Quiz 23: Operational Budgeting
Budgeting philosophies: Renaldo's is following the Total Quality Management approach of budgeting. Under this approach the entire organization is committed to completely eliminating inefficiency and non-value-added activities. Inventory shrinkage is a non-value-added activity. Not allowing the budget to include an expense for inventory shrinkage is a signal of commitment to eliminate it from the operations of the stores. According to the information given the customer theft is 35%, employee theft is 40%, administrative errors 18% and vendor dishonesty 7% are the combination of Internal and external causes that led to Inventory shrinkage. In comparing actual performance with budgeted amounts, top management should consider the philosophy used in developing the budgeted amounts. If total quality management approach is used, a highly efficient unit should fall slight short of the budget standard.
Planning is the process of setting financial and operational goals, including cost levels, and deciding upon the actions that will achieve these goals. Exercising control over costs means monitoring actual results, comparing those results to the plan, and taking corrective action when actual results fall below expectations. In short, control is the function of keeping actual results in line with the plan.
a. Compute the budgeted amount for purchase of direct materials during the year: Direct materials budget is prepared to calculate the materials that must be purchased, in a given time span, so that the requirements of the production budget can be fulfilled. Therefore, budgeted purchases during the year are $276,000. b. Compute the budgeted amount for cash payments during the year to suppliers of materials: Consider budgeted amount for purchase of direct materials, opening and ending accounts payable. Therefore, cash payments to suppliers during the year are $ 307,000.