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Top down Budgeting and computation of variable costs

Budgeting behavioral implications

Crunch numbers is a manufacturer of calculators
In the budget setting process, budget A was put
together by lower and middle management. Budget
B was put together by senior management.

A B
Unit sales 20,000 30,000
dollar sales $600,000 $900,000
less variable expenses:
direct materials 260,000 360,000
direct labor 40,000 60,000
variable overhead 60,000 75,000
variable selling and administrative expense 60,000 60,000
total variable expenses 420,000 555,000
Contribution margin 180,000 345,000
less fixed expenses
manufacturing $60,000 $50,000
selling and administrative 100,000 80,000
taxes and interest 10,000 10,000
total fixed expenses $170,000 $140,000
Net income (loss) 10,000 205,000

A. Calculate the cost per unit for the variable costs.

B. why do you think budget 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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See attached file for full problem description.

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Budgeting behavioral implications

Crunch numbers is a manufacturer of calculators
In the budget setting process, budget A was put
together by lower and middle management. Budget
B was put together by senior management.

A B
Unit sales 20,000 30,000
dollar sales $600,000 $900,000
less variable expenses:
direct materials 260,000 360,000
direct labor 40,000 60,000
variable overhead 60,000 75,000
variable selling and administrative expense 60,000 60,000
total variable expenses 420,000 555,000
Contribution margin 180,000 345,000
less fixed expenses
manufacturing $60,000 $50,000
selling and administrative 100,000 80,000
taxes and ...

Solution Summary

This explains the calculation of variable costs and explain the concepts of top down budgeting.

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