Cost Accounting (14th Edition)

204 CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
Decision
Point
What are the special
challenges involved
in budgeting at
multinational
companies?
that might take place during the year. Exchange rates are constantly fluctuating, so to
reduce the possible negative impact on performance caused by unfavorable exchange
rate movements, finance managers will frequently use sophisticated techniques such as
forward, future, and option contracts to minimize exposure to foreign currency fluctuations.
Besides currency issues, multinational companies need to understand the political,
legal, and, in particular, economic environments of the different countries in which they
operate. For example, in countries such as Zimbabwe, Iraq, and Guinea, annual inflation
rates are very high, resulting in sharp declines in the value of the local currency. Issues
related to differences in tax regimes are also critical, especially when the company transfers
goods or services across the many countries in which it operates.
Multinational companies find budgeting to be a valuable tool when operating in very
uncertain environments. As circumstances and conditions change, companies revise their
budgets. The purpose of budgeting in such environments is not to evaluate performance
relative to budgets, which is a meaningless comparison when conditions are so volatile,
but to help managers throughout the organization to learn and to adapt their plans to the
changing conditions and to communicate and coordinate the actions that need to be taken
throughout the company. Senior managers evaluate performance more subjectively, based
on how well subordinate managers have managed in these uncertain environments.
Problem for Self-Study
Required
Consider the Stylistic Furniture example described earlier. Suppose that to maintain its
sales quantities, Stylistic needs to decrease selling prices to $582 per Casual table and
$776 per Deluxe table, a 3% decrease in the selling prices used in the chapter illustration.
All other data are unchanged.
Prepare a budgeted income statement, including all necessary detailed supporting budget
schedules that are different from the schedules presented in the chapter. Indicate those
schedules that will remain unchanged.
Solution
Schedules 1 and 8 will change. Schedule 1 changes because a change in selling price affects
revenues. Schedule 8 changes because revenues are a cost driver of marketing costs (sales
commissions). The remaining schedules will not change because a change in selling price
has no effect on manufacturing costs. The revised schedules and the new budgeted income
statement follow:
Schedule 1: Revenue Budget
For the Year Ending December 31, 2012
Selling Price Units Total Revenues
Casual tables $582 50,000 $29,100,000
Deluxe tables 776 10,000 ƒƒ7,760,000
Total $36,860,000
Schedule 8: Nonmanufacturing Costs Budget
For the Year Ending December 31, 2012
Business Function
Variable
Costs
Fixed Costs
(as in Schedule 8, p. 196)
Total
Costs
Product design $1,024,000 $1,024,000
Marketing (Variable cost: $36,860,000 * 0.065) $2,395,900 1,330,000 3,725,900
Distribution (Variable cost: $2 * 1,140,000 cu. ft.) ƒ2,280,000 ƒ1,596,000 ƒ3,876,000
$4,675,900 $3,950,000 $8,625,900