Managers prepare budgets with the objectives of;
a. allocating the company’s resources to each operation effectively,
b. communicating the objectives and goals to the subordinates,
c. motivating the superiors and subordinates towards the goals,
d. providing coordination among all divisions or employees,
e. comparing the actual and budgeted results, and take corrective actions, if necessary,
f. taking necessary precautions for the possible bottlenecks that the company may face in the following period.

Determining which basis to decide is the first stage of decision making activity

Currently achievable standards reflect the production process that is as efficient as possible under normal conditions. These standards allow for inefficiencies and imperfections at a reasonable level, and it should be kept in mind that, in intensely competitive environments, the allowed level of inefficiency may negatively affect the success of operations. 

The direct labor efficiency variance is related to the difference between the actual and needed number of hours for the actual production.

answer should be unsustainable

Business managers should take some aspects into consideration while implementing CVP analysis in decision making. The disadvantages of CVP analysis are listed as follows:

• The variable and fixed cost classification used in CVP analysis may not reflect the truth. This can make the managers take wrong decisions.
• Most of the fixed cost factors have the feature of semi-variable cost. This can be ignored in the analysis.
• It is assumed that the total revenue and total cost are linear. In fact, this relationship is not linear or is about to be linear in most businesses.
• The errors in the analysis can be caused due to market conditions.
• If numerous products are produced, the determination of their contribution to total sales will be hard. This may cause errors in the results of the analysis.
• As a product contributes the production of other products, a great number of production is made. Thus, there would be difficulties in determining the cost of the products.

Sales-volume variance = (Actual sales volume - Budgeted sales volume) x Budgeted selling price

Classification According to Time Covered

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.

Decisions which are related to management levels are:

• Strategic Decisions
• Operational Decisions
• Managerial Decisions.

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.

The production budget describes how many units to produce in order to satisfy the ending inventory requirements, after selling the expected number of units. In order to plan the production, managers should consider expected sales volume, units of beginning inventory, and desired level of ending inventory.

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.

A master budget is the combination of operational and financial budgets covering all aspects of company’s operations for a period of time

Risks and uncertain conditions are accepted is not one of them 

In this method, expenditures for all manufacturing related factors are included in the product cost.

The strategy provides the general framework for long-term plans, which are the action plans for 5 to 10 years. This kind of plan is based on capital budgeting techniques. Management synchronizes the company’s capabilities with the long-term objectives by using the capital budgets. The capacity of the company for the following period is determined by using capital budgets. Capital budgeting is the process of evaluating.  the feasibility of a project, using some indicators such as rate of return, the time
needed to pay back, etc.

Classification According to Updating Frequency: The two contrast types of standards are “fixed standards” and “kaizen (continuous-improvement) standards”. Fixed standards are determined for the conditions at the beginning and not changed for many years. Kaizen standards are exactly opposite of fixed standards because they require continuous updating by their nature. These standards are continuous-improvement standards that reflect planned improvements year by year.

As the name states, in variable costing method, only the variable manufacturing costs are included in the product cost (Lazol, 2011: 132), irrespective of whether the cost in question is direct or indirect. Within the scope of variable costing method, all fixed costs are considered as period expenses, suggesting that fixed costs would still exist even if there were no production and this makes those factors irrelevant for calculating the manufacturing cost. Only the variable manufacturing costs are treated as product costs under variable costing method, variable non-manufacturing costs are excluded despite their variable nature.

Long-term budgets, on the other hand, are prepared considering the strategic goals and the mission of the company

Over the years, budgeting techniques have taken different forms in order to improve the efficiency of planning and executing the operations. Different approaches are developed for different companies, depending on the nature and variety of their operations. If the operations are suggested to incur cumulatively over the years, “incremental budgeting” is preferable; whereas “zero-based budgets” may be better for planning each year separate than the preceding one. On the other hand, companies with a high variety of activities may plan for and assess the performance of their operations by using the “Activity-Based Budgeting (ABB)” technique. As a philosophy of continuous improvement, it may be the best choice to apply kaizen budgeting instead of the other techniques.

The main function of cost accounting is to produce cost information related to the production activity of the business. The information produced by cost accounting contributes to the following functions:
• Determination of unit cost,
• Providing expense control,
• Planning,
• Contributing special purpose decisions