Profit Planning and Budgeting

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CHAPTER 9 PROFIT PLANNING AND BUDGETING Questions, Exercises, Problems, and Cases: Answers and Solutions 9.1 See text or glossary at the end of the book. 9.2 A cost center is a responsibility center in which management is responsible only for costs. In a profit center, management is responsible for both costs and revenues. 9.3 An investment center is a responsibility center in which management is responsible for managing costs, revenues, and assets. A profit center is not responsible for assets. 9.4 Input/output relationships are not well defined in discretionary cost centers. Evaluation of such centers from accounting data is difficult and requires managerial judgment. 9.5 a. Program or course director; possibly…show more content…
Of course, if the targets are set so tight that they cannot be reasonably achieved then there may be a problem for the entire incentive system. In addition, there may be a disincentive to increase sales if it means increasing costs. 9.15 Most companies find it essential to develop a budget for planning and performance evaluation purposes, no matter where the company is located. Without a plan, areas within a company would have difficulty determining the resources needed to attain the goals of the company. For example, the audit department of an accounting firm would not know how many employees to hire (or fire!). The production department of a manufacturing firm would not know the quantities of direct materials required (and, therefore, how much to purchase). Airlines would not know how many planes to purchase or lease. In addition, companies are able to evaluate the performance of their employees by comparing actual results with the initial budget. Soliciting budget input from employees (including managers) not only provides for more accurate forecasting, it creates a sense of responsibility and ownership on the part of those involved. Employees tend to look negatively at budgets that are imposed by executive management rather than established by company employees. 9.16 Marketing, the laboratory, manufacturing, finance, and engineering all have ideas to

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