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As also understood from the information given, all of the statements in the options related to the objectives of budget are correct, so the correct answer is E.

As also understood from the information given, the correct answer is E. Efficient resource allocation, communication, coordination, time management and motivation are the benefits resulting from the preparation and use of budgets.

A well-organized decision by management consists of two planning phases. First of these phases is attaining the short-term objectives and the second phase is attaining the long-term objectives, which is possible through the first one. Therefore, companies prepare two types of budgets; one for short-term objectives and the other for long-term objectives.

Short-term budgets determine the goals to reach in the short-term period, which is usually a 12 months period. Even if the budget covers 12 months, companies also prepare quarterly budgets as subcomponents in order to keep the operations under control and have the opportunity to take corrective actions, if necessary. Companies are increasingly preparing rolling (perpetual; continuous; revolving) budgets that always utilize the 12-months period by periodically adding an incremental timeperiod to the end of the budget period, upon completion of month/quarter. By using rolling budgets, management stays in connection with the budgeting process and this provides better control over the operations.

Long-term budgets, on the other hand, are prepared considering the strategic goals and the mission of the company. Long-term budgets cover longer periods such as 5 to 10 years. These budgets include the capital budget, which represents the company’s long-term plans regarding the capacity investments, such as the purchase of property, plant, and equipment, or adding a new product line, to assist the shortterm operations. In other words, capital budgets bring the capabilities of companies in line with their long-term plans.

Classification According to the Scope of Coverage

Similar to the fact that successful implementation of short-term plans constructs the way to reach the long-term objectives, attainment of objectives at narrow scope is the path to follow in order to reach the objectives at a broader sense. Therefore, companies prepare different budgets that reveal objectives at a different scope.

Master budget; is the comprehensive set of schedules and budgets that covers all phases of the company’s operations and describes the company’s overall financial plans for the following period. It represents the short-term objectives of a company in all aspects. A master budget can be divided into two budget categories as operating budgets and financial budgets.

Operating budgets; are the budgets that companies assign objectives for the income generating operations of the company, such as sales, production, operating activities, etc. Preparation of the master budget starts with the preparation of operating budgets and the ultimate outcome of operating budgets is the pro-forma (budgeted) income statement. The number and scope of operating budget depends on the company’s characteristics, such as firm size, the complexity of production, etc.

Financial budgets; are the budgets representing the sources and uses of cash during the budget period, as well as the expected financial position as of the end of the period. They represent the plan of how the company is expected to direct its cash flows in terms of both timing and amount. Additionally, the target financial position of the company as of the end of the budget period is also represented by financial budgets.

Functional Budgets; are the components of the master budget, and they are separately prepared for each process or department. Management prepares department -or process- based plans to lead the company through the plans that the operating budgets based on. Managers use functional budgets to determine the cost and income targets for particular departments and communicate them with subordinates.

Classification According to Capacity Utilization

For most companies, once the target is determined, it stays constant until the year-end and at the end of the year, the target is compared with the actual results to assess whether the targets are met or not. However, it may not help the management in determining the reason for any deviation from the target. Because a deviation may arise because of either the difference between the actual and expected sales in units or unit costs and sales prices may be different than the standards.

Static (Fixed) budgets; are the budgets, in which the predetermined sales levels are used in preparing the budgets. In other words, the static budget remains unchanged irrespective of the actual level of activity. This kind of budget does not consider a possible difference between the actual and budgeted production volumes. Therefore, any deviation from the budget may result because of the difference between either the actual and budgeted volume or different-than-standard unit costs/prices. It mainly aims to coordinate sectional activities to attain company objectives.

Flexible budgets; are prepared to prevent the unexpected effects of uncertainties in activity volumes, as opposed to static budgets. The flexible budgets are prepared for a specific interval, rather than a specific activity level, by considering the cost behavior pattern. These budgets help management with the variance analysis and make it easier to match the variances with the corresponding responsibility centers. For example, if the actual income differs from the budgeted income, which portion of the deviation results from the deviation in sales volume and which portion results from the difference between standard and actual unit costs (and/or sales prices) can be revealed with the help of flexible budgets. The effectiveness of using the flexible budget passes through the understanding of cost structure (cost behavior) for a specific time and/ or interval of activity volume. If there is not a direct relationship between the costs and relevant outputs of a specific activity, that activity cannot be budgeted in accordance with the principles of flexible budget.

As also understood from the information given static (fixed) budget and flexible budgets are the budget types depending on the classification according to capacity utilization, so the correct answer is D.

If the company is a merchandising company, no production budget is prepared. Instead, merchandising companies prepare Merchandise Purchase Budget to identify the needed units of merchandise inventory to purchase during the year. The basic format of this budget is the same as the production budget, except that the bottom line represents “budgeted purchases”.

As also understood from the information given all of the statemements in the options are correct, so the answer is E.

As also understood from the information given, if the operations are suggested to incur cumulatively over the years, “incremental budgeting” is preferable, so the correct answer is A.

The information about the budgeting techniques taking place in the options:

Incremental budgeting technique does not require complex calculations or assumptions and can be achieved for various departments easily. Additionally, as the current year’s budget is the basis for it, no large deviations incur in the following year’s assessments, providing the companies a more stable budget year-by-year. Another benefit of using this budget is that the value of equality is created among all departments as all departments are given a small amount of improvement in their targets. However, at this point, this budgeting technique may have some shortcomings as managers may determine lower targets, within which high spending or low revenue generation ability is tolerated. Departments do not need to be innovative or to decrease the costs as far as the budgets are met with the current level of efficiency.

As opposed to traditional budgeting that starts with the current budget, zero-based budgeting requires managers to prepare the budget with zero-base, meaning that all items to be included in the following year’s budget should be analyzed and determined by considering only the next year’s operations. No item can be added to the budget unless the managers justify its need and usefulness for the company.

With the fact that preparing the budget on a departmental basis does not provide accurate information on drivers of success on a company, many companies apply Activity-Based Budgeting (ABB) technique. By applying this technique, the budgeting process is saved from the chart of accounts structure (such as depreciation, marketing, salaries, etc.).

With the kaizen budgets, expectations on continuous improvement are incorporated with the budgeting process. The required amounts of resources are adjusted every time according to the desired levels of efficiency and productivity. Kaizen budgeting approach is much more effective when combined with activity-based budgeting technique.

With the fact that preparing the budget on a departmental basis does not provide accurate information on drivers of success on a company, many companies apply Activity-Based Budgeting (ABB) technique. By applying this technique, the budgeting process is saved from the chart of accounts structure (such as depreciation, marketing, salaries, etc.).

Managers use production budgets to prepare plans for gathering the necessary resources for the budgeted production. One of those necessary resources is direct materials. Plans regarding the direct materials are prepared with the help of two budgets, which are;

Budgetary slack (padding the budget); is one of those behavioral issues, which states that managers consciously include higher expenditures and lower revenues than they actually believe will occur. This provides them to be assessed more successful at the end of the budget period. Budgetary slack also causes lower capacity utilization of resources and may lead labors to make half-hearted efforts to meet the targets (Blocher et al., 2010: 394). As also understood from the information given, the correct answer is A.

The information about the behavioral issues of budgeting taking place in the other options:

Goal congruence; is a term that states the consistency between the objectives of the organization and its subordinates is important to achieve the desired results. A budget that aligns the objectives of the company with those of labors has much more chance of being successful and attaining the goals. The factors explained below are suggested to affect the level of congruence:

As also understood from the information given, the statements about Authoritative / Participative Budgeting in the options I and II are correct, so the answer is A. The statement in the option III is not correct because of the fact that authoritative budgeting is better for decision-making control but does not provide a commitment of subordinates. The statement in the option IV is not correct because of the fact that participative budgeting provides more realistic goals, because subordinates have in-depth knowledge of what can be done in the field.

Efficient Resource Allocation

Communication

Coordination

Performance Evaluation

Time Management

Motivation

Master budget

Operating budgets

Financial budgets

Functional Budgets