13.1 Roles of Budgets and the Budgeting Process

Question 1

_____________ is imposed by upper management and therefore has less chance of acceptance by those on whom the budget is imposed. This approach has the advantage of ensuring consistency across functional areas. It is also far less complex and time-consuming than coordinating input from middle and lower levels.

Answer 1

Top-down (authoritative) budgeting

Question 2

___________ is characterized by general guidance from the highest levels of management, followed by extensive input from middle and lower management. Because of this level of participation within the company, there is usually a greater chance of acceptance and optimal decision making. Disadvantages of this standards setting include its time and money costs. In addition, the quality of participation is affected by the goals, values, and expectations of those involved.

Answer 2

Bottom-up budgeting (participative)

Question 3

The excess of resources budgeted over the resources necessary to achieve organizational goals. This practice results in the underestimation of revenues and overestimation of expenses. This must be avoided if a budget is to have its desired effects.

Answer 3

budgetary slack

Question 4

Different purposes of a budget

Answer 4

Planning, control, motivation, communication, and goal congruence

Question 5

Steps of the planning process for an organization

Answer 5

1. Formulate mission statement
2. Draw up strategic plan
3. Set priorities
4. Set short-term objectives

Question 6

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

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

Answer 6

A. Limit unauthorized expenditures

Question 7

In the budgeting and planning process for a firm, which one of the following should be completed first?

A. Sales budget
B. Financial budget
C. Cost management plan
D. Strategic plan

Answer 7

D. Strategic plan

Question 8

The starting point for any organization’s planning process is the formulation of its

Answer 8

mission statement

Question 9

_____ plans and budgets most concern senior managers and have time frames of up to 10 years or more

Answer 9

strategic plans

Question 10

_____ plans and budgets most concern middle managers and have time frames of up to 2 years

Answer 10

Intermediate plans

Question 11

______ plans and budgets most concern lower-level managers and generally have time frames of 1 month to 1 year

Answer 11

Operational plans

Question 12

A manufacturer’s factory manager had lost her patience. Six months ago, she appointed a team from the production and service departments to finalize the allocation of costs and setting of standard costs. They were still feuding, so she hired a large consulting firm to resolve the matter. All of the following consequences of having the standards set by the consulting firm except that

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

Answer 12

B. The standards may appear to lack management support.

Question 13

Which one of the following statements concerning approaches for the budget development process is correct?

A. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year.
B. The top-down approach to budgeting will ensure adherence to strategic organizational goals.
C. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget.
D. With the information technology available, the role of budgets as an organizational communication device has declined.

Answer 13

C. Since the department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks of the operating budget.

Question 14

Which one of the following is an advantage of using the budgeting process to judge performance?

A. Past performance can be used to evaluate performance improvements
B. Management believes that past conditions are an indicator of future conditions
C. Management is able to measure actual performance against predicted performance
D. Company performance can be measured against the performance of others in the same industry

Answer 14

C. Management is able to measure actual performance against predicted performance

Question 15

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

A. Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary process.
B. Provides a formal benchmark to be used for feedback and performance evaluation
C. Ensure improved cost control within the organization and prevents inefficiencies.
D. Serves as a coordination and communication device between management and subordinates

Answer 15

C. Ensure improved cost control within the organization and prevents inefficiencies

Question 16

When properly developed and administered, budgets provide the following advantages to the organization except to

A. Provide a structure for measuring performance
B. Ensure that the organization makes a profit
C. Motivate managers and other employees
D. Promote the efficient allocation of resources

Answer 16

B. Ensure that the organization makes a profit

Question 17

What is budgetary slack?

Answer 17

The excess of resources budgeted over the resources necessary to achieve organizational goals.

Question 18

Budgetary slack results in the underestimation of ___________ and overestimation of ______________

Answer 18

Underestimation of revenues
Overestimation of expenses

Question 19

_________ is the extent to which a manager can influence activities and related revenues and costs.

Answer 19

Controllability

Question 20

Controllable costs

Answer 20

Those that are at the discretion of a particular manager

Those that a particular manager can influence or decide.

Question 21

Noncontrollable costs

Answer 21

Those to which another level of the organization has committed, removing the manager’s discretion.

Those set by a another level in the organization, leaving the manager with no control over them.

Question 22

Goal congruence exists when

Answer 22

everyone at all levels of the organization is working toward the same goals

Question 23

Which one of the following is not an advantage of a participatory budgeting process?

A. Coordination between departments
B. Goal congruence
C. Communication between departments
D. Control of uncertainties

Answer 23

D. Control of uncertainties

Question 24

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

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

Answer 24

D. Needs to be involved, including using the budget process to communicate goals.

Question 25

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

Answer 25

B. Have the divisional and senior management jointly develop goals and the divisional manager develop the implementation plan.

Question 26

A budget manual, which enhances the operation of a budget system, is most likely to include

A. Employee hiring policies
B. Distribution instructions for budget schedules
C. Documentation of the accounting system software
D. A chart of accounts

Answer 26

B. Distribution instructions for budget schedules

Question 27

An advantage of participatory budgeting is that it

A. Yields information known to management but not to employees
B. Minimizes the cost of developing budgets
C. Reduces the effect on the budgetary process of employee biases.
D. Encourages acceptance of the budget by employees

Answer 27

D. Encourages acceptance of the budget by employees

Participatory budgeting is considered motivational because it involves the individuals who are responsible for meeting the budget. Since employees are involved in preparing the budget, they are more encouraged to accept the budget than if it were simply handed down to them by top management.

Question 28

Which one of the following is not a characteristic of a successful budget process?

A. Implementing the budget as the only benchmark for performance evaluation
B. Setting specific expectations to compare to actual results
C. Using market feedback to assist in setting expectations
D. Gaining top management’s support

Answer 28

A. Implementing the budget as the only benchmark for performance evaluation

Question 29

The finance department of a large company has prepared a master budget with very limited expense budgets for each department. The department managers are worried about being held accountable for theses assigned targets, but senior management wants to keep spending reduced to allow for contingencies and strategic adjustments to the company-wide master budget. Based on this information, this budget process is

A. Not a successful budgeting because it has not been widely accepted by the employees.
B. Not a successful budgeting process because management has left too much room for strategic unknowns.
C. A successful budgeting process because it will be a very useful tool to hold people accountable for overspending
D. A successful budgeting process because it will encourage the associates to work their hardest to meet the goals.

Answer 29

A. Not a successful budgeting process because it has not been widely accepted by the employees.

Question 30

An improperly executed budget process might have the effect(s) of

A. Disregard of overall company goals
B. Inflated budget requests
C. Meeting short-term but not long-term goals
D. All of the answers are correct

Answer 30

D. All of the answers are correct.

Question 31

A planning calendar in budgeting is the

A. Calendar period covered by the budget
B. Sales forecast by months in the annual budget period
C. Calendar period covered by the annual budget and the long-range plan
D. Schedule of activities for the development and adoption of the budget

Answer 31

D. Schedule of activities for the development and adoption of the budget.

The budget planning calendar is the schedule of activities for the development and adoption of the budget. It should include a list of dates indicating when specific information is to be provided by each information source to others. The preparation of a master budget usually takes several months. For instance, many firms start the budget for the next calendar year some time in September in hopes of having it completed by December 1. Because all of the individual departmental budgets are based on forecasts prepared by others and the budgets of other departments, it is essential to have a planning calendar to ensure the proper integration of the entire process.

Question 32

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

A. May limit the acceptance of proposed goals and objectives
B. Reduces the communication between employees and management
C. May result in a budget that is not possible to achieve
D. Reduces the time required for budgeting

Answer 32

D. Reduces the time required for budgeting

Question 33

One of the primary advantages of budgeting is that it

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

Answer 33

B. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.

Question 34

Describe the role budgeting plays in strategic planning

Answer 34

Planning helps an organization set goals and determine how to achieve them. It starts with a mission statement, which defines the organization’s purpose. From there, a strategic plan outlines long-term objectives–specific, measurable goals to fulfill the mission. These objectives guide priorities and resource allocation, leading to short-term goals. Budgets play a key role by quantifying plans and enable progress evaluation. Comparing actual results to the budget helps measure overall and individual performance, making the budget a tool for strategic control.

Question 35

Describe the role budgeting plays in defining short-term objectives

Answer 35

A company achieves goals like increasing market share or steady dividends through small, incremental steps. Budgets set monthly revenue targets and expense limits for each department, not just a yearly total. Incremental goals are tracked weekly or monthly, especially in seasonal businesses.

Question 36

Identify and explain three characteristics of a successful budgeting process

Answer 36

• In most successful budget programs, department managers participate with upper management in preparing their own budgets.
• The success of a budget program also depends on whether upper management believes the budget program is a vital part of the company’s activities and how upper management uses budget information.
• Rather than viewing the budget as something to be achieved at all costs, management should use the budget as a means of establishing goals, measuring results, and determining areas that need attention. Budgets should establish achievable but challenging targets.
• Sufficient lead time is critical because the preparation of a budget usually takes several months.

Question 37

Explain how the budgeting process might be able to facilitate communication among the manufacturing, marketing, and finance units of the company.

Answer 37

The budget coordinates company activities by requiring managers to consider how their departments are iinterrelated. Changes in products or focus impact manufacturing, marketing, and financing. If one department misses its goal, others may need to adjust theirs.

Question 38

Define flexible budgeting and explain how it is used

Answer 38

Flexible budgeting is a type of budgeting in which the budgeted amounts may be adjusted to any activity level. Flexible budgeting permits better analysis of variances. IT show the differences between actual amounts and flexible budget amounts based on standard costs and prices for the actual level of activity.

Question 39

The primary role of the budget director and the budgeting department is to

A. Settle disputes among operating executives during the development of the annual operating plan
B. Develop the annual plan by selecting the alternatives to be adopted from the suggestions submitted by the various operating segments.
C. Compile the budget and manage the budget process
D. Justify the budget to the executive committee of the board of directors

Answer 39

C. Compile the budget and manage the budget process

Question 40

A budget helps a company control costs by setting cost guidelines. However, a budget also performs the function(s) of

A. All of the answers are correct.
B. Planning.
C. Motivating.
D. Communicating.

Answer 40

A. All of the answers are correct.

A budget is a realistic plan for the future expressed in quantitative terms. It is a planning tool that establishes goals and permits a company to anticipate problems and to plan for decisions. A budget can be a motivator, especially if it sets reasonable standards, has some flexibility, and was prepared with the participation of those affected. A budget is a communication tool because it informs employees about the goals the company is striving to attain and thus enhances goal congruence. A budget is also a means of coordinating the company’s various activities. The company’s overall budget consists of many smaller budgets.

Question 41

The major disadvantage of a budget produced by means of a top-down process is

A. Inconsistency with strategic plans.
B. Lack of involvement by upper-level management.
C. Impairment of goal congruence.
D. Positive motivational effect.

Answer 41

C. Impairment of goal congruence.

Budgets provide a means for coordinating the plans of all organizational subunits. Thus, budgets are a way to promote goal congruence. Although budgets should be consistent with the strategic plans of top management, they should also be based on input from lower-level managers since the latter have detailed knowledge of operating activities. Successful budgets are therefore a compromise. In a top-down process, however, budgets are imposed on subordinates without their participation.