Budgeting Questions Theory:

Q#01: Gleason Company, a manufacturer of children’s toys and furniture, is beginning budget
preparation for next year. Jack Tiger, a recent addition to the accounting staff at Gleason, is
questioning Leslie Robbins and James Crowe, sales and production managers, to learn about
Gleason’s budget process.
Crowe says that he incorporates Robbins’s sales projections when estimating closing inventories
but that the resulting numbers aren’t completely reliable because Robbins makes some
“adjustments” to her projections. Robbins admits that she does indeed lower initial sales
projections by 5% to 10% to give her department some breathing room. Crowe admits that his
department makes adjustments not unlike Robbins’s; specifically, production adds about 10% to
its estimates. “I think everyone here does something similar,” he says, and Robbins nods assent.
Questions
A. What benefits do Robbins and Crowe expect to realize from their budgetary practices?
B. What are possible adverse effects of introducing budgetary slack for Robbins and Crowe?

Q#02: Eugene Logan is the chief financial officer of Artech Corporation, a manufacturer and
distributor of electronic security devices primarily suited for residential applications. Logan is
currently in the process of preparing next year’s annual budget and implementing an incentive
plan to reward the performance of key personnel. The final operating plans will then be
presented to the board of directors for approval.
Logan is aware that next year may be difficult due to announced price increases to major
customers. Artech’s president has put pressure on management to achieve the current year’s
earnings per share amounts. Logan is, therefore, considering introducing zero-based budgeting in
order to bring costs into line with revenue expectations.
Leonard Drake, Artech’s manufacturing director, is attempting to convince Logan to build
budgetary slack into the operating budget. Drake contends that productivity is burdened by an
abnormal amount of product design changes and small lot size production orders that incur costly
setup times.
Questions
A. Explain at least three advantages and at least three disadvantages of budgetary slack from the
point of view of Artech Corporation’s management group as a whole.
B. Describe how zero-based budgeting could be advantageous to Artech Corporation’s overall
budget process.

Q#03: Stark Manufacturing, a division of Davis Corporation, produces and sells a variety of
leather goods to both wholesalers and retail outlets. Four months ago, Davis sent a team from
their Internal Audit Department to Stark to perform a routine review of operations. A portion of
the audit report presented to Davis on the operations of Stark is presented below.
Observation
Departmental budgets are not being utilized at Stark. Currently, the division does not have the
automated systems capability to produce budget analyses at the departmental level. Traditionally,
the plant has been controlled through a total plant concept rather than a departmental approach to
cost control. Given present business conditions, this approach may no longer be the optimum
control process. Increased competition in the marketplace, declining profits, deteriorating
margins, and increased costs have combined to necessitate an aggressive approach to cost
reduction. Based on experience at other Davis plants, we believe that Stark would benefit from
the development and use of departmental budgets for all functions.
Recommendation
We recommend that Stark establish a management objective to develop and utilize flexible
departmental expense budgets for all departments. Resources and systems development efforts
should be devoted to this objective as they become available. We suggest, as an interim step, that
operating budgets be employed on a monthly basis. Operating targets for both direct labor and
indirect labor expense should be established for each manufacturing department monthly.
Departmental managers should track performance and explain deviations from targets as part of
the regular agenda at the weekly production meetings.
Preliminary Management Response
Stark will develop and utilize a flexible departmental budget sys-tem. In the interim, work has
begun to establish daily, month-to-date, and annual targets for direct and indirect labor for the
manufacturing departments. These targets include efficiency objectives, overtime objectives, and
indirect labor usage objectives based on volume and product mix.
Prior to making the Preliminary Management Response presented in the audit report, the
president of Stark announced to the departmental managers that the company was planning to
accept the audit recommendation implement a departmental budgeting system. The managers
were asked for suggestions on implementation procedures and were encouraged to raise any
questions they might have about the budget system.
Required:
A. Describe the benefits, other than better cost control, that are likely to accrue to Stark
Manufacturing from the implementation of departmental budgeting.
B. Discuss the behavioral impact the introduction of depart-mental budgeting is likely to have on
Stark Manufacturing's
1. Departmental managers.
2. Production workers.
C. Describe several steps that Stark Manufacturing should take in order to gain maximum
acceptance of the new departmental budgeting system.

Q#04: Law Services Inc. provides a variety of legal services to its clients. The firm’s attorneys
each have the authority to negotiate billing rates with their clients. Law Services wants to
manage its operations more effectively, and established a budget at the beginning of last year.
The budget included total hours billed, amount billed per hour, and variable expense per hour.
Unfortunately, the firm failed to meet its budgeted goals for last year. The results are shown
below.
Actual Budget
Total hours billed 5,700 6,000
Amount billed/hour $275 $325
The budgeted variable expense per hour is $50, and the actual total variable expense was
$285,000. There is disagreement among the attorneys over the reasons that the firm failed to
meet its budgeted goals.
Required:
1) What is the advantage of using a flexible budget to evaluate Law Services’ results for last year
as opposed to a static budget? Explain your answer.
2) Explain the process of creating a flexible budget for Law Services.
Q#05: Tru Jeans, a new startup company, plans to produce blue jean pants, customized with the
buyer’s first name stitched across the back pocket. The product will be marketed exclusively via
an internet website. For the coming year, sales have been projected at three different levels:
optimistic, neutral, and pessimistic. Tru Jeans does keep inventory on hand, but prefers to
minimize this investment.
The controller is preparing to assemble the budget for the coming year, and is unsure about a
number of issues, including the following.
• The level of sales to enter into the budget.
• How to allocate the significant fixed costs to individual units.
• Whether to use job order costing or process costing.
In addition, the controller has heard of kaizen budgeting and is wondering if such an approach
could be used by Tru Jeans.
Required:
A. How can the controller use the expected value approach to set the sales level for the budget?
What additional information would be needed?
B. How could the use of variable (direct) costing mitigate the problem of how to allocate the
fixed costs to individual units?
C. Which cost system seems to make more sense for Tru Jeans, job order costing or process
costing? Explain your answer.

Q#06: Inman Inc. is a manufacturer of a single product and is starting to develop a budget for the
coming year. Because cost of goods manufactured is the biggest item, Inman’s senior
management is reviewing how costs are calculated. In addition, senior management wants to
develop a budgeting system that motivates man-agers and other workers to work toward the
corporate goals. Inman has incurred the following costs to make 100,000 units during the month
of September.

Inman Inc.’s September 1 inventory consisted of 10,000 units valued at $72,000 using absorption
costing. Total fixed costs and variable costs per unit have not changed during the past few
months. In September, Inman sold 106,000 units at $12 per unit.
Required:
a. Identify one strength and one weakness each of authoritative budgeting and participative
budgeting.
b. Which of these budgeting methods will work best for Inman Inc.? Explain your answer.
c. Identify and explain one method the top managers can take to restrict the Production Manager
from taking advantage of budgetary slack.