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ReSA-WCM-BUDGETING 240531 153818
ReSA-WCM-BUDGETING 240531 153818
ReSA-WCM-BUDGETING 240531 153818
REQUIRED:
Determine the effective cost of CDO’s credit.
BUDGET PERIOD The length of time for which a budget is to be prepared and implemented
BUDGET COMMITTEE Key management personnel responsible for drafting the budget manual, and
coordinating/approving budgets submitted by managers
BUDGET MANUAL A written description on how to prepare budgets that includes a planning calendar
and distribution instructions for budget schedules
AUTHORITATIVE BUDGETING A process wherein budgets are prepared by top management with little or no
(Top-Down Budgeting) inputs from operating personnel (i.e., imposed budgeting)
PARTICIPATORY BUDGETING A process wherein budgets are developed through joint decisions by top
(Bottom-Up Budgeting) management and operating personnel (i.e., consensus budgeting)
ZERO-BASED BUDGETING A process of starting over each budget and justifying each budgeted item as if the
programs involved were being proposed for the first time every period
CONTINUOUS BUDGET An incremental budget that adds the current period and drops the older period to
(Rolling Budget) maintain a constant budget period of usually 12 months
KAIZEN BUDGETING A process that assumes continuous improvement of products and/or processes so
that budgets are based not on existing system but on changes to be made.
ACTIVITY BASED BUDGETING A process that applies mostly Activity-Based Costing (ABC) principles and
procedures to come up with budgets
LIFE-CYCLE BUDGETING A process wherein a product’s revenues and expenses are budgeted over its entire
life cycle from R&D to production to marketing to customer service
STRATEGIC BUDGET A long-term budget based on the identifications of action plans to achieve
company goals and, ultimately, its mission
BUDGETARY SLACK A practice of underestimating revenues or overestimating costs to make budget
targets easily achievable in order to project a seemingly favorable performance.
STATIC BUDGET A budget prepared for a single level of activity that does not change even when
(Fixed Budget) actual activity differs from planned activity
FLEXIBLE BUDGET A budget that adjusts revenues and costs when actual activity differs from the
(Variable Budget) planned activity stated in the fixed budget
MASTER BUDGET A static budget that is based on the comprehensive plan for the overall activities
(Pro-Forma Budget) of a company. The major components of a master budget are:
(Comprehensive Budget) OPERATING budget – sales forecast, sales budget, production budget,
inventory budget, CGS budget, selling & administrative expense budget
FINANCIAL budget – cash budget, working capital budget, capital expenditures
budget*, pro-forma balance sheet, pro-forma statement of cash flows
* The capital expenditures budget, prepared mainly for the acquisition and
maintenance of long-term assets, may be shown as a separate major component
of the master budget, alongside operating and financial budgets.
USES of BUDGETS Forced Planning Coordination Communication Motivation Efficient Allocation
of Resources Progress Check Benchmark for Performance Evaluation
PROBABILITY ANALYSIS
PROBABILITY is a mathematical expression of doubt or assurance about the occurrence of a chance event.
The probability of a particular event ranges from 0 (never) to 1 (always).
A probability of 0 means the event cannot occur; a probability of 1 means the event is certain to occur.
PROBABILITY ANALYSIS is commonly used in planning to determine the likelihood of a specific event occurring
when several outcomes are possible in order to reduce the level of uncertainty in decision making.
EXPECTED VALUE uses probabilities as weights to compute the arithmetic mean or average of possible outcomes.
JOINT PROBABILITY, determined by multiplying the probability of the first event by the conditional probability
of the second event, is the probability of an event occurring given that another event has already occurred.
Decision-making under CERTAINTY: for each decision alternative, there is only one event with 100% chance.
Decision-making under conditions of RISK: the probability distribution of possible future events is known.
Decision-making under conditions of UNCERTAINTY: each decision alternative has several possible outcomes
and the probability distribution of possible future events is not known and must be determined subjectively.
DECISION TREE is a diagram that shows decision alternatives and the possible outcomes of each decision along
with their associated expected values and probabilities.
DECISION (Pay-off) TABLE shows the decision, outcomes with their probabilities and the monetary values of all
possible decision-outcome combinations.
PERFECT INFORMATION is the knowledge that a future event will occur with certainty.
EXPECTED VALUE (EV) of PERFECT INFORMATION is the difference between expected value with perfect
information (i.e., best results given perfect information) and expected value without perfect information.
EV of Perfect Information = EV with Perfect Information – EV without Perfect Information
5. Expected Value
France Company prepared the following probability distribution describing the relative likelihood of monthly
sales volume levels and related profit (loss) for its lone product that sells for P 20 per unit:
Sales volume Probability Profit (Loss)
6,000 10% (P 70,000)
12,000 30% 10,000
18,000 20% 60,000
24,000 30% 100,000
30,000 10% 140,000
REQUIRED: Using the expected value approach,
A) How much is the budgeted sales for the month?
B) What is the expected value of the monthly profit?
REQUIRED:
A) If the success rate is 70%, what is the value of act “to invest?”
B) What probability-percentages should be assigned to the events ‘success’ and ‘failure’ to be indifferent
between the two actions “to invest” and “not to invest?”
7. Joint Probability
Colombia Company has three sales departments, each contributing the following percentages of total sales:
Alcohol, 30%; Beverages, 50%; and Cigars, 20%. Each department has had the following average annual
damaged goods rates: Alcohol, 10%; Beverages, 12%; and Cigars, 5%. A random corporate audit has found
a weekly damaged goods rate of sufficient magnitude to alarm Colombia’s management.
REQUIRED:
Determine the probability in percentage that the damage occurred in the:
A) Alcohol department
B) Beverages department
C) Cigars department
8. Decision Tree
A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000
bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold
(probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the
yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without
rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only.
REQUIRED:
Determine the optimal expected value.
NOW ________________
D COLD ( ): __________________
REQUIRED:
A) What is the expected value with perfect information?
B) What is the expected value of perfect information?
C) What maximum amount is Puerto Rico willing to pay for the additional information?
1. Budgets are a necessary component of financial decision making because they provide a (n)
A a. Efficient allocation of resources c. Means to check managerial discretion
b. Means to use all the firm’s resources d. Automatic corrective mechanism for errors
2. Which of the following is NOT an advantage of budgeting?
D a. It requires managers to state their objectives.
b. It facilitates control by permitting comparisons of budgeted and actual results.
c. It facilitates performance evaluation by comparing budgets with actual results.
d. It provides a check-up device that allows managers to keep close tabs on their subordinates.
3. Which of the following is true of master budgets?
C a. They aid in quantifying the expectations of all stakeholders.
b. They must be administered rigidly after they are committed to.
c. They aid in coordinating what needs to be done to implement a plan.
d. They include only financial aspects of a plan and exclude nonfinancial aspects.
4. To assure better management acceptance, flow of input data for budgeting should begin in which area?
D a. Top management c. Accounting department
b. Budget committee d. Lower levels of management
5. In an organization that plans by using comprehensive budgeting, the master budget is
A a. A compilation of all the separate operational and financial budget schedules of the organization
b. The booklet containing budget guidelines, policies and forms to use in the budgeting process
c. The current budget updated for operations for part of the current year
d. A budget for a non-profit entity after it is approved by the appropriate authoritative body
6. The sales budget is classified as
C a. A financial budget c. An operating budget
b. A flexible budget d. A program budget
7. Ohio Company developed the following sales forecasts and associated probabilities.
Sales Forecast Probability
P 600,000 10%
P 650,000 50%
P 700,000 35%
P 800,000 5%
What is the expected value of sales?
B a. P 650,000 c. P 667,500
b. P 670,000 d. P 800,000
8. Colorado Company desires an ending inventory of P 60,000. It expects sales of P 120,000 and has a beginning inventory
of P 40,000. Cost of sales is 60% of sales. Budgeted purchases are
C a. P 60,000 c. P 92,000
b. P 72,000 d. P 132,000
9. Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule
that would provide the necessary input data for the direct labor budget would be the
D a. Sales forecast c. Schedule of cash receipts and disbursements
b. Raw materials purchases budget d. Production budget
If Sn is defined as total sales in month ‘n,’ which one of the following expressions correctly describes Alabama’s collection
on account in any given month?
C a. 0.6 S n-1 + 0.3 S n-2 + 0.08 S n-3 c. 0.42 S n-1 + 0.21 S n-2 + 0.056 S n-3
b. 0.42 S n+1 + 0.21 S n+2 + 0.056 S n+3 d. 0.6 S n-1 + 0.3 S n-2 + 0.08 S n-3 - 0.02 S