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    Top down Budgeting and computation of variable costs

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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 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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    Solution Preview

    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.

    $2.19

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