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Chapter 22: Q8RQ (page 1228)
In a manufacturing company, what are the three types of budgets included in the master budget? Describe each type.
The master budget includes the operating, capital, andfinancial budgets.
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Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so employee turnover is high.
Assistant Manager/Controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel’s performance. These performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on which hotels deserve extra funds for capital improvements.
When the budget was almost complete, Dunn asked the bookkeeper to increase the amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly control capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously.
Requirements Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following questions:
1. What is the ethical issue?
2. What are the options?
3. What are the possible consequences?
4. What should you do?
Preparing an operating budget—selling and administrative expense budget
Consider the sales budget presented in Exercise E22-31. Slate’s selling and administrative expenses include the following:
Rent, \(2,000 per month
Salaries, \)4,000 per month
Commissions, 5% of sales
Depreciation, $1,000 per month
Miscellaneous expenses, 2% of sales
Prepare a selling and administrative expense budget for each of the three quarters of 2018 and totals for the nine-month period.
Describing master budget components
Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.
Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?
Using sensitivity analysis in budgeting Riverbed Sporting Goods Store has the following sales budget:
Suppose June sales are expected to be \(81,000 rather than \)65,000. Revise Riverbed’s sales budget.
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