Curtis Dunst, president of Michigan Mining, Ltd., has made budgets a major focus for managers. Making budget was such an important goal that the only two managers who had missed their budgets in 20X7 (by 5% and 7%, respectively) had been summarily fired. This caused all managers to be wary when setting their 20X8 budgets. The Mica Copper Division of Michigan Mining had the following results for 20X7: (Click the icon to view the 20X7 results.) Lane Murphy, general manager of Mica Copper, received a memo from Dunst that contained the following: We expect your profit for 20X8 to be at least $333,700. Prepare a budget showing how you plan to accomplish this. Murphy was concerned because the market for copper had recently softened. Her market research staff forecast that sales would be at or below the 20X7 level, and prices would likely be between $0.89 and $0.90 per pound. Her manufacturing manager reported that most of the fixed costs were committed and there were few efficiencies to be gained in the variable costs. He indicated that perhaps a 2% savings in variable costs might be achievable but certainly no more. Read the requirements. Requirements - Requirements 1. Prepare a budget for Murphy to submit to headquarters. What dilemmas does Murphy face in preparing this budget? 2. What problems do you see in the budgeting process at Michigan Mining? 3. Suppose Murphy submitted a budget showing a $333,700 profit. It is now late in 20X8, and she has had a good year. Despite an industry-wide decline in sales, Mica Copper's sales matched last year's 1.5 million pounds, and the average price per pound was $0.935, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $5,000 below budget. Murphy was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $16,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? is budget? crease in variable costs. Requirement 1. Prepare a budget for Murphy to submit to headquarters. What dilemmas does Murphy face in preparing this budget? Begin by preparing an optimistic preliminary budget assuming a level sales volume, a $0.90 per pound price, and a 2% decrease in variable costs. 20X8 Budget Sales Variable costs Fixed costs Pretax profit What dilemmas does Murphy face in preparing this budget? The optimistic budget that Murphy prepared above the profit goal. As a result, Murphy Requirement 2. What problem(s) do you see in the budgeting process at Michigan Mining? OA. Lower-level management is not being given the opportunity participate in the setting of budgetary targets. OB. Top management is setting an arbitrary target budget without regard to whether the target can be achieved. ...... OC. Draconian measures (termination of employment) are being used when a budget is not met, even if the shortfall is small or reasonable explanations for the shortfall are given. D. All of the above. Data table Sales, 1.5 million pounds @ $0.94/pound Variable costs $ 1,410,000 800,000 Fixed costs, primarily depreciation Pretax profit 290,000 320,000 Print Done Requirement 3. Suppose Murphy submitted a budget showing a $333,700 profit. It is now late in 20X8, and she has had a good year. Despite an industry-wide decline in sales, Mica Copper's sales matched last year's 1.5 million pounds, and the average price per pound was $0.935, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $5,000 below budget. Murphy was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $16,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? Extending the depreciable lives of fixed assets by two years will When the estimates of depreciable lives were first made, there may have been much uncertainty in the estimates. The controller should

Curtis Dunst, president of Michigan Mining, Ltd., has made budgets a major focus for managers. Making budget was such an important goal that the only two managers who had missed their budgets in 20X7 (by 5% and 7%, respectively) had been summarily fired. This caused all managers to be wary when setting their 20X8 budgets. The Mica Copper Division of Michigan Mining had the following results for 20X7: (Click the icon to view the 20X7 results.) Lane Murphy, general manager of Mica Copper, received a memo from Dunst that contained the following: We expect your profit for 20X8 to be at least $333,700. Prepare a budget showing how you plan to accomplish this. Murphy was concerned because the market for copper had recently softened. Her market research staff forecast that sales would be at or below the 20X7 level, and prices would likely be between $0.89 and $0.90 per pound. Her manufacturing manager reported that most of the fixed costs were committed and there were few efficiencies to be gained in the variable costs. He indicated that perhaps a 2% savings in variable costs might be achievable but certainly no more. Read the requirements. Requirements - Requirements 1. Prepare a budget for Murphy to submit to headquarters. What dilemmas does Murphy face in preparing this budget? 2. What problems do you see in the budgeting process at Michigan Mining? 3. Suppose Murphy submitted a budget showing a $333,700 profit. It is now late in 20X8, and she has had a good year. Despite an industry-wide decline in sales, Mica Copper's sales matched last year's 1.5 million pounds, and the average price per pound was $0.935, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $5,000 below budget. Murphy was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $16,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? is budget? crease in variable costs. Requirement 1. Prepare a budget for Murphy to submit to headquarters. What dilemmas does Murphy face in preparing this budget? Begin by preparing an optimistic preliminary budget assuming a level sales volume, a $0.90 per pound price, and a 2% decrease in variable costs. 20X8 Budget Sales Variable costs Fixed costs Pretax profit What dilemmas does Murphy face in preparing this budget? The optimistic budget that Murphy prepared above the profit goal. As a result, Murphy Requirement 2. What problem(s) do you see in the budgeting process at Michigan Mining? OA. Lower-level management is not being given the opportunity participate in the setting of budgetary targets. OB. Top management is setting an arbitrary target budget without regard to whether the target can be achieved. ...... OC. Draconian measures (termination of employment) are being used when a budget is not met, even if the shortfall is small or reasonable explanations for the shortfall are given. D. All of the above. Data table Sales, 1.5 million pounds @ $0.94/pound Variable costs $ 1,410,000 800,000 Fixed costs, primarily depreciation Pretax profit 290,000 320,000 Print Done Requirement 3. Suppose Murphy submitted a budget showing a $333,700 profit. It is now late in 20X8, and she has had a good year. Despite an industry-wide decline in sales, Mica Copper's sales matched last year's 1.5 million pounds, and the average price per pound was $0.935, nearly at last year's level and well above that forecast. Variable costs were cut by 2% through extensive efforts. Still, profit projections were more than $5,000 below budget. Murphy was concerned for her job so she approached the controller and requested that depreciation schedules be changed. By extending the lives of some equipment for two years, depreciation in 20X8 would be reduced by $16,000. Estimating the economic lives of equipment is difficult, and it would be hard to prove that the old lives were better than the new proposed lives. What should the controller do? What ethical issues does this proposal raise? Extending the depreciable lives of fixed assets by two years will When the estimates of depreciable lives were first made, there may have been much uncertainty in the estimates. The controller should

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter8: Budgeting

Section: Chapter Questions

Problem 1TIF: Ethics in Action The director of marketing for Starr Computer Co., Megan Hewitt, had the following...

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