The Sticky Company makes a glue that is used to glue the layers of wood veneer together to make plywood. The process for making the glue has been used for many years and the customers are satisfied with the product. The Sticky Company has had very low turnover of personnel and the president and the managers have all been with the company for many years. Although the company appears very stable today, plywood prices are rising and the construction industry is beginning to switch to a cheaper product called chipboard. Chipboard uses a different glue than the glue made by the Sticky Company.
Required:
Given the present condition of Sticky Company, should the company use long-term budgets, line-item budgets, budget lapsing, flexible budgets, or zero-based budgeting?

Question

Quizplus · Accepted Answer

The Answer is If the market for the glue for plywood was viewed as a stable market, then Sticky Company is likely to use long-term budgets. The managers and employees have all been with the Sticky Company for many years, so there is no need to use line-item budgeting and not much need to transfer information. Therefore, incremental budgeting is probably better than zero-based budgeting. Budget lapsing is generally not used in a profit company. Flexible budgets are probably appropriate because the demand for the product depends on the demand for plywood, which is not controlled by the managers of Sticky Company.
If Sticky Company is facing a transition due to the conversion from plywood to chipboard, the company is likely to change its budgeting. There will be a greater focus on short-term budgets because of increased uncertainty about the long run. Line item and fixed budgets may be used more frequently because more control from central administration may be desired in an attempt to adapt to a new environment. Zero-based budgeting may be instituted to increase information flow.

The Sticky Company Makes a Glue That Is Used to Glue