CMA ESSAY TYPE QUESTIONS

CMA ESSAY QUESTION 

COST TERMS AND CONCEPTS

Q1  Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants.  They are:

                  Cost object #1:      The physical buildings and equipment

                  Cost object #2:      The use of buildings and equipment

                  Cost object #3:      The availability and use of manufacturing labor

            The following manufacturing overhead cost categories are found in the accounting records:

                  a.   Depreciation on buildings and equipment

                  b.   Lubricants for machines

                  c.   Property insurance

                  d.   Supervisors’ salaries

                  e.   Fringe benefits

                  f.    Property taxes

                  g.   Utilities

            Required:

            Assign each of the above costs to the most appropriate cost object.

            Answer:

            Cost object # 1 includes categories a, c, and f.

            Cost object # 2 includes categories b and g.

            Cost object # 3 includes categories d and e.

Q2  .  Archambeau Products Company manufactures office furniture.  Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories.  Categorize each of the following items as being appropriate for (1) cost tracing to the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item.

                                                                                      Cost                Cost           Nonmanu-

            Item                                                                Tracing         Allocation        facturing

            Carpenter wages                                           ________        ________        ________

            Depreciation - office building                       ________        ________        ________

            Glue for assembly                                         ________        ________        ________

            Lathe department supervisor                        ________        ________        ________

            Lathe depreciation                                        ________        ________        ________

            Lathe maintenance                                        ________        ________        ________

            Lathe operator wages                                    ________        ________        ________

            Lumber                                                          ________        ________        ________

            Samples for trade shows                               ________        ________        ________

            Metal brackets for drawers                           ________        ________        ________

            Factory washroom supplies                           ________        ________        ________

            Answer:

                                                                                            Cost             Cost        Nonmanu-

            Item                                                                      Tracing      Allocation     facturing

                 

            Carpenter wages                                                        X

            Depreciation - office building                                                                             X

            Glue for assembly                                                                           X

            Lathe department supervisor                                                          X

            Lathe depreciation                                                                                               X

            Lathe maintenance                                                                         X

            Lathe operator wages                                                                     X

            Lumber                                                                      X

            Samples for trade shows                                                                                     X

            Metal brackets for drawers                                        X

            Factory washroom supplies                                                            X

           
Q3 Butler Hospital wants to estimate the cost for each patient stay.  It is a general health care facility offering only basic services and not specialized services such as organ transplants.

         Required:

         a.      Classify each of the following costs as either direct or indirect with respect to each patient.

         b.      Classify each of the following costs as either fixed or variable with respect to hospital costs per day.

                                                                         Direct            Indirect       Fixed      Variable

                  Electronic monitoring                   ______         ______         ______      ______

                  Meals for patients                         ______         ______         ______      ______

                  Nurses' salaries                              ______         ______         ______      ______

                  Parking maintenance                     ______         ______         ______      ______

                  Security                                         ______         ______         ______      ______

            Answer:               

                                                                         Direct         Indirect          Fixed      Variable

                 

            Electronic monitoring                              X                                                         X

            Meals for patients                                    X                                                         X

            Nurses salaries                                                               X                  X

            Parking maintenance                                                    X                  X

            Security                                                                        X                  X

           

Q4  .  Combs, Inc. reports the following information for September sales:

                  Sales                                 $15,000

                  Variable costs                       3,000

                  Fixed costs                           4,000

                  Operating income              $ 8,000

         Required:

         If sales double in October, what is the projected operating income?

         Answer:

         (15,000 x 2) - ($3,000 x 2) - $4,000 = $20,000

Q5 Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

                  Direct materials                                       $200

                  Direct manufacturing labor                         30

                  Variable manufacturing overhead               60

                  Fixed manufacturing overhead                   40

                       Total manufacturing costs                  $330

         The plant has capacity for 2,000 axles.

         Required:

         a.      What is the total cost of producing 1,000 axles?

         b.      What is the total cost of producing 1,500 axles?

         c.      What is the per unit cost when producing 1,500 axles?

         Answer:

         a.      [($200 + $30 + $60) x 1,000 units] + ($40 x 1,000 units) = $330,000

         b.      [($200 + $30 + $60) x 1,500 units] + $40,000 = $475,000

         c.      $475,000 / 1,500 = $316.67 per unit

        

Q6     The following information pertains to Ball Company:

        

                  Manufacturing costs               $2,400,000

                  Units manufactured                       40,000

                  Beginning inventory                       0 units

         39,800 units are sold during the year for $100 per unit.

         Required:

         a.      What is the average manufacturing cost per unit?

         b.      What is the amount of ending finished goods inventory?

         c.      What is the amount of gross margin?

         Answer:

         a.      $2,400,000 / 40,000 = $60.00

         b.      (40,000 – 39,800) x $60 = $12,000

         c.      39,800 x ($100 - $60) = $1,592,000

        

Q7  .  Cheaney Incorporated reports the following information.

         On January 31, 20x1, Job #101 was the only job in process with accumulated costs of:

                  Direct materials                                          $2,000

                  Direct manufacturing labor                          1,000

                  Manufacturing overhead                              1,000

                       Total                                                      $4,000

         During February, Job #102 and Job #103 were started and the following costs were added:

                                                                                 Job #101         Job #102         Job #103

                  Direct materials                                          $4,000             $5,000             $6,000

                  Direct manufacturing labor                          1,000               2,000               3,000

                  Manufacturing overhead                              2,000               3,000               4,000

                       Total                                                      $7,000           $10,000           $13,000

         On February 28, 20x1:

                  Job #101 was completed and sold for $20,000.

                  Job #102 was completed but not sold.

                  Job #103 remains in production.

         Required:

         Using the above information, determine the following amounts:

         a.      Work-in-process inventory on February 1, 20x1.

         b.      Work-in-process inventory on February 28, 20x1.

         c.      Finished goods inventory on February 28, 20x1.

         d.      Cost of goods manufactured for February.

         e       Cost of goods sold for February.

         f.       Gross margin for February.

         Answer:

         a.      $4,000

         b.      Job #103   $13,000

         c.      Job #102   $10,000

         d.      (Job #101  $11,000) + (Job #102  $10,000) = $21,000

         e.      Job #101   $11,000

         f.       $20,000 - $11,000 = $9,000

Q8  .  Evans Inc. had the following activities during 20x1:

                  Direct materials:

                           Beginning inventory                                              $ 40,000

                           Purchases                                                                123,200

                           Ending inventory                                                      20,800

                  Direct manufacturing labor                                                32,000

                  Manufacturing overhead                                                    24,000

                  Beginning work-in-process inventory                                  1,600

                  Ending work-in-process inventory                                       8,000

                  Beginning finished goods inventory                                  48,000

                  Ending finished goods inventory                                      32,000

            Required:

            a.   What is the cost of direct materials used during 20x1?

            b.   What is cost of goods manufactured for 20x1?

            c.   What is cost of goods sold for 20x1?

            d.   What amount of prime costs was added to production during 20x1?

            e.   What amount of conversion costs was added to production during 20x1?

            Answer:

            a.   $40,000 + $123,200 - $20,800 = $142,400

            b.   $142,400 + $32,000 + $24,000 + $1,600 - $8,000 = $192,000

            c.   $192,000 + $48,000 - $32,000 = $208,000

            d.   $142,400 + $32,000 = $174,400

            e.   $32,000 + $24,000 = $56,000

Q9  .     Helmer Sporting Goods Company manufactured 100,000 units in 20x3 and reported the following costs:

         Sandpaper                                   $    32,000         Leasing costs - plant                 $   384,000

         Materials handling                          320,000         Depreciation - equipment              224,000

         Coolants & lubricants                       22,400         Property taxes - equipment              32,000

         Indirect manufacturing labor          275,200         Fire insurance - equipment              16,000

         Direct manufacturing labor          2,176,000         Direct material purchases           3,136,000

         Direct materials, 1/1/x3                   384,000         Direct materials, 12/31/x3             275,200

         Finished goods, 1/1/x3                    672,000         Sales revenue                            12,800,000

         Finished goods, 12/31/x3             1,280,000         Sales commissions                         640,000

         Work-in-process, 1/1/x3                    96,000         Sales salaries                                  576,000

         Work-in-process, 12/31/x3                64,000         Advertising costs                           480,000

                                                                                       Administration costs                     800,000

         Required:

        

a.      What is the amount of direct materials used during 20x3?

b.      What manufacturing costs were added to WIP during 20x3?

c.      What is cost of goods manufactured for 20x3?

d.      What is cost of goods sold for 20x3?

         Answer:

         a.      $384,000 + $3,136,000 - $275,200 = $3,244,800

         b.      $3,244,800 + $2,176,000 + $32,000 + $320,000 + $22,400 + $275,200 + $384,000 + $224,000 + $32,000 + $16,000 = $6,726,400

         c.      $6,726,400 + $96,000 - $64,000 = $6,758,400

         d.      $6,758,400 + $672,000 - $1,280,000 = $6,150,400

budgeting cma

1.1     BUDGETING CONCEPTS

1.       A budget (profit plan) Is a realistic plan for the future expressed in quantitative terms.

a.      The budget is a planning tool.

1)     A budget is a written plan for the future.

2)      Companies that prepare budgets anticipate problems before they occur.

a) EXAMPLE: If a company runs out of a critical raw material, it may have to
            shut down. At best, it will incur extremely high freight costs to have the
         needed. materials rushed in. The company with a budget will have

anticipated the shortage and planned around it.

3)      A firm that has no goals may not always make the best decisions. A firm with a

goal in the form of a budget will be able to plan.

b.      The budget is a control tool.

1)     A budget helps a firm control costs by setting cost guidelines.

2)      Guidelines reveal the efficient or inefficient use of company resources.

3) A manager is less apt to spend money for things that are not needed if (s)he

knows that all costs will be compared with the budget.

a)      (S)he will be accountable if controllable costs exceeding budgeted

amounts.

4)      Budgets can also reveal the progress of highly effective managers.

Consequently, employees should not view budgets negatively. A budget is just

as likely to provide a boost to a manager's career as it is to be detrimental.

5)      Managers can also use a budget as a personal self-evaluation tool.

6)      Budgetary slack (overestimation of expenses) must be avoided, however, if a

budget is to have its desired effects. The natural tendency of a manager is to

negotiate for a less stringent measure of performance so as to avoid

unfavorable variances from expectations.

7)      For the budgetary process to serve effectively as a control function, it must be

integrated with the accounting system and the organizational structure. Such

integration enhances control by transmitting data and assigning variances to

the proper organizational subunits.

c.      The budget is a motivational tool.

1)     A budget helps to motivate employees to do a good job.

a) Employees are particularly motivated if they help prepare the budget.

b) A manager who. is asked to prepare a budget for his/her department will
         work hard to stay within the budget.

2) A budget must be seen as realistic by employees before it can become a good

motivational tool.

3)    Unfortunately, the budget is not always viewed in a positive manner. Some

managers view a budget as a restriction.

4)    Employees are more apt to have a positive feeling toward a budget if some

degree of flexibility is allowed.

24           SU 1: Budgeting Concepts and Forecasting Techniques

d.      The budget is a means of communication.

1)      A budget can help tell employees what goals the firm is attempting to

accomplish.

2)      If the firm does not have an overall budget, each department might think the firm

has different goals.

3)      For example, the sales department may want to keep as. much inventory as

possible so that no sales will be lost, but the company treasurer may want to keep the inventory as low as possible so that cash need not be spent any sooner than necessary. If the budget specifies the amount of inventory, all employees can work toward the same objectives.

2.       The Budget as a Formal Quantification of Management's Plans

a.      Corporations have goals for market share, profitability, growth, dividend payout, etc.

Not-for-profit organizations also have goals, such as increased number of free meals

served, lowered recidivism rate among offenders, etc.

1)     These goals cannot be achieved without careful planning about the allocation of

resources and the expected results.

b.      A budget lays out in specific terms an organization's expectations about the

consumption of resources and the resulting outcomes.

3.       Budgeting's Role in the Overall Planning and Evaluation Process

a.       Planning is the process by which an organization sets specific goals for itself and sets

about pursuing those goals. Planning is an organization's response to the aphorism "If you don't know where you're going, any path will take. you there."

1)     The starting point for any organization's planning process is the formulation of its

mission statement. The mission statement, formulated by the board and
senior management, embodies the organization's reason for existing.

a) EXAMPLE: Increase shareholder value through providing global
            telecommunications services.

2)      Next, the organization draws up its strategic plan containing the means by

which the firm expects to fulfill its stated mission.

a) To a great extent, the strategy is made up of long-term objectives, a set
            of specific, measurable goals.

b)- EXAMPLE: Hold a 35% market share of U.S. cell phone users within five
            years.

3)      Once the long-term objectives are in place, the priorities of the organization will

be clear.

a) Awareness of priorities is crucial-for the allocation of limited resources.

b) EXAMPLE: How many cell towers, each of which require the outlay of

construction and maintenance costs, will provide the optimum amount of coverage.

4) Short-term objectives flow directly from the priorities.

.a)      EXAMPLE: Determine the appropriate number of cell towers needed and

where they can feasibly be placed in the Metro Atlanta region.

SU 1: BudgetingConcepts and ForecastingTechniques                                                                                                           25

b.      To evaluate progress toward success in each of these stages, quantification is

necessary. This is the role of the various types of budgets.

1)     Not all quantification is in monetary terms. To extend the previous example,

although cell towers obviously have a dollar cost, they must be simply counted

as well.

2)     Comparing actual results to the budget allows the organization as a whole to

evaluate its performance and managers to do the same on an individual level.

4.       Effects of External Factors on the Budgeting Process

a.      Decisions about a firm's strategy, and in turn about its budget, are dependent on

general economic conditions and their expected trends and the availability of financial resources.

1)     For instance, if the economy is entering a period of lower demand, a

manufacturer will not project increased sales.. If costs are not changeable, the
company may budget losses for the short-term to hold on to market share.

b.       Industry situation includes the company's current market share, governmental

regulatory measures, the labor market, and the activities of competitors.

1)      For instance, if input costs are rising in a firm's industry, the budget must reflect

that reality; profit margins and cash flows will not be the same as in prior years.

Also, a company in, or near, bankruptcy will face a different financial situation

than would the market leader.

5.       Budgeting's Role in Formulating and Controlling Short-term Objectives

a.      A company's goal of increasing market share, making a steady dividend payout, etc.,

can only be achieved through the completion of incremental steps.

b.      The budget lays out the specific revenue targets and expense limitations for. each

functional area and department of the organization on a month-by-month basis.

1)     A budget cannot simply be a lump-sum total for a year. Incremental goals must

be achieved each month or week. This is especially true in seasonal

businesses, such as agricultural supply.

6.       Characteristics of a Successful Budgeting Process

a.       Sufficient lead time. For a budget to be useful, it must be finalized when the fiscal

year begins. This often calls for. months of preparation, since the overall goals and baseline assumptions must be announced before functional areas and individual departments can begin formulating their numbers.

1)      The preparation of a complete organizational budget usually takes several

months. A firm with a calendar year-end may start the budget process in September, anticipating its completion by the first of December.

2)     The budget planning calendar is the schedule of activities for the development

and adoption of 'the budget. It includes a list of dates indicating when specific information is to be provided to others by each information source.

a) 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 integrate the entire process.

1)

26           SU 1: Budgeting Concepts and Forecasting Techniques

b.      Budget manual. Everyone involved in preparing the budget at all levels must be

educated on the detailed procedures for preparing and submitting their part of the

overall budget.

1)      Because of the number of component departments, budgets must be prepared in

a standard format.

a) In addition, all concerned must be informed of the ultimate goals that are
            being pursued and the baseline assumptions that have been laid down.
         A budget may, for example, begin with a blanket mandate to raise
         revenues by 6.5% or to cut expenses across all departments by 2%.

2)      Distribution instructions are vital because of the interdependencies of a.

master budget.

a) One department's budget may be dependent on another's, and functional
            areas must be aggregated from their constituent department budgets.

The distribution instructions coordinate these interdependencies.

c.     Buy-in at all levels. Participative budgeting has a much greater chance of

acceptance by those affected and thus of achieving ultimate success than does a

budget that is imposed from above.

1)     See item 12. on the next page.

7.       Role of Budgets in 'Measuring Performance against Established Goals

a.      One of the most important reasons for adopting a budget is to provide guideposts for

the assessment of success or failure on the part of individual managers and functional areas.

b.      As the fiscal year progresses, revenues, expenses, and other metrics can be

compared to the.budget to determine where organizational performance-is meeting, lagging, or exceeding expectations.

8.       Role of Budgeting Process in Facilitating Communication among Organizational Units

and Enhancing Coordination of Organizational Activities

a.-     On a detailed level, the budget informs employees at all levels what objectives the firm

is attempting to accomplish.  •

1)      If the firm does not have an overall budget, each department tends to pursue its

own objectives without regard to what is good for the firm as a whole. Thus, a

budget promotes-goal congruence.

2)    For example, the sales department may want to keep as much inventory as

possible so that no sales will be lost, but inventory control may be judged on its
turnover rate. If the budget specifies the level of inventory, the two departments
have a common framework for decision making and are no longer working at
cross purposes.

b.      The concrete. nature of a budget facilitates coordination of the activities of a firm.

An example is the purchasing of raw materials.                     •

1) " Materials are needed prior to production, but the proper quantity to buy cannot

be determined until the projected level of output is established.         .

a) Thus, a production budget (in units) is a prerequisite to the preparation of a

materials purchases budget.

2)    Similarly, a direct labor budget is based on how many units are to be produced

and. how fast the workers are.

a) Labor standards are also complex in that they must consider the impact of
         the learning curve on productivity.

SU 1: Budgeting Concepts and Forecasting Techniques                                                                                                           27

9.       The Concept of Controllability

a.      Controllability is a key concept in the use of budgets and other standards to evaluate

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

b. Controllable costs are those that are under the discretion of a particular manager.

Noncontrollable costs are those to which another level of the organization has

committed, removing the manager's discretion.

c.       Controllability can be difficult to isolate because few costs or revenues are under the

sole influence of one manager. Also, separating the effects of current management's decisions from those of former management is difficult.

1)     If responsibility exceeds the extent to which a manager can influence an activity,

the result may be reduced morale, a decline in managerial effort, and poor

performance.

2)      The principle of controllability must be kept in mind when the budget is used as

the basis for managerial evaluation.

10.    The planning process coordinates the efficient allocation of organizational resources.

11.    Time Frames for Budgets

a.       Each phase of the organization's planning cycle has its own budget with an

appropriate time frame.

1)     Strategic plans and budgets most. concern senior managers and have time

frames of up to 10 years or more.

2)      Intermediate plans and budgets most concern middle managers and have time

frames of up to 2 years.

3)      Operational plans and budgets most concern lower-level managers and

generally have time frames of 1 month to 1 year.

12.     Participation in the Budget Process

a.       Participation in the budget preparation process is up and down the organization.

1)     The budget process begins with the mission statement formulated by the board

of directors.

2)      Senior management translates. the mission statement into a strategic plan with

measurable, realizable goals.

3)      A budget committee composed of top management is formed to draft the

budget calendar and budget manual. The budget committee also reviews and approves the departmental budgets submitted by operating managers.

Middle and lower management receive their budget instructions, draw up their departmental budgets in conformity with the guidelines, and submit them to the budget committee.

13.    The Use of Cost Standards                                                                                   }

a.     Standard costs are predetermined expectations'about how much a unit of input, a

unit of output, or a given activity should cost:                    -

1)   The use of standard costs in budgeting allows'the standard=cost system to-alert

management when the actual costs of production differ significantly from the standard.

28           SU 1: Budgeting Concepts and Forecasting Techniques

b.      A standard cost is not just an average of past costs but an objectively determined

estimate of what a cost should be. Standards may be based on accounting,

engineering, or statistical quality control studies.

1)    Because of the impact of fixed costs in most businesses, a standard costing

system is usually not effective unless the company also has a flexible budgeting

system (see item 6.b. in Study Unit 2, Subunit 1).

14.    Theoretical vs. Practical Standards

a.       Ideal (theoretical) standards are standard costs that are set for production under

optimal conditions. For this reason, they are also called perfection or maximum

efficiency, standards.

1)     They are based on the work of the most skilled workers with no allowance for

waste, spoilage,. machine breakdowns, or other downtime.

2) Often called "tight" standards, they can have positive behavioral implications if
            workers are motivated to, strive for excellence. However, they are not in wide
            use because they can have negative behavioral effects if the standards are
            impossible to attain.

3)      Ideal standards are ordinarily replaced by currently attainable standards for cash

budgeting, product costing, and budgeting departmental performance. Otherwise, accurate financial planning will be impossible.

4)      Ideal standards have been adopted by some companies that apply continuous

improvement and other total quality management principles.

b.       Currently attainable (practical) standards may be defined as the performance that

is expected to be achieved by reasonably well-trained workers with an allowance for normal spoilage, waste, and downtime.

1)     An alternative interpretation is that practical standards represent possible but

difficult-to-attain results.

15.    Authoritative vs. Participative Standard Setting

a.      A purely top-down (authoritative) approach to standard setting has the advantage of

ensuring total consistency across all functional areas. It is also far less complex and time-consuming than coordinating input from the middle and lower levels.

b.       Participative (grass-roots) standard setting uses input from middle- and lower-level

employees.

1)      Participation encourages employees to have a sense of ownership of the output

of the process. The result is an acceptance of, and commitment to, the goals

expressed in the budget.

2)    An imposed budget is much less likely to foster this sense of commitment,

c.     Participation also enables employees to relate performance to rewards or penalties.

1)     A further advantage of participation is that it provides a broader information

base. Middle- and lower-level managers are often far more informed about

operational realities than senior managers.

d.     Disadvantages of participative standard setting include its cost in terms of time and

money. In addition, the quality of participation is affected by the goals, values,

beliefs, and expectations of. those involved.

1)     A manager who expects his/her request to be reduced may inflate the amount.

2)    If a budget is to be used as a performance evaluator, a manager asked for an

estimate may provide one that is easily attained.

SU 1: Budgeting Concepts and Forecasting Techniques                                                                                                           29

16.     Steps in Developing Standards

a.       For direct materials, there is often a direct relationship between unit price and

quality. In establishing its cost standards, a manufacturer must decide whether it will

use an input that is

1)      Cheaper per-unit but will ultimately result in higher consumption because of low

quality, or

2)    Pricier but allows more efficient usage because of lower waste and spoilage.

b.     For direct labor, the complexity of the production process and the restrictions on pay

scales imposed by union agreements have the most impact on formulating cost

standards. Human resources also must be consulted to help project the costs of

benefits.

17.     Activity analysis identifies, describes, and evaluates the activities that go into producing a

particular output. Determining the resources and steps that go into the production process

aids in the development of standard costs.

a.       Each operation requires its own unique set of inputs and preparations. Activity

analysis describes what these inputs are and who performs these preparations.

1)      Inputs include the amounts and kinds of equipment, facilities, materials, and

labor. Engineering analysis, cost accounting, time-and-motion study, and other approaches may be useful.

b.       Historical data may be used to set standards by firms that lack the resources to

engage in the complex task of activity analysis.

18.     Revisions to the Budget

a.       Often an organization will find that the assumptions under which the budget was

prepared undergo significant change during the year. A policy must be in place to accommodate revisions to the budget resulting from these. changes.

1)     Accommodation of change is a key characteristic of successful budgeting. If

such a policy is not in place, managers can come to believe they are being held to a budget that is no longer possible to achieve, and morale can suffer.

b.       Information gained during the year as actual results and variances are reported can be

used to help the company take corrective action.. These steps make up a control

loop:

1)     Establishing standards of performance (the budget)

2)    Measuring actual performance

3)    Analyzing and comparing performance with standards

4)    Devising and implementing corrective actions

5)    Reviewing and revising the standards

19.     The Role of Budgets in Monitoring and Controlling Expenditures

a.     The initial budget is a planning tool. To monitor how.actual performance compares

with the budget, budget reports are produced periodically during the year.

1)       The difference between actual performance and a budgeted amount is called a

variance. Analysis of variances reveals the efficient or inefficient use of
company resources (see Study Unit 7, "Cost and Variance Measures").

30           SU 1: Budgeting Concepts and Forecasting Techniques

20. Participation in developing a budget may result in a padding of the budget, also known as

budgetary slack.

a.       Budgetary slack is the excess of resources budgeted over the resources necessary

to achieve organizational goals.

1)    The natural tendency of a manager is to negotiate for a less stringent measure of

performance so as to avoid unfavorable variances from expectations.

b.    Management may create slack by overestimating costs and underestimating revenues:

1)     A firm may decrease slack by emphasizing the consideration of all variables,

holding in-depth reviews during budget development, and allowing for flexibility in making additional budget changes.

c.       The existence of slack can have both positive and negative effects on the budgeting

process. The existence of slack can reduce the planning benefits of a budget since

the budget may not be entirely accurate.

1)      For example, a cash budget might show that $500,000 needs to be borrowed

this month, whereas the money is not really needed because managers were

just being cautious.

2)      Alternatively, the lack of slack may discourage managers from implementing new

programs, or might cause managers to avoid, routine maintenance when the budget does not show funds available in a particular period.

Stop and review!. You have completed the outline for this. subunit. Study multiple-choice questions 1 through 18 beginning on page 43