and, therefore, they are motivated to work harder in order to avoid such situations.

What are the four elements of the budgeting cycle? 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.