This Presentation is based on Horngren Book 16th edition question answer which is presented on the management accounting courses by Group 7. So, we are very delight to get such opportunity.

1. MANAGEMENT ACCOUNTING
Chapter 7: Introduction to Budgets and Preparing the Master Budget
Group 7

2. List of Group Members
Ratika Hossain, 19-022
Anika Mahmud, 19-024
Umma Hania, 19025
Rifat Bin Tarek, 19-027
Md. Ashiqul Islam Badhan, 19-065

3. Question 7-1
What are the major benefits of budgeting?
Answer
1. Opportunity for managers to reevaluate existing activities and evaluate possible
new activities
2. Compels managers to think ahead by formalizing their responsibilities for
planning,
3. Aids managers in communicating objectives to units and coordinating actions
across the organization
4. provides benchmarks to evaluate subsequent performance.

4. Question 7-2
Is budgeting used primarily for scorekeeping , attention directing, or problem solving?
Answer
Budgeting is primarily attention directing because it helps managers to focus on
operating or financial problems early enough for effective planning or action.

5. Question 7-3
Answer
Strategic planning covers no specific time period, is quite general, and often is not
built around financial statements.
Long-range planning usually has a 5- or 10-year horizon and consists of financial
statements without much detail.
Budgeting usually has a horizon of one year or less, and consists of financial
statements with much detail.
How do strategic planning, long-range planning, and budgeting differ?

6. Question 7-4
Answer
-Continuous budgets add a month in the future when the month ended is dropped.
-The continuous budget provides a continually updated budget looking twelve months ahead.
-When the new month (or quarter) is added, the budget for the remainder of the current year
may also be revised.
-When companies revise the budgets for the remainder of the current year, they usually
compare subsequent results to the original budget in addition to comparing them to the latest
revised budget.
“I oppose continuous budgets because they provide a moving target. Managers
never know at what to aim.” Discuss.

7. Question 7-5
Answer
-If the measures used to reward employees in the performance evaluation system are
not aligned with the goals of the company
-The incentives from the evaluation system may lead employees to take actions that
conflict with the interests of the company.
Why is it important to align performance goals of the company and the system
used to evaluate and reward employees?

8. Ratika Hossain
ID:19022

9. Question 7-6
Explain the cycle of bias by lower-level managers and bias-adjustment by upper-
level managers that can spiral out of control and result in meaningless budget?
Answer
Lower-level managers bias their forecasts to create budgetary slack or padding .
Upper-level managers adjust for this bias in creating a revised budget .Therefore ,
lower-level managers introduce additional bias to complete for the adjustment that will
be made by upper-level managers introduce additional adjustments for the additional
bias. This cycle can quickly destroy the potential benefits of budget.

10. Question 7-7
What are the incentives for inappropriate behaviors to increase reported profit when
it appears that profits are likely to fall just short of a manager’s target?
Answer
A manager may make short run decisions to increase profits that are not in the
company’s best long-run interests such as offering customers excessively favorable
credit terms or cutting discretionary expenditures such as R & D and advertising,
trading future sales for current profits. In the extreme, the manager might choose to
falsely report inflated profits

11. Question 7-8
Why is there an incentive for a manager to inappropriately reduce reported profit
when it appears that profits are likely to be above the upper limit of a manager’s
bonus range?
Answer
a) by moving this year’s sale into next year or moving next year’s expenses into this year
, the manager ensures a higher level of reported profit(and probably a higher bonus)
next year.
b) by decreasing this year’s income, the manager avoids ratcheting up of performance
expectations in setting the bonus target for the next year

12. Question 7-9
Why is budgeted performance better than past performance as a basis for judging
actual results?
Answer
Budgeted performance is better than past performance as a basis for judging current
performance because the budget contains no hidden inefficiencies and can be founded
on current rather than past economic conditions.

13. Question 7-10
“Budgets are okay in relatively certain environments . But everything changes so quickly
in the electronics industry that budgeting is a waste of time ”. Comment on this
statement.
Answer
Budgets are specially important in environments that are rapidly changing. They force
managers to look forward and plan for change . Budget force analysis the factors that
are bringing about the changes.

14. Anika Mahmud
ID-19024

15. Question 7-11
“Budgeting is an unnecessary burden on many managers. It takes time away from
important day-to-day problems.” Do you agree? Explain.
Answer
I do not agree with the statement because I think budgeting is definitely necessary for
the long-term success of any business. When budgeting in done correctly, it is an
important aid to managers. Managers need time to plan and co-ordinate their various
activities. Budgeting forces them to take time from the day-to-day problems and focus
on longer-term issues.
.

16. Question 7-12
Why is the sales forecast the starting point for budgeting?
Answer
• Sales forecast is a forecast of firm's future sales both in terms of volume and value.
• Sales forecasting serves as the starting point for all activities of the firm and gives direction
to all activities. It helps the firm to decide which produces are to be continued, which ones
are to be dropped, which ones are to be added and which need modification. All other
operating activities of the company are affected by the volume of sales.

17. Question 7-13
What factors influences the sales forecast?
Answer
• The sales forecast is influenced by some factors. They are-
• Past patterns of sales,
• Estimates made by the sales force,
• General economic conditions,
• Competitors' actions,
• Changes in prices,
• Market research studies, and
• Advertising and sales promotion plans.

18. Umma Hania
ID-19025

19. 7-1 What are the major benefits of budgeting?
1. Opportunity for managers to reevaluate existing
activities and evaluate possible new activities

20. Cont…..7-1 What are the major benefits of budgeting?
2. Compels managers to think ahead by formalizing their responsibilities for
planning,

21. Cont…..7-1 What are the major benefits of budgeting?
3. Aids managers in communicating objectives to units and coordinating actions
across the organization

22. Cont…..7-1 What are the major benefits of budgeting?
4. provides benchmarks to evaluate subsequent performance.

23. 7-2 Is budgeting used primarily for scorekeeping,
attention directing, or problem solving?
Budgeting is primarily attention directing because it
helps managers to focus on operating or financial
problems early enough for effective planning or
action.

24. 7-3 How do strategic planning, long-range planning,
and budgeting differ?
Strategic planning covers no specific time period, is quite general, and often is not
built around financial statements.
Long-range planning usually has a 5- or 10-year horizon and consists of financial
statements without much detail.
Budgeting usually has a horizon of one year or less, and consists of financial
statements with much detail.

25. 7-4 “I oppose continuous budgets because they provide a moving target. Managers
never know at what to aim.” Discuss.
• Continuous budgets add a month in the future when the month ended is
dropped.
• the continuous budget provides a continually updated budget looking twelve
months ahead.
• When the new month (or quarter) is added, the budget for the remainder of the
current year may also be revised.
• When companies revise the budgets for the remainder of the current year, they
usually compare subsequent results to the original budget in addition to
comparing them to the latest revised budget.

26. 7-5 Why is it important to align performance
goals of the company and the system used to
evaluate and reward employees?
If the measures used to reward employees in the
performance evaluation system are not aligned with
the goals of the company

27. The incentives from the evaluation system may lead employees to take actions that
conflict with the interests of the company.

28. Md. Ashiqul Islam Badhan
ID-19065

29. Question 7-14
Differentiate between operating budget and financial budget?
Answer
No. When budgeting in done correctly, it is an important aid to
managers. Managers need time to plan and coordinate their various
activities. Budgeting forces them to take time from the day-to-day
problems and focus on longer-term issues

30. Question 7-15
Distinguish between operating expenses and disbursements for operating expenses
Answer
Operating expenses are costs charged to the income statement
in a particular period. And Cash disbursements for these
operating expenses may fall in a previous period (assets
purchased in one period and depreciated over future periods)
or in a future

31. Question 7-16
Answer
A cash budget is an attempt to monitor and regulate the flow of cash
in optimum fashion.
What is the principal objective of cash budget

32. Rifat Bin Tarek
ID-19027

33. Question 7-17
Answer
Budgeting will be effective only if it is accepted by those managers who are
responsible for controlling costs. Since their performance will be measured against the
budget, they must be educated in the assumptions underlying the budget and
convinced of its objectivity and relevance.
“Education and salesmanship are key features of budgeting”
Explain

34. Question 7-18
Answer
Both functional and activity-based master budgets begin with the forecasted demand
for products or services. However, whereas functional budgets then determine the
inventory, materials, labor, and overhead budgets, the activity-based budget focuses
on determining the demand for key activities.
What are the main differences between functional and
Activity-Based-Budgets

35. Question 7-19
Answer
No. Financial planning models are mathematical statements of the relationships in the organization
among all the operating and financial activities and of other major internal and external factors that
may affect the financial results of decisions. But financial planning models are only as good as the
assumptions and inputs used to build them. Managers must understand the models to provide
appropriate assumptions and inputs. If managers do not understand budgeting, using financial
planning models can result in GIGO (Garbage in, Garbage out).
“Financial Planning modes guide managers through the budget process so that
managers do not really need to understand budgeting “ Do you agree?