Acct 556 - Final Exam

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TCO A) Describe three disadvantages of budgeting. Which disadvantage of the three that you described is the most detrimental and why? (Points : 15) Budgeting can be a very useful tool but it can also be very difficult to achieve. There are quite a few disadvantages or weaknesses related to budgeting, three most important are 1) managers set goals that are unattainable, off target, and unrealistic, 2) the budget takes too long to prepare, 3) budget is prepared using different methods each year. The most detrimental of these three is when managers set unattainable budgets. This causes personnel and managers to feel discourage and stop working towards a common goal. It also causes personnel to feel detached from the process and may lead to more absenteeism in the department. (TCO B) What is a flexible budget? How can a flexible budget be used as a control? (Points : 15) The primary use of a flexible budget is to measure performance by comparing actual costs for a given output with the budgeted costs for the same level of output. A flexible budget is the opposite of a static budget. Flexible budget allows for variability in business and allows for unexpected changes. It distinguishes between fixed and variable costs in this way the budget can be adjusted automatically to a particular activity. The flexible budget is an excellent control tool because it is geared towards a range of activities rather than a single level of activity. By using the flexible budget formula, a series of budgets can be developed for various levels of activities. The following steps need to be followed by management in order to build a flexible budget: 1) estimate the range of expected activity for a given period, 2) analyze cost behavior trends, whether fixed, variable, or mixed, 3) separate costs by behavior, that is, breakup mixed costs into variable and fixed, and finally,
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