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Chapter 9
Profit Planning
Solutions to Questions
9-1 A budget is a detailed plan outlining the acquisition and use of financial and other resources over a given time period. As such, it represents a plan for the future expressed in formal quantitative terms. Budgetary control involves the use of budgets to control the actual activities of a firm. 9-2 1. Budgets provide a means of communicatingmanagement’s plans throughout the organization. 2. Budgets force managers to think about and plan for the future. 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. 4. The budgeting process can uncover potential bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization.Budgeting helps to ensure that everyone in the organization is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance. 9-3 Responsibility accounting is a system in which a manager is held responsible for those items of revenues and costs—and only those items—that the manager can control to a significant extent. Eachline item in the budget is made the responsibility of a manager who is then held responsible for differences between budgeted and actual results. 9-4 A master budget represents a summary of all of management’s plans and goals for the future, and outlines the way in which these plans are to be accomplished. The master budget is composed of a number of smaller, Solutions Manual, Chapter 9 specificbudgets encompassing sales, production, raw materials, direct labor, manufacturing overhead, selling and administrative expenses, and inventories. The master budget generally also contains a budgeted income statement, budgeted balance sheet, and cash budget. 9-5 The level of sales impacts virtually every other aspect of the firm’s activities. It determines the production budgets, cash collections,cash disbursements, and selling and administrative budgets that in turn determine the cash budget and budgeted income statement and balance sheet. 9-6 No. Planning and control are different, although related, concepts. Planning involves developing objectives and formulating steps to achieve those objectives. Control, by contrast, involves the means by which management ensures that the objectivesset down at the planning stage are attained. 9-7 The flow of information moves in two directions—upward and downward. The initial flow should be from the bottom of the organization upward. Each person having responsibility over revenues or costs should prepare the budget data against which his or her subsequent performance will be measured. As the budget data are communicated upward, higher-levelmanagers should review the budgets for consistency with the overall goals of the organization and the plans of other units in the organization. Any issues should be resolved in discussions between the individuals who prepared the budgets and their managers. All levels of an organization should participate in the budgeting process—not just top management or the accounting department. Generally, thelower levels will be more familiar with detailed, day-to-day operating data, and for 491

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this reason will have primary responsibility for developing the specifics in the budget. Top levels of management will have a better perspective concerning the company’s strategy. 9-8 A self-imposed budget is one in which persons withresponsibility over cost control prepare their own budgets, i.e., the budget is not imposed from above. The major advantages are: (1) the views and judgments of persons from all levels of an organization are represented in the final budget document; (2) budget estimates generally are more accurate and reliable, since they are prepared by those who are closest to the problems; (3) managers generally are...
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