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    Budget-top-down &bottom-up approach

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    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?

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    Solution Summary

    The answer contains the behavioural implications of top-down approach and bottom-up approach with respect to variable cost and fixed cost.