Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

• A. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
• B. Another purpose of a budget is to set targets to motivate managers and optimize their performance.
• C. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.
• D. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.
• E. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
• F. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack.

A company has to choose between three mutually exclusive projects. Market research has shown that customers could react to the projects in three different ways depending on their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20% chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3. The company uses expected value to make this type of decision.
The net present value of each of the possible outcomes is as follows:

A market research company believes it can provide perfect information about the preferences of customers in this market.
What is the maximum amount that should be paid for the information from the market research company?

• A. $140 000
• B. $145 000
• C. $135 000
• D. $125 000

Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods.
In which ways will this information be beneficial to the management team?
Select all the true statements.

• A. The identification of cost drivers provides information to management to enable them to take actions to improve the overall profitability of the company.
• B. Through the tracing of costs to product in this way ABC establishes less accurate costs for the product or service.
• C. Operational analysis will provide information to management on how costs can be incurred and managed.
• D. The cost drivers that cause a change to the cost of activities are also identified and used as the basis to attach activity costs to a particular product or service.
• E. Under an activity based costing system the various support activities that are involved in the process of making products or providing services are identified.

TP makes wedding cakes that are sold to specialist retail outlets which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:

The general market prices at the time of purchase for Ingredient A and Ingredient B were $23 per kg and $20 per kg respectively. TP operates a JIT purchasing system for ingredients and a JIT production system; therefore, there was no inventory during the period.
Discuss the usefulness of the planning and operational variances calculated for TP's management.
Select ALL the TRUE statements.

• A. The use of planning and operational variances will enable TP's management to draw a distinction between variances caused by factors extraneous to the business and planning errors (planning variances) and variances caused by factors that are within the control of management (operational variances).
• B. Standards that failed to anticipate known market trends when they were set will reflect faulty standard setting.
• C. The purchasing manager's performance can't be compared with the adjusted standards that reflect the conditions the manager actually operated under during the reporting period.
• D. Where a revision of standards is required due to environmental changes that were not foreseeable at the time the budget was prepared, the planning variances are controllable.
• E. If planning and operational variances are not distinguished, there is potential for dysfunctional behavior especially where the manager has been operating efficiently and performance is being judged by factors outside the manager's control. In the case of TP it became evident during the period that the prevailing market prices for materials were significantly less than those set during the budget process.

EF manufactures and sells three products, X, Y and Z. The following production overhead costs are budgeted for next year:

Required:
Calculate the total budgeted production overhead cost for each product using activity based budgeting.

• A. The total budgeted production overhead cost was $ 1 285 000
• B. The total budgeted production overhead cost was $ 2 195 000
• C. The total budgeted production overhead cost was $ 1 305 000
• D. The total budgeted production overhead cost was $ 1 188 000
• E. The total budgeted production overhead cost was $ 1 258 000