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When managers are allowed to give input in developing the budget, they tend to feel that its success or failure reflects personally on them. In an imposed budgetary setting, communication flows from the top to the bottom and is mostly a one-way flow. Any upward flow would have to do with understanding the budgets being communicated. For participative budgeting, the communication flows are necessarily in both directions, with much of the communication being initiated by subordinate managers.
The first communication process imposed budgeting leaves the impression that the opinions and thoughts of lower-level managers are unimportant. Subordinate managers may feel that no input is being solicited because their input is not valued.
The second process participative budgeting , however, conveys the impression that opinions and views are important and valued. This tends to create a greater feeling of worth to the organization and a stronger commitment to achieving its goals. Thus, the budget for 5, inspection hours is given as follows:. The formula is only valid for this range because of the step-cost nature of the fixed resources. Outside this range the number of inspectors and equipment needed may change.
Note: Cycles, instead of moves, could have been used as the output measures. In this case, the variable cost per unit would double. In some ways, cycles is a better measure because crates then become a strictly variable cost for moves, it is a step-variable cost treated as a variable cost.
For either moves or cycles, salaries and leases are step-fixed costs. The reduction in output reduces the demand for crates and fuel, but the number of operators and forklifts would stay the same even if the reduction in activity output were permanent.
If part-time operators are al-. This illustrates the lumpy nature of resources and their role in budgeting. Received from sales in: June: 0. July: 0. August: 0. September: 0. Schedule 6: Selling and Administrative Expenses Budget Planned sales Schedule 1 Variable selling and administrative expenses per unit Total variable expense Fixed selling and administrative expenses: Salaries Depreciation Other Total fixed expenses Total selling and administrative expenses.
Schedule Cash Budget Beg. To determine accounts payable as of June 30, a schedule of purchases will be constructed. This schedule will also be used to build the cash budget.
Cost of sales Desired end. From purchases schedule prepared in Requirement 1. Participative budgeting communicates a sense of responsibility to subordinate managers and fosters creativity.
Since the subordinate manager creates the budget, it also increases the likelihood that the goals of the budget will become the managers personal goals, resulting in a higher degree of goal congruence.
Many believe that the increased responsibility and challenge provide nonmonetary incentives that lead to a higher level of performance because it is felt that individuals who are involved in setting their own standards work harder to achieve them. It also involves individuals whose knowledge of local conditions may enhance the entire planning process.
There are also certain disadvantages or problems associated with participative budgeting. Some managers may tend to either set the budget too loosely or too tightly. Participative budgeting also creates the opportunity for managers to build slack into the budget by underestimating revenues or overestimating costs.
Another problem is that top management may assume total control of the budgeting process and, simultaneously, seek superficial participation of lower-level managers. The participation is generally limited to an endorsement activity, and no real input is sought. In this case, the advantages of participation are negated. Scott Weidners participative budgetary policy has certain deficiencies. They are as follows: a. Managers do not participate in setting the appropriation target figure.
Recommendation: Managers should have the opportunity to give some input as to what the target figure will be. Setting an upper spending constraint gives indirect approval to spending up to that level whether justified or not. Recommendation: Zero-based budgeting could be used. Setting prior constraints, such as maximum limits and inclusion of noncontrollable fixed expenditures prior to departmental input, defeats the purpose of participative management.
Recommendation: Divisional constraints should be known to management prior to budgeting, but individual limits should be determined with the input of managers. Arbitrary allocation of the approved budget defeats the purpose of a participative budget process. Recommendation: The department managers should be involved in the reallocation of the approved budget. The division manager holds back a specified percentage of each departments appropriation for discretionary use.
Recommendation: Contingency funds should not be a part of a departmental budget. These funds should be identified and provided for before the allocation process to departments.
Exception reporting and evaluation based on performance must be accompanied by rewards. Recommendation: Recognition should be given to those attaining budget goals, not just exceptions. Part 2 is adapted from CMA unofficial answers. Collections: Cash sales 0. Credit sales: July: With discounta Without discountb Sale of old equipment Total cash available Less disbursements: Raw materials: Julye Direct labor Operating expenses Total disbursements Minimum cash balance Total cash needs The new budget system allows the managers to focus on those areas that need attention.
By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded frequent feedback is provided. Also, the company has segregated costs into fixed and variable components, an essential step for good control. A major weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which they have no control.
The performance report should emphasize those items over which the manager has control. The report should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for 3, units with the actual costs for production of 3, units.
A flexible budgeting system needs to be employed. Berwin, Inc. Variable manufacturing costs: Direct materials Direct labor Variable overhead Total variable costs. Berwins budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget. The controller needs to be certain that the budget objectives are based on realistic conditions and expectations.
The managers should be held accountable only for costs over which they have control. Low-volume products may consume nonunit-level overhead activities in much greater proportions than indicated by a unit-level cost driver and vice versa for high-volume products.
If so, then the low-volume products will receive too little overhead and the high-volume products too much. Cost measurement is determining the dollar amounts associated with resources used in production. Cost assignment is associating the dollar amounts, once measured, with units produced. If some products are undercosted and others are overcosted, a firm can make a number of competitively bad decisions. For example, the firm might select the wrong product mix or submit distorted bids.
An actual overhead rate is rarely used because of problems with accuracy and timeliness. Waiting until the end of the year to ensure accuracy is rejected because of the need to have timely information. Timeliness of information based on actual overhead costs runs into difficulty accuracy problems because overhead is incurred nonuniformly and because production also may be nonuniform.
For plantwide rates, overhead is first collected in a plantwide pool, using direct tracing. Next, an overhead rate is computed and used to assign overhead to products. First stage: Overhead is assigned to production department pools using direct tracing, driver tracing, and allocation. Second stage: Individual departmental rates are used to assign overhead to products as they pass through the departments. Nonunit-level overhead activities are those overhead activities that are not highly correlated with production volume measures.
Examples include setups, material handling, and inspection. Nonunit-level cost drivers are causal factors — factors that explain the consumption of nonunit-level overhead. Examples include setup hours, number of moves, and hours of inspection.
Product diversity is present whenever products have different consumption ratios for different overhead activities.
An overhead consumption ratio measures the proportion of an overhead activity consumed by a product. Departmental rates typically use unit-level cost drivers.
If products consume nonunitlevel overhead activities in different proportions than those of unit-level measures, then it is possible for departmental rates to move even further away from the true consumption ratios, since the departmental unit-level ratios usually differ from the one used at the plant level.
Prime costs can be assigned using direct tracing and so do not cause cost distortions. Overhead costs, however, are not directly attributable and can cause distortions. For example, using unit-level activity drivers to trace nonunit-level overhead costs would cause distortions.
Departmental rates would be chosen over plantwide rates whenever some departments are more overhead intensive than others and if certain products spend more time in some departments than they do in others. Plantwide overhead rates assign overhead to products in proportion to the amount of the unit-level cost driver used. If the products consume some overhead activities in different proportions than those assigned by the unit-level cost driver, then cost distortions can occur the product diversity factor.
These distortions can be significant if the nonunit-level overhead costs 75 ties are those that are performed each time a batch of products is produced. Product-level or sustaining activities are those that are performed as needed to support the various products produced by a company.
Activity-based product costing is an overhead costing approach that first assigns costs to activities and then to products. The assignment is made possible through the identification of activities, their costs, and the use of cost drivers. An activity dictionary is a list of activities accompanied by information that describes each activity called attributes Rates can be reduced by building a system that approximates the cost assignments of a fully specified ABC system.
One way to do this is by using only the most expensive activities to assign costs. If the most expensive activities represent a large percentage of the total costs, then most of the costs are assigned using a cause-and-effect relationship, thus creating a good level of accuracy while reducing the complexity of the ABC system.
A primary activity is consumed by the final cost objects such as products and customers, whereas secondary activities are consumed by other activities ultimately consumed by primary activities.
Costs are assigned using direct tracing and resource drivers. Other actions that may help include possible increases in prices of the seats particularly the A seats , offering additional performances of some of the other ballets, cutting administrative costs they seem somewhat high , and offering a less expensive ballet direct costs of Sleeping Beauty are quite high.
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Is this content inappropriate? Report this Document. Flag for inappropriate content. Download now. For Later. Related titles. Carousel Previous Carousel Next. Jump to Page. Search inside document. Thus, the cost equation for JIT includes fixed costs, unit variable cost times the number of units sold, and unit product-level cost times the number of products sold or related cost driver. Price Variable cost per unit Contribution margin per unit 3.
Units for target 4. Sales mix is Twice as many videos are sold as equipment sets. Operating income 0. Alvin Adrian. Riyad Amin.
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