In the budget-setting process, budget A was put together by lower management, including sales representatives, purchasing managers and factory supervisors. Budget B ws put together by senior management.
A B
Unit Sales 10000 15000
Dollar Sales 2000000 3000000
Less Variable expenses:
Direct Materials 1100000 1500000
Direct Labor 220000 300000
Variable Overhead 110000 150000
Variable Selling and
Admin expense 88000 120000
Total Variable expenses 1518000 2070000
Contribution Margin
Less Fixed expenses:
Manufacturing Overhead 350000 300000
Selling and administrative 200000 200000
Taxes and Interest 10000 10000
Total fixed expenses 560000 510000
Net Income (loss) (78000) 420000
A. Calculate the cost per unit for the variable costs.
B. Why do you think budge A has high costs and low sales forecasts?
C. Why do you think budget B has low costs and high sales forecasts? What are the behavioral implications of this top-down approach?
D. How should the two groups participate to come to a consensus on the budget? What are the advantages of this approach?