Question

Denim Factory is a company that manufactures jackets and is in the process of making budget for the year 2020, with the following details:

1. Budgeted sales for the first months are as follows:

January February March

25,000 jackets 30,000 jackets 20,000 jackets

2. Thesellingpriceforeachjacketis$50.

3. Endinginventoryofjacketsisestimatedtobe20%ofthenextmonth’ssales.

4. Assume that target ending inventory for March is 3,000 jackets and the beginning

inventory in January is 5,000 jackets.

Required:

a. Prepare the sales budget for January, February, March, and for the first quarter of 2020.

b. Prepare the production budget for January, February, March, and for the first quarter of 2020.

c. Provide examples of how human factors could affect budgeting process in an organization.

d. Explain the meaning of “budgetary slack” and how companies should manage this.

Answer 1

Answer to sub questions a & b have been solved in excel shhet and the image of the same has been attached.

For sub questions c & D refer below.

c. The success of the budgeting dependds on three important factors

1. Top management must be enthusiastic and committed towards the budget process.

2. Top management must not use the budget to pressure the employees or blame them while something goes wrong.

3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.

d. Budgetary slack is the deliberate under-estimation of budgeted revenue or over-estimation of budgeted expenses. This allows managers a much better chance of "making their numbers," which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers.

Budgetary slack is less likely to occur when a small number of aggressive managers are the only ones allowed input into the budget model, since they can set expectations extremely high. Slack is also less likely when there is no link between performance or bonus plans and the budget. Autonomously motivated managers try to attain the budgetary targets because they want to, not because they have to.