1-planning and budgeting concepts

Question 1 - CMA 692 H9 - Planning and Budgeting Concepts

Strategy is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily excludes the

A. Target product mix and production schedule to be maintained during the year.B. Forms of organizational structure that would best serve the entity.C. Trends that will affect the entity's markets.D. Best ways to invest in research, design, production, distribution, marketing, and administrative activities.

A. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threats that the company will face in the future. The production schedule for the year is not a strategic item as it is a short-term issue. This production plan would be more of an operational budget or plan.

B. Creating the correct internal structure for the company that will enable the fulfillment of the company's long-term strategic objectives is a critical strategic decision.

C. Market trends are strategic in nature and would be included in strategic analysis.

D. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threats that the company will face in the future. Research, design, production methods and the other listed items will be included in the strategic analysis.

Question 2 - IMA 08-P2-21 - Planning and Budgeting Concepts

Diana Stinson, Cherry Valley Inc.'s factory manager, had lost her patience. Six months ago, she had appointed a team from the production and service departments to finalize the allocation of costs and setting of standard costs. They were still feuding, and so she had hired Brennan and Rose, a large consulting firm, to resolve the matter.

All of the following are potential consequences of having the standards set by Brennan and Rose except that

A. The standards may appear to lack management support.B. There could be dissatisfaction if the standards contain costs which are not controllable by the unit held responsible.C. Brennan and Rose may not fully understand Cherry Valley’s manufacturing process, resulting in suboptimal performance.D. Employees could react negatively since they did not participate in setting the standards.

A. If management has hired an outside company to develop standards, the standards will appear to have management support, since management has delegated the responsibility to the outside company. Therefore, the appearance of lacking management support is not a potential consequence of having the standards set by an outside company.

B. If a company segment is being held responsible for costs, that segment needs to have the authority to control those costs. If standards are set by an outside organization, that organization most likely will not know what costs are controlled by what company segments. Therefore, the standards could contain costs that are not controllable by the unit being held responsible, which could lead to de-motivation on the part of employees.

C. As outside consultants they cannot be as immediately familiar with the corporate manufacturing processes as internal teams would be, and the resulting standards may be unworkable.

D. Employees are likely to feel left out as the consultants arrive and therefore may not accept the consultants' recommendations. They may not be motivated to meet the standards.

Question 3 - HOCK CMA P3A H8 - Planning and Budgeting Concepts

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(c) HOCK international, page 1

It could be argued that the reason a company has succeeded in a very competitive market while its rivals have failed is because:

A. The company has adopted a strategy with a low propensity for risk-taking.B. The successful company has adopted more steps to its formal strategic planning process.C. The strategies that the successful company pursues have a strong impact on its performance relative to its rivals.D. The company has evolved into a multi-divisional organization.

A.

Although some successful companies adopt strategies that involve low risk, a company that does not take risks will not be very innovative. Superior innovation is one of the four factors derived from a company's distinctive competencies that create competitive advantage. (The four factors are superior efficiency, superior quality, superior innovation, and superior customer responsiveness.)

Innovation in products and processes is perhaps the most important component of competitive advantage. Competition is driven by innovations. Product innovations give the innovator something that is unique, and this uniqueness provides differentiation which in turn allows the company to charge a premium price for its product. Process innovation can reduce unit costs below those of the competition.

B. Success does not rest on adopting a formal strategic planning process with many steps (there are typically five steps in the process).

C.

The company in a leadership position has developed and pursued strategies that succeed in its own marketplace and that build competitive advantage. The strategies that a company pursues can build new resources and capabilities or strengthen existing ones and thus can enhance the company’s distinctive competencies. At the same time, distinctive competencies shape the strategies that a company uses, and those strategies in turn lead to a competitive advantage and superior profitability. So the relationship between a company’s distinctive competencies and its strategies is a circular one. Strategies help build and create distinctive competencies, and distinctive competencies in turn shape strategies.

There are typically five steps in the strategic planning process:

1. Defining the company’s mission and addressing the key corporate goals;

2. Analyzing the organization’s external competitive environment in order to identify the opportunities and threats;

3. Analyzing the internal operating environment to identify the strengths and weaknesses of the organization;

4. Formulating and selecting strategies that, consistent with the organization’s mission and goals, will optimize the organization’s strengths and correct its weaknesses for the purpose of taking advantage of external opportunities while countering external threats (SWOT analysis); and

5. Developing and implementing the chosen strategies.

D. Success does not rest on becoming a multi-divisional organization.


In developing the budget for the next year, which one of the following approaches would produce the greatest amount of positive motivation and goal congruence?

A. Permit the divisional manager to develop the goal for the division that in the manager's view will generate the greatest amount of profits.B. Have the divisional and senior management jointly develop goals and objectives while constructing the

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corporation's overall plan of operation.C. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.D. Have senior management develop the overall goals and permit the divisional manager to determine how these goals will be met.

A. While the manager may view his budget for the division as generating the most profit, generally he/she is unaware of what is going on elsewhere within the organization. Without this knowledge, the division manager may be headed in a different direction than what is necessary for organization wide success.

B. Senior management should prepare the corporation's overall plan prior to budget development. The corporate plan is likely to be longer term and include elements both external and non-financial that a budget does not address.

C. With open communication between the division manager and senior management all of the options can be discussed and a mutually acceptable budget can be developed. Once this budget is developed, the implementation is best left to the division manager because the division manager understands the process, employees, and environment better than senior management can, as senior management is not actively involved in the day to day operations.

D. When senior management develops goals they can miss opportunities or issues known by the division manager. Rarely does one entity fully understand everything that happens with other entities. Communication is essential.


All types of organizations can benefit from budgeting. A major difference between governmental budgeting and business budgeting is that

A. Business budgeting can be used to measure progress in achieving company objectives, whereas governmental budgeting cannot be used to measure progress in achieving objectives.B. Governmental budgeting usually represents a legal limit on proposed expenditures.C. Business budgeting is required by the SEC.D. Governmental budgeting is usually done on a zero-base.

A. Governmental budgeting can also be used to measure progress in achieving objectives.

B. Governmental budgets differ from business budgets because a governmental budget represents the legal amount that the government can spend. In order to spend more than the budgeting amount, legislation must be passed by the government to allow the additional spending.

C. The SEC (Securities Exchange Commission) does not require businesses to budget.

D. Zero-base budgeting does not need to be used, and is rarely used, in governmental budgeting.

Question 6 - CMA 692 3-13 - Planning and Budgeting Concepts

Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division's

A. Net revenue minus controllable division costs.B. Contribution margin.C. Gross profit.D. Net income minus the division's fixed costs.

A. A manager's performance valuation should be based on the factors controllable by the manager. A contribution income statement that presents net revenue minus controllable division costs can be used to isolate the controllable costs of a business unit from its non-controllable costs such as depreciation or allocated central costs. According to the contribution income statement approach to evaluation, a division

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manager usually controls the division's revenues, variable costs and a portion of its fixed costs.

B. A manager's performance valuation should be based on the factors controllable by the manager. Contribution margin does not include fixed costs and some of the fixed costs may be controllable by the division manager.

C. A manager's performance valuation should be based on the factors controllable by the manager. Gross profit is equal to sales revenue minus COGS. Cost of goods sold includes part of the fixed manufacturing overheads. However, fixed manufacturing overheads usually include items that are not controlled by a division manager, such as depreciation. Thus, gross profit should not be used as a division manager performance evaluation tool.

D. A manager's performance valuation should be based on the factors controllable by the manager. Net income minus the division's fixed costs would (a) include a reduction for the fixed costs twice, since fixed costs are a reduction to net income; and (b) only some of the fixed costs, not all, may be controllable by the division manager.


Kaizen budgeting is a budgeting approach that:

A. Adjusts costs to the actual level of output achieved or expected to be achieved during the budget period.B. Projects expenses from the ground up, as though the budget were being prepared for the first time.C. Projects costs on the basis of future improvements rather than current practices and methods.D. Focuses on the costs of activities necessary to produce and sell products and services.

A. This is a flexible budget, not kaizen budgeting.

B. This is zero based budgeting, not kaizen budgeting.

C. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the philosophy of kaizen leads to expected continuous improvements in the production process. A budget developed on the kaizen philosophy will take into account these expected improvements.

D. This is activity based costing, not kaizen budgeting.


A company's mission statement is, above all, intended to define:

A. The specific actions that the company should take.B. The weaknesses of the firm.C. The company's profit objectives.D. Why the company exists.

A. The actions the company might take based on its strengths and weaknesses, along with its profit objectives, can be a result of the mission statement and the strategic planning process, but they are not what the mission statement defines.

B. A recognition of the firm's weaknesses can be a result of the mission statement and the strategic planning process, but it is not what the mission statement defines.

C. The company's profit objectives can be a result of the mission statement and the strategic planning process, but they are not what the mission statement defines.

D. The mission statement defines why the company exists and also prioritizes and communicates the company's overall objectives.

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Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a significant reason for planning and budgeting?

A. Ensuring profitable operations.B. Checking progress toward the objectives of the organization.C. Providing a basis for controlling operations.D. Forcing managers to consider expected future trends and conditions.

A. The budget is a realistic plan expressed in quantitative terms. A budget serves as a number of tools: planning, control, motivation and communication tools. However, the budget by itself is not able to ensure profitable operations.

B. Checking progress toward the objectives of the organization is a reason for developing plans and budgets.

C. Providing a basis for controlling operations is a reason for developing plans and budgets.

D. Forcing managers to consider expected future trends and conditions is a reason for developing plans and budgets.


Which one of the following items would most likely cause the planning and budgeting system to fail? The lack of:

A. Historical financial data.B. Adherence to rigid budgets during the year.C. Input from several levels of management.D. Top management support.

A. Simply not having historical data would not necessarily cause a budget to fail. Even first year companies can generate meaningful budgets without historical information as a starting point.

B. Having a strict budget that is upheld displays discipline and commitment to the desired goal. This is not something that would necessarily cause a budget to fail. A budget with rigidity may in fact, have a stronger chance to succeed than one that has more slack in it.

C. Top down budgets, while not necessarily the best approach, can be successful – especially in smaller organizations.

D. One of the primary reasons to budget is to have everyone working in the same direction. If a budget is not endorsed by senior management, employees will make no effort to meet the budget targets, and the budget will become a meaningless exercise.


Which of the following is not a characteristic of a tactical plan:

A. Top management is responsible for development and overall implementation.B. It relates to production, materials requirements, inventory, cash flows and income statements.C. It covers a period of time one year to five years.D. It is quantitative in focus.

A. Top management is not responsible for a tactical plan but rather for the development and overall implementation of the strategic plan. Upper and middle management are responsible for the tactical plan.

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B. This is a characteristic that describes a tactical plan, which explains "how to get there" or how to achieve the ultimate objectives of a strategic plan.

C. This is a characteristic that describes a tactical plan, which explains "how to get there" or how to achieve the ultimate objectives of a strategic plan. Tactical plans cover an intermediate time period: less than a strategic plan but greater than an operational plan.

D. Quantitative in focus is a characteristic that describes a tactical plan, which explains "how to get there" or how to achieve the ultimate objectives of a strategic plan.

Question 12 - CIA 590 IV-14 - Planning and Budgeting Concepts

One of the primary advantages of budgeting is that it

A. Bases the profit plan on estimates.B. Does not take the place of management and administration.C. Is continually adapted to fit changing circumstances.D. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.

A. One of the disadvantages of budgeting is that it bases the profit plan on estimates.

B. One of the primary advantages of budgeting is that it does take the place of management and administration.

C. One of the disadvantages of budgeting is that it is continually adapted to fit changing circumstances.

D. The budget is a realistic plan for the future expressed in quantitative terms. The budget serves as planning, control, coordination, evaluation tool, etc. Budgets of individual departments are formed into one organizational budget. Thus, one of the primary advantages of budgeting is that it requires departmental managers to make plans in conjunction with the plans of other interdependent departments, thus promoting coordination and communication among organization units and activities.


Rainbow Inc. recently appointed Margaret Joyce as vice president of finance and asked her to design a new budgeting system. Joyce has changed to a monthly budgeting system by dividing the company’s annual budget by twelve. Joyce then prepared monthly budgets for each department and asked the managers to submit monthly reports comparing actual to budget. A sample monthly report for Department A is shown below.

Rainbow, Inc.Monthly Report for Department A

Actual Budget VarianceUnits 1,000 900 100FVariable production costs Direct material $2,800 $2,700 $100U Direct labor 4,800 4,500 300U Variable factoy overhead 4,250 4,050 200UFixed costs Depreciation 3,000 2,700 300U Taxes 1,000 900 100U Insurance 1,500 1,350 150UAdministration 1,100 990 110UMarketing 1,000 900 100U Total costs $19,450 $18,090 $1,360U

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This monthly budget has been imposed from the top and will create behavior problems. All of the following are causes of such problems except:

A. The lack of consideration for factors such as seasonalityB. The inclusion of noncontrollable costs such as depreciation.C. The use of a flexible budget rather than a fixed budget.D. Top management's authoritarian attitude toward the budget process.

A. Many companies experience seasonality for their products and this can easily be built into a budget. By straight lining the line items, some of the months will reflect significant unfavorable variances while other months will be decidedly favorable. These swings can hide true budgetary problems or opportunities as variances will be brushed off as resulting from seasonal fluctuations.

B. The inclusion of depreciation in and of itself isn't the problem. But it is not controllable by the department management in most cases. They should not be held accountable for items beyond their control – in this case, that is likely all of the fixed costs.

C. By using a flexible budget, the budget can be adjusted to actual production and sales levels. This will ensure that the focus is on the variances due to causes other than the volumes of output and sales.

D. When workers feel that they are being dictated to, they are less likely to buy into the budget. An attitude of "Management didn’t ask for or respect my opinion, so why should I respect their wishes?" will lead to morale problems as well as increased unfavorable budget variances.


Pavilion Inc. has implemented a budget process that begins with the analysis of current practices to find improvements and determine changes needed to attain improvements. Then budgets are based on the improved practices or procedures resulting in budget figures that are lower than the previous period. The firm expects to be able to manufacture its product or render its service at a lower cost. The decrease in the budget amounts are the consequence of doing the same activity more efficiently and with higher quality and is not the result of arbitrary cuts. The budget process described is referred to as:

A. Standard cost budgeting.B. Activity-based budgeting.C. Zero-based budgeting.D. Kaizen budgeting.

A. Standard cost budgeting uses standard costs and a flexible budget that can be adjusted to reflect actual production. However, standard cost budgeting looks more at expected costs rather than improvement of activities and improvement of related costs.

B. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, a budgeted level of activity for each of these drivers is determined based on a budgeted level of production, and budgeted amounts are developed based on the budgeted level of activity. This focuses on activities but not necessarily on improvement of performance.

C. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the current period's budget and the likely operating results for the current period. Zero based budgeting does not refer to or use current practices, but starts all over. The budget described here starts by looking at the current practices and then at ways to improve current practices and lower current costs.

D. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the philosophy of kaizen leads to expected continuous improvements in the production process. A budget developed on the kaizen philosophy will take into account these expected improvements.

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Cerawell Products Company is a ceramics manufacturer that is facing several challenges in its operations. Which one of the following is subject to the least control by the management of Cerawell in the current fiscal year?

A. Experienced employees have decided to terminate their employment with Cerawell and go to work for the competition.B. A competitor has achieved an unexpected technological breakthrough that has given them a significant quality advantage, and has caused Cerawell to lose market share.C. Vendors have asked that the contract price for the goods they supply to Cerawell be renegotiated and adjusted for inflation.D. A new machine that was purchased this year has not helped reduce Cerawell’s unfavorable labor efficiency variances.

A. While employees are certainly an important part of the internal operations of any company, if they choose to leave, that is not something management can control. However, management does have some control over employee relations including: salary, benefits, and working conditions.

B. Management cannot control what happens in another company. This would be an environmental issue that may propose a threat and should be taken into consideration, but it is not something that is controllable by management.

C. Management would be actively involved in contract negotiations with suppliers and would have control over the terms agreed upon.

D. Management would have control over this internal matter. The use of a new machine that has not provided efficiencies that were anticipated should be evaluated for possible operational changes, employee training needs, or process modifications.


Which one of the following best describes the role of top management in the budgeting process? Top management

A. Lacks the detailed knowledge of the daily operations and should limit their involvement.B. Should be involved only in the approval process.C. Needs to be involved, including using the budget process to communicate goals.D. Needs to separate the budgeting process and the business planning process into two separate processes.

A. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation, motivation, communication, identifying future problems. To use the budget as a communication and motivational tool, top management should be involved in budgeting process even though they lack detailed knowledge of the daily operations.

B. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation, motivation, communication, identifying future problems. To use the budget as a communication and motivation tool, the top management should be involved in the whole budgeting process, not only in the approval process.

C. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation, motivation, communication, identifying future problems. To use the budget as a communication and motivational tool top management should be involved in budgeting process.

D. The budget is a realistic plan for the future expressed in quantitative terms. In other words budgeting is a part of overall planning process.

Question 17 - CIA QZP2B-2 - Planning and Budgeting Concepts

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The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is

A. Detection risk.B. Inherent risk.C. Control risk.D. Audit risk.

A. Detection risk is the risk that the auditor will not detect a material misstatement. Detection risk is affected by the auditor's procedures and can be changed at his or her discretion.

B. Inherent risk is the risk that there is an error in the first place.

C. Control risk is the risk that the internal controls will not detect, or prevent the error.

D. Audit risk is the risk that the auditor will give an unqualified opinion, when in fact; there is a material misstatement in the area being audited.


When budgets are used to evaluate performance and to set limits on spending, the process will often result in departments adding something "extra" to ensure the budgets will be met. This "extra" is

A. Continuous budgeting.B. Budgetary slack.C. Management by objectives.D. Strategic planning.

A. A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time ahead of the present. For example, a 1-year continuous budget will be prepared at the end of every month for the next 12 months.

B. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expenses are overstated and this slack makes it difficult to properly evaluate performance.

C. Management by objectives is a management approach that increases the amount of self-direction that employees have. In MBO, a manager and his or her workers are responsible for agreeing upon their objectives and the methods to be used to obtain them.

D. Long-term (or Strategic) planning is usually for periods of five years or longer and is based on the objectives of the organization. Some plans may extend up to 20 years. Strategic planning is directional, rather than operational. This means it focuses on where we want to go instead of specifically how we are going to get there.


The process of creating a formal plan and translating goals into a quantitative format is

A. Budgeting.B. Job-order costing.C. Process costing.D. Budget manual preparation.

A. A budget is a realistic plan for the future expressed in quantitative terms.

B. Job-order costing is the method by which all of the costs associated with a specific job (or client) are accumulated and charged to that job (or client). The costs are accumulated on what is called a job-cost sheet.

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C. Process costing is the method by which costs are assigned to individual products when the products are all relatively similar (homogeneous) and are mass-produced.

D. A budget manual details the budgeting process.


The method(s) that managers employ to attain one or more of the organization's goals can be defined as:

A. Capital investments.B. Strategy.C. Choosing the company's organizational structure.D. Determining the company's business model.

A. Capital investments are long-term investments made by a business for the purpose of increasing capacity and shareholder wealth. While they are an important part of a business's strategy, they are not the method that managers employ to attain the organization's goals.

B. Management uses strategy (strategies) to attain the company's goals and objectives.

C. Choosing the company's organizational structure is strategic in nature but is not the method that managers employ to attain the organization's goals.

D. A company's business model is its managers’ idea of how the set of strategies and capital investments that the company makes should fit together to generate above-average profitability and, at the same time, profit growth. Determining the company's business model is strategic in nature but is not the method that managers employ to attain the organization's goals.


All of the following are advantages of the use of budgets in a management control system except that budgets:

A. Force management planning.B. Limit unauthorized expenditures.C. Promote communication and coordination within the organization.D. Provide performance criteria.

A. Forcing management to focus on the future and make appropriate plans for the organization's success is a significant advantage of the use of budgets.

B. Even the most advanced and accurate budget cannot prevent unauthorized expenditures. This is controlled through management oversight, rather than the budgeting process.

C. Throughout the budget process the various departments within an organization will meet to plan for the next year. These meetings will foster cooperation, communication and familiarity which will carry over after budgeting season.

D. Budgets provide performance information, in that management can analyze what they thought would happen vs. what actually happened. From that point they can determine what factors were within their control and what was outside of their control and use this information for future budgets and operational decisions.


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The basic purpose of a responsibility accounting system is

A. Authority.B. Motivation.C. Variance analysis.D. Budgeting.

A. Authority is an element of responsibility accounting. However, it is not the main purpose.

B. Motivation is the basic purpose of a responsibility accounting. According to responsibility accounting, managers are responsible for those factors that they can control. Their performance is evaluated on how well they manage the areas over which they exercise influence, whether they are costs, revenues or both.

C. Variance analysis is an element of responsibility accounting. However, it is not the main purpose.

D. Budgeting is an element of responsibility accounting. However, it is not the main purpose.


Budgetary slack can best be described as

A. A plug number used to achieve a pre-set level of operating income.B. The elimination of certain expenses to enhance budgeted income.C. The planned underestimation of budgeted expenses.D. The planned overestimation of budgeted expenses.

A. Budgetary slack is not a plug number.

B. Budgetary slack exists when revenues are understated or expenses are overstated. This is done in order to make it easy for the department, company or individual to meet the budget. The elimination of certain items is not budgetary slack, as it is rather making the budget appear better than the actual results will be.

C. Budgetary slack exists when revenues are understated or expenses are overstated.

D. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists either revenues are understated or expenses are overstated to which makes it difficult to properly evaluate the performance.

Question 24 - CIA 1188 IV-51 - Planning and Budgeting Concepts

Budgets are a necessary component of financial decision making because they help provide a(n)

A. Means to use all the firm's resources.B. Means to check managerial discretion.C. Efficient allocation of resources.D. Automatic corrective mechanism for errors.

A. Budgets help to provide effective and efficient use of recourses, not just the basic usage use of all resources.

B. Budgets are not used check managerial discretion.

C. Budget is a realistic plan for the future expressed in quantitative terms. Budget serves as planning, control, evaluation tool. As such, the use of budget helps to allocate resources efficiently.

D. Budgets do not provide an automatic corrective mechanism for errors.

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One of the steps in the the strategic planning process is analyzing external factors in order to identify the organization's opportunities and threats. Which of the following is not a part of external analysis?

A. Analysis of the macroenvironment.B. Analysis of the national environment in which the company operates.C. Examination of the industry in which the company operates.D. Identification of the company's strengths and weaknesses.

A. Analysis of the macroenvironment is analysis of the wider environment in which the company operates. This is a part of external analysis. Analysis of the macroenvironment includes macroeconomic factors such as inflation and the labor market, social factors such as environmental issues, and government, legal, international and technological factors that affect the industry and the company.

B. Analysis of the national environment in which the company operates is a part of external analysis. Analyzing the national environment includes assessing domestic and international political risk and the impact of globalization on competition within the industry.

C.

Examination of the industry in which the company operates is a part of external analysis. The industry analysis involves assessing the company’s industry, the company’s competitive position in the industry, and the competitive positions of its major rivals. The nature of the industry, the stage the industry is in, the dynamics and the history are all part of this analysis.

D.

Identification of the company's strengths and weaknesses is a part of internal analysis, not external analysis. Strengths lead to superior performance and weaknesses lead to inferior performance in efficiency, quality, innovation, and customer responsiveness.


Suboptimal decision making is not likely to occur when:

A. There is little congruence among the overall organization goals, the subunit goals, and the individual goals of decision makers.B. Guidance is given to subunit managers about how standards and goals affect them.C. The subunits in the organization compete with each other for the same input factors or for the same customers.D. Goals and standards of performance are set by the top-management.

A. When goals at various levels are not connected there are many decisions that will be made with ineffective information and therefore the decisions will not necessarily be the best possible.

B. This is correct. Guidance provided to managers allows them to work at their optimal level within the constraints.

C. Creating a culture of competition within an organization for scarce resources (be they input factors or customers) cannot result in a win for the company as a whole. The company is directing their efforts inward rather than outward and opportunities will be missed.

D. Senior management is not fully aware of day to day operations and would not be in the best position to develop the most optimal goals and standards. They simply don't have the best knowledge of the situation.

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Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $36.45 per unit. It is expected that the component’s cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit depending on the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the

A. price agreed upon by the purchasing manager and the appropriate level of company management.B. current actual cost plus the forecasted 10% price increase.C. highest price in the anticipated range to insure that there are only favorable purchase price variances.D. lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range.

A. Discussions between relevant managers to determine the exact quantities required and the timing of those purchases will help determine what price level would be most appropriate for the standard. This is the participative method of standard setting, and it is more likely to be supported by the employees than an authoritative method of standard setting.

B. Standards are set using either an authoritative process or a participative process. Standards based on historical costs plus an expected price increase may be a starting point for discussion using either process, but there is no absolute standard that should be used in this situation.

C. Standards should never be set to result in favorable variances. To do that renders the standard setting process useless from the beginning. Standards need to be based on expected reality, considering all appropriate factors.

D. Standards are set using either an authoritative process or a participative process. Standards based on anticipated costs may be a starting point for discussion using either process, but there is no absolute standard that should be used in this situation. Setting a standard in order to keep pressure on an employee or group of employees is not a participative process. Furthermore, pressure to obtain the lowest price may encourage the purchase of excess inventory, which creates increased inventory carrying costs.


The type of budget system that projects costs based on future improvements rather than current practices and methods is called:

A. Zero-based budgeting.B. Activity-based budgeting.C. Kaizen budgeting.D. Flexible budgeting.

A. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of, the current period’s budget and the likely operating results for the current period. In zero based budgeting the manager must start from scratch and justify all incomes and expenses proposed. Future improvements may or may not be included in a zero-based budget but they are not included in it as a matter of course.

B. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified, a budgeted level of activity for each of these drivers is determined based on a budgeted level of production, and budgeted amounts are developed based on the budgeted level of activity. This focuses on activities but not necessarily on improvement of performance.

C. Kaizen is a Japanese term for continuous improvement. When applied to the budgeting process, the philosophy of kaizen leads to expected continuous improvements in the production process. A budget developed on the kaizen philosophy will take into account these expected improvements.

D. A flexible budget is a budget with amounts that are adjusted to the actual level of activity that has occurred. With a flexible budget, actual incomes and expenses can be better compared with budgeted incomes and expenses, thus providing the user with variances that are devoid of volume variance issues. However, a flexible budget is not created

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based on future anticipated improvements.


The use of budgetary slack does not allow the preparer to

A. Project actual expenses.B. Be flexible under unexpected circumstances.C. Increase the probability of achieving budgeted performance.D. Use the budget to control subordinate performance.

A. Budgetary slack exists when revenues are understated or expenses are overstated. The projected actual expenses are usually estimated by a manager, those expenses do not appear as budgeted expected expenses though. The projected actual expenses are usually overstated (budgetary slack is added) to be easily attainable.

B. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it allows a manager to be more flexible under unexpected circumstances.

C. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it is easy to attain a budget performance increasing budgeted profitability.

D. A budget can serve as a control tool. Actual performance results are compared with budgeted. The budget should set the performance standards at a high but attainable level. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expenses are overstated, or both. This makes it difficult to properly evaluate the performance.


Which one of the following reasons is not a significant reason for planning in an organization?

A. Forcing managers to consider expected future trends and conditions.B. Monitoring profitable operations.C. Developing a basis for controlling operations.D. Promoting coordination among operating units.

A. In the planning process managers need to consider future trends and conditions and this will assist the company in their planning for, and potentially avoiding, negative events in the future.

B. Monitoring is a control function, and not a planning function. Though monitoring is very important to the company, it is not a reason for planning.

C. Without a plan it is very difficult to control, so this is a reason for planning.

D. The coordination of efforts between operating units is a reason for planning because planning helps make certain that everyone is working towards the same goal.


Which one of the following is usually not cited as being an advantage of a formal budgetary process?

A. Ensures improved cost control within the organization and prevents inefficiencies.B. Serves as a coordination and communication device between management and subordinates.

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C. Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process.D. Provides a formal benchmark to be used for feedback and performance evaluation.

A. A budget is a realistic plan for the future expressed in quantitative terms. A budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation, motivation, communication, identifying future problems. Developing a budget is an important step in the process of control. However, a formal budgetary process alone will not ensure improved cost control or prevent inefficiencies. After the budget has been developed, it must be used as a tool by management to accomplish those objectives.

B. The budget communicates and authorizes actions and also promotes coordination within an organization. This is an advantage of a budget.

C. One of the advantages of a budget is that it forces management to evaluate the reasonableness of assumptions used in the budgetary process and goals that have been set.

D. A budget provides criteria against which to measure performance during the upcoming period. Therefore, it does provide a formal benchmark to be used for feedback and performance evaluation, and that is an advantage of budgeting.


A controllable expense

A. Is an expected future expense that will be different under various alternatives.B. Is an expense that will remain semivariable in total over the relevant range in a given time period.C. Is one that is directly influenced at a given level of managerial authority within a given time period.D. Is an expense whose actual amount will not normally differ from the standard (budget) amount.

A. This is the definition of an incremental (differential) cost.

B. This is the definition of a semivariable cost.

C. A controllable expense is an expense that is directly influenced at a given level of managerial authority within a given time period. Therefore, that manager is able to control this expense because he or she has the authority to make decisions about how the money will be spent.

D. Any cost can differ from the standard (budget) amount and usually does.


All of the following are characteristics of the strategic planning process except the

A. Review of the attributes and behavior of the organization's competition.B. Emphasis on the long run.C. Analysis and review of departmental budgets.D. Analysis of external economic factors.

A. In strategic planning external factors, such as competition, are examined because this is part of the environment in which the company will be operating. Therefore, it is part of the long-term, strategic planning process.

B. Strategic plans are broad, general, long-term plans, usually for 5 years or longer. They are developed from the company's mission statement and so they are focused on long-term goals and objectives.

C. Strategic planning is long-term planning that looks at how the company is going to achieve its goals and objectives over a period of usually 5 years or longer. This type of planning is neither detailed nor focused

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on specific financial targets, but instead looks at the strategies as well as the objectives and goals of the company by examining both internal and external factors that affect the company. Analysis and review of departmental budgets is not a strategic planning concern, since it is a short-term operational concern.

D. In strategic planning external economic factors are examined because this is part of the wider environment, or macroenvironment, in which the company operates. Economic factors such as inflation and the labor market are factors that will affect the industry and the firm. The primary purpose of analyzing the external operating environment is to identify opportunities as well as threats that can affect the company in its pursuit of its mission.


When the organization develops a plan or plans to prepare for future, often unpredictable events, it is called:

A. Long-term business planning.B. Contingency planning.C. Short-term business planning.D. Capital budgeting.

A. Long-term (strategic) business plans define the corporate mission and address the long-term objectives of the organization.

B. Contingency planning, or scenario planning, considers alternatives that enable the company to respond quickly and capably to future, external, generally unpredictable events.

C. Short-term business plans encompass tactics for achieving short-term objectives and operational elements that will contribute to the achievement of long-term strategic goals.

D. Capital budgeting involves analyzing a proposed capital investment project to determine whether the investment will increase shareholder value.


Kallert Manufacturing currently uses the company's budget only as a planning tool. The company decided that it would be beneficial to also use budgets for control purposes. In order to implement this change, the management accountant must

A. Synchronize the budgeting and accounting system with the organizational structure.B. Appoint a budget director.C. Organize a budget committee.D. Develop forecasting procedures.

A. In order to use the budget as both a planning and control tool, the budgeting and accounting systems need to be synchronized. The responsibility centers used for budgeting need to be the same as the responsibility centers used for accounting; the chart of accounts used for budgeting need to be the same as the chart of accounts used for accounting; and so forth. This enables management to compare the budget with the actual levels of activity, revenues and expenditures and calculate variances.

B. Because the company already has a budget, there should already be a budget director.

C. Because the company already has a budget, there should already be a budget committee.

D. The existing budget process should have forecasting procedures already in place.

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The budgeting technique that is most likely to motivate managers is

A. Zero-base budgeting.B. Top-down budgeting.C. Bottom-up budgeting.D. Program budgeting and review technique.

A. Zero-based budgeting is a budget which is prepared ignoring the past periods. The budget is developed from "zero" and all expenses need to be justified for the current period. The use of this method by itself is not going to motivate or demotivate managers.

B. Top-down budgeting is less motivating for managers as according to this budgeting technique the plan is set by top-management and lower level managers do not participate in preparing it.

C. Bottom-up budgeting is the budgeting technique that motivates lower-level managers the most. The budgeting process starts with departments at the lowest level in the organization. Managers and subordinates set goals and objectives and translate those goals and objectives into quantitative budgets for their responsibility centers. Then the budgets are sent on to the next highest level, which does the same thing, and so forth. At the top the company's budget is developed by consolidating all of the lower-level budgets. Of course, top management reviews the lower-level budgets as well as the consolidated budget that results from them. If the company's consolidated budgeted results are not what top management wants to see, top management may negotiate changes to the lower-level budgets as necessary to achieve the company's objectives. Employees are more likely to support budgets when they have participated in their preparation. It gives them a feeling of ownership of the process and they will be more likely to support the budget's implementation.

D. Program budgets are formulated by objective rather than function. This type of budget by itself will not motivate or demotivate managers.


Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September. Hannon's policy is to have on hand enough inventory at the end of the month to cover 25% of the next month's sales. What will be the cost of the inventory that Hannon should budget for purchase in August?

A. $509,600B. $540,000C. $560,000D. $680,000

A. This is simply 70% of the August sales figure. The correct way to calculate the cost of inventory is to divide the sales by 1 + .30 (the markup). Then beginning and ending inventory need to be taken into consideration. See correct answer for full calculation.

B.

All calculations need to be done using cost figures, not sales figures. So sales figures will need to be converted into cost figures using this formula: Cost of inventory = Sales price / 1.3.

Beginning inventory (Aug. 1) needs to be 25% of the cost of August sales. August sales are expected to be $728,000. Therefore, the cost of those sales will be $728,000 / 1.3, or $560,000. And 25% of $560,000 is $140,000. So the beginning inventory will be $140,000.

Ending inventory (Aug. 31) needs to be 25% of the cost of September sales. September sales are expected to be $624,000. Therefore, the cost of those sales will be $624,000 / 1.3, or $480,000. And 25% of $480,000 is $120,000. So the ending inventory will be $120,000.

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The inventory equation is:

Beginning Inventory + Purchases – Cost of Goods Sold = Ending Inventory

We have all of those amounts except the Purchases. Whenever we have three out of the four amounts, we can always solve for the fourth amount.

Let X represent the August Purchases amount:

$140,000 + X - $560,000 = $120,000X = $540,000

C. This is the COGS for the month, but does not take into consideration beginning or ending inventory. See correct answer for calculations.

D. This answer does not take into consideration the beginning inventory carried over from July's ending inventory.


Which one of the following management considerations does the company usually address first in strategic planning?

A. Overall objectives of the company.B. Outsourcing.C. Recent annual budgets.D. Structure of the organization.

A. The company must determine its overall objectives before anything else can be set.

B. Outsourcing is not directly related to the strategic planning process.

C. The review of recent annual budgets is not the first consideration addressed in the strategic planning process.

D. The structure of the organization is not the first consideration addressed in the strategic planning process.


One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards are accepted by top management. This approach would best be characterized as a(n):

A. Centralized top-down approach.B. Team development approach.C. Imposed approach.D. Engineering approach.

A. This is incorrect as there exists a considerable amount of communication and negotiation before senior management accepts the standards in this situation.

B. This is the correct answer. The standards described above are developed from multiple levels and multiple departments ensuring that every aspect is reviewed and well thought out. A true team effort.

C. This implies that information is dictated. With four levels of involvement before top management accepts a number, the approach described is more participative.

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D. An engineering approach focuses on the technical standards required for production. Here we also have input from the accountants and line managers as well, making it a little more all encompassing than a traditional engineering approach.


All of the following are advantages of top-down budgeting as opposed to participatory budgeting, except that it:

A. Increases coordination of divisional objectives.B. Reduces the time required for budgeting.C. May limit the acceptance of proposed goals and objectives.D. Facilitates implementation of strategic plans.

A. This is an advantage of top-down budgeting. Frequently, departmental managers have blinders on and are unaware of what is happening in other areas of the company. Senior management has a better perspective of the big picture and what will be necessary to achieve overall organizational objectives.

B. This is an advantage of top-town budgeting. When the budget is dictated from above, departmental managers do not need to spend time putting together their plans and ideas for the future. Furthermore, there is no need for lower level managers to make adjustments to the first draft of the budget, as is done with bottom up budgeting after senior management has examined the first draft budgets of the lower level managers. The result is that less time is required for the budgeting process.

C. This is not an advantage of top-down budgeting, although it is a true statement. When senior management determines the budget without input from the departments being held to that budget, employees are less likely to feel they can / want to achieve the target. It wasn't their idea and no one listened to them.

D. This is an advantage of top-town budgeting. Strategic plans are long-term in nature and require a good deal or coordination in order to be successful. Senior management's job is to position each division and department appropriately to fulfill their role in the long term organizational plan. Top-down budgeting achieves this more readily than bottom-up budgeting, because senior management has the required long-term perspective and lower level managers do not.


Stumphouse Cheese is in the process of implementing a cost improvement system with kaizen costing as the basis for budgeting all manufacturing activities. This will be utilized over the next four years in an attempt to become more profitable. The target reduction rate has been set at 5% of fixed overhead costs. Total fixed overhead costs for this year were $900,000. What is the budgeted amount for the next two years using kaizen costing?

Current Year +1, Current Year +2

A. $855,000, $812,250.B. $900,000, $855,000.C. $855,000, Unable to determine.D. $855,000, $810,000.

A. Current Year +1 will be 95% of the current year's fixed overhead costs, which is $900,000 × .95 = $855,000. Current Year +2 will be 95% of Current Year +1's fixed overhead costs, which is $855,000 × .95 = $812,250

B. The cost reductions should begin in Current Year +1.

C. Costs for the Current Year +1 are calculated correctly; but Current Year +2 can be determined.

D. Current Year +1 is calculated correctly, but Current Year +2 uses the same $45,000 that was deducted from the

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Current Year cost to calculate the Current Year +1 cost. Instead, the 5% reduction should be calculated on the Current Year +1 costs.


The preparation of a comprehensive master budget culminates with the preparation of the

A. Production budget.B. Cash management and working capital budget.C. Strategic budget.D. Capital investment budget.

A. The production budget is a part of the operating budget. The operating budget is part of the master budget. The master budget is a comprehensive expression of management's operating and financial plans for a future time period (usually a year) that is summarized in a set of budgeted financial statements. It embraces the impact of both operating and financing decisions.

B. The cash management and working capital budgets are the last budgets prepared. This is because they are dependent upon all of the other budgets since the production budget, advertising budget, overhead budget, and so on all have a cash component that is reflected in the cash budget and the working capital budget. The cash budget and working capital budgets are therefore prepared last, because all of the other budgets contribute to them.

C.

The master budget is an annual budget. The quantitative effect of strategic plans, which are long-term plans for periods of more than five years, must be integrated into the annual budgeting process, as well as into the capital budgeting process. As such, strategic planning precedes the development of the annual budget.

D. The capital investment budget is a long-term budget that is outside of the normal, annual budgeting process. The effect of budgeted current period expenditures for capital assets will need to be taken into account in the development of the master budget, since they will affect the balance sheet, income statement, and cash flows. However, the capital invesstment budget is not the final budget prepared in preparation of the comprehensive master budget.


The goals and objectives upon which an annual profit plan is most effectively based are

A. Quantitative measures such as growth in unit sales, number of employees, and manufacturing capacity.B. A combination of financial, quantitative, and qualitative measures.C. Financial measures such as net income, return on investment, and earnings per share.D. Qualitative measures of organizational activity such as product innovation leadership, product quality levels, and product safety.

A. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answer includes only quantitative measures.

B. An annual profit plan should be based on a combination of financial, quantitative and qualitative measures. The development of goals and objectives is the first step in the planning process. Top management must establish the major goals and objectives, set priorities and communicate these priorities to the people within the organization. Lower levels of the organization bear a part of the responsibility for the overall organizational goals and objectives, which become subunits' goals and objectives. However, specific departments' goals and objectives may conflict with other departments' goals and objectives. For example, a goal of an increase in market size may conflict with a goal of profitability of sales. Thus, profit plans should be based on multiple measures.

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C. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answer includes only financial measures.

D. An annual profit plan should be based on a combination of financial, quantitative, qualitative measures. This answer includes only qualitative measures.


From the perspective of corporate management, the use of budgetary slack

A. Increases the probability that budgets will not be achieved.B. Increases the effectiveness of the corporate planning process.C. Increases the likelihood of inefficient resource allocation.D. Increases the ability to identify potential budget weaknesses.

A. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists either revenues are understated or expenses are overstated.

B. Budgetary slack exists when revenues are understated or expenses are overstated. Budget should set high but attainable performance standards. However, budgetary slack makes it easy to achieve the budgeted level of performance. Thus, the effectiveness of the corporate planning process decreases when there is budgetary slack.

C. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expenses are overstated or both. Hence, management won't work hard on cost-minimization as they simply have to achieve 'easily attainable goals'. Hence, the resources most likely will be allocated inefficiently.

D. Budgetary slack exists when revenues are understated or expenses are overstated. Since the budgetary slack distort a real attainable level of performance it is difficult to identify potential budget weaknesses.


All of the following statements concerning standard costs are correct except that:

A. Time and motion studies are often used to determine standard costs.B. Standard costs can be used in costing inventory accounts.C. Standard costs are usually set for one year.D. Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

A. These studies are often used to determine how long it usually takes to perform a given task. That "usual time" becomes the standard.

B. Standard costs are used for budgeting and planning purposes, not inventory valuation.

C. Standard costs are reviewed periodically to account for any market changes. Annually during budget time is frequently the review period for standard costs.

D. This is the correct answer because it is not a correct statement. The statement is actually flipped around. Standards are stated on a per unit basis, while budgeted figures are stated in total.

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1-planning and budgeting concepts

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