Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

• A. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
• B. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
• C. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack.
• D. Another purpose of a budget is to set targets to motivate managers and optimize their performance.
• E. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.
• F. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.

Explain THREE benefits that organizations gain from using budgetary planning and control systems.
Select ALL the true statements.

• A. The budget acts as a variable mechanism, with actual results being compared with budget.
• B. The budget provides an external benchmark against which performance against which performance can be evaluated.
• C. The budget ensures actions of different parts of the organization are coordinated are reconciled otherwise managers take actions for the benefit of their own part of organization that may not benefit the organization as a whole.
• D. The budget is a useful device of influencing an operator's thoughts and motivating operators to perform in line with the organization's marketing budget.
• E. Budgeting forces an organization's management to look ahead and set performance targets.
• F. Another benefit of budgeting is to set targets to motivate managers and optimize their performance.
• G. It provides a standard which managers may be motivated to achieve. It can also encourage inefficiency
  and conflict between managers particularly if the budget is imposed from above, whereby it may act as a threat rather than as a challenge.

A company uses an activity based costing system. The company manufactures three products, details of which are given below:

• A. $0.31
• B. $0.35
• C. $0.23
• D. $0.27

RT produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Market research shows that the maximum demand for products R and T during June 2010 is 500 units and 800 units respectively. This does not include an order that RT has agreed with a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of $100 and $135 per unit respectively. Although the customer will accept part of the order, failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000 financial penalty. At a recent meeting of the purchasing and production managers to discuss the production plans of RT for June, the following resource restrictions for June were identified:
Direct labour hours 7,500 hours
Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours
Assuming that RT completes the order with the commercial customer, prepare calculations to show, from a financial perspective, the optimum production plan for June 2010 and the contribution that would result from adopting this plan.
The optimum production plan will be:

• A. Contract: R = 250, T = 360 and Market: R = 650 T = 710
• B. Contract: R = 250, T = 360 and Market: R = 500 T = 710
• C. Contract: R = 250, T = 360 and Market: R = 600 T = 710
• D. Contract: R = 250, T = 360 and Market: R = 500 T = 700
• E. Contract: R = 250, T = 360 and Market: R = 660 T = 720

'Public sector organizations are often judged by their economy, efficiency and effectiveness. Consequently, they should use an approach to budgeting other than incremental budgeting.' Required:
Explain ONE advantage and TWO disadvantages of public sector organizations using incremental budgeting.
Select all true statements.

• A. The incremental approach means that budget holders in public sector organizations will be encouraged to use up this year's budget will be as high as possible.
• B. The incremental approach encourages managers in public sector organizations to look at the efficiency and effectiveness of activities undertaken.
• C. Under an incremental approach to budgeting, existing operations and the current budgeted allowance for these existing activities are taken as the base level for preparing the budget.
• D. An incremental; approach is not as easy and fast to implement than other forms of budgeting approaches e.g. zero based budgeting.
• E. The main advantage of incremental budgeting is that the cost of past activities becomes fixed and any inefficiencies or wastage is perpetuated.
• F. Public sector organizations tend to be fairly complex and in many cases outputs cannot be measured in monetary terms therefore the link between inputs and outputs is difficult to establish. An incremental approach can therefore provide a cost effective approach to budgeting.