Atkinson, Solutions Manual t/a Management Accounting, 6th Edition Chapter 01: How Management Accounting Information Supports Decision Making
Atkinson, Solutions Manual t/a Management Accounting, 6th Edition Chapter 07: Management Accounting and Control Systems: Assessing Performance Over the Value Chain
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Chapter 10
Using Budgets to for
Planning and
Coordination
QUESTIONS
A budget is a quantitative model of the expected consequences of the
organization’s short-term operating activities. A budget typically expresses the
expected money inflows and outflows in order to assess whether the planned
operations will meet the organization’s financial objectives.
Flexible resources are those that vary with the activity level of the firm or
organization. Those that do not change with the activity level are capacity-
related (or committed or fixed resources).
Yes, a spending plan is a budget since it provides a summary, in financial terms,
of the student’s spending intentions.
In many ways the goal of a family budget is quite similar to the goal of a budget
developed for an organization. In these settings, the goal is to help both families
and organizations achieve their objectives by allocating their resources wisely.
Organizational budgets usually differ from family budgets in sheer size (the
dollar amounts proposed), scope (the number of operating units and their goals),
and number of iterations (submission and resubmissions of budgets) before the
final budget is determined.
A production plan is an exhibit that identifies proposed production during an
interval of time, such as a week or a month. A production plan in a courier
company identifies the number of drivers and trucks needed and assigns drivers
and trucks to routes.
Financial budgets represent projected financial results for an organization.
Such budgets include a statement of expected cash flows, projected balance
sheet, and a projected income statement. These are often called pro forma
financial statements. Operating budgets are plans used to guide the operations
of the organization. Such plans include sales, capital spending, production,
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materials purchasing, labor hiring and training, and administrative and
discretionary spending plans.
You should not jump to the conclusion that the university’s hiring and training
plan is likely to be more important because it hires skilled rather than unskilled
labor. A number of factors determine the importance of a labor hiring and
training plan in any organization. However, the two most important are likely
the amount of employee turnover that requires replacement and the amount of
ongoing retraining that the organization must provide. If the university has
reached relatively stable employment, the labor hiring and training plan would
be relatively unimportant since university faculty members are expected to
attend to their own training. If the municipality is continuously hiring new
employees or retraining existing employees to use equipment, it will have a
continuous need for a hiring and training plan.
The sales plan is based on the demand forecast. The numbers in the demand
forecast must not be less than the numbers in the sales plan. Otherwise the sales
plan is infeasible because it calls for selling more than customers will buy.
A demand forecast is an estimate of the number of units that customers would
be willing to buy under specified conditions. The intended sales in the sales
plan, a crucial component of the master budget process, cannot exceed the
numbers in the demand forecast. Thus, the demand forecast is used to develop
the sales plan.
Yes. Employee training does not have a physical relationship with the
organization’s activity level. (However, employee training should enhance
performance potential, supporting achievement of an organization’s strategy.)
A capital spending plan summarizes an organization’s plans to acquire or sell
long-term capital investments, such as buildings and equipment, that are needed
to meet the organization’s objectives.
A capacity-related expenditure is any expenditure that an organization cannot
avoid in the short-run. A payment on a long-term lease is a capacity-related
expenditure.
This is a tricky question. If the cafeteria is committed to preparing a given
amount of food for each student in the residence, whether the student shows up
for meals or not, the food cost is a capacity-related (fixed) cost. However, if the
cafeteria only prepares enough food for students who, on average, actually
show up to eat, the food cost is a variable cost.
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A defining characteristic of a flexible resource is one where you only pay for
what you use. Flexible resources can be acquired or disposed of in the short run
based on the number of output units. We usually assume that materials costs are
variable (flexible) because we can always carry materials until we use them.
However, if an organization pays a set amount for materials, no matter how
much it uses, the materials cost is a capacity-related (fixed) cost. A store that
buys merchandise may consider merchandise, or materials costs, a capacity-
related resource because it is unable to carry merchandise indefinitely or return
unused merchandise—but this is stretching the idea of a capacity-related
resource.
A line of credit is a short-term financing arrangement made between an
organization and a financial institution. A line of credit provides an organization
with a ready supply of cash, up to a limit negotiated between the organization
and its bank. We can think of a line of credit as a commitment from a financial
institution to allow the debtor to borrow money on demand up to a specified
maximum amount.
Planners use budget information for the following purposes:
(1) Identify broad resource requirements. This helps develop plans to put needed
resources in place.
(2) Identify potential problems. This helps to avoid problems or to deal with
them systematically.
(3) Compare projected operating and financial results to actual results. These
comparisons within an organization can be used to evaluate the efficiency of
the organization’s operating processes.
Both what-if and sensitivity analyses use the same model to evaluate future
alternatives. However, the approaches differ in their purposes. What-if-analysis
is a process that uses a model to predict the results of varying that model’s key
parameters or estimates. Sensitivity analysis is the process of selectively
varying key estimates of a plan or a budget to identify over what range a
decision option is preferred. In this way, sensitivity analysis enables planners to
identify estimates critical to the decision under consideration. What-if-analysis
relies on that model tested via sensitivity analysis.
A variance is a difference between an actual amount and a planned (budgeted)
amount. The oil pressure warning light comes on in a car when the oil pressure
falls outside a specified planned or expected range.
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Analysis of reasons for the variance between actual and estimated job costs can
help managers in several ways. If the managerial actions that led to actual costs
being lower than the estimated costs are identified, similar cost savings can be
realized by repeating those actions in the production of other jobs. If factors
resulting in actual costs being higher are identified, then managers may be able
to take the necessary actions to eliminate or control those factors. If cost
changes are likely to be permanent, however, the revised cost information can
be used in revising standards for future variance analyses and in bidding for
jobs in the future.
A flexible budget presents cost targets or forecasts for the organization’s
achieved level of activity.
The first level of variance analysis for a cost item focuses on the differences
between actual and estimated (master budget) costs for the item. The second
level of variance analysis decomposes the first-level variances into a flexible
budget variance and a planning variance. The flexible budget variance is the
difference between actual costs and flexible budget costs, which reflect the
volume level achieved, rather than planned. The planning variance is the
difference between flexible budget costs and master budget costs. For variable
costs, the third level of variance analysis decomposes the flexible budget
component of the second level variance into efficiency (use) and price (rate)
variances.
By classifying flexible budget variances into rate (price) and efficiency
(quantity) variances, managers can better understand the factors causing those
variances and correct the standards or institute changes that help reduce
expenses.
Yes. The labor efficiency variance will likely be favorable because fewer
(actual) hours will be required for a job when experienced workers work on the
job. The labor rate variance, however, will likely be unfavorable because
experienced workers’ wages will be higher than those of less experienced
workers.
The purchase and use of cheaper, lower-quality materials is likely to result in a
favorable material price variance, an unfavorable material quantity variance,
and an unfavorable labor efficiency variance, but the labor rate variance is not
likely to be affected.
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