In this easy-to-implement technique, what managers need to do is just adjusting the current year’s budget for small changes.

Opportunity cost is the value of benefit sacrificed in favor of an alternative course of action.

Cost-Volume-Profit analysis is the study of the effects on future profit of changes in
fixed cost, variable cost, sales price, quantity as a whole.

Equivalent unit is a derived measure of output that reflects the number of completed units that could be produced with the same quantity of input consumed for both finished goods and work-in- process inventories.

There are behavioral issues relating to budgets such as budgetary slack and goal congruence. These behavioral issues become more obvious when subordinates’ actual performance is to be compared with and evaluated against budget performance. Some of the behavioral issues of budgeting are as follows:

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:

1. Authoritative / Participative Budgeting: “Authoritative (imposed) budgeting” is a top-down process of budgeting, in which managers set the goals and communicate to subordinates. However, “participative budgeting” represents a bottom-up approach that involves all levels of people in the company in the budgeting process. Authoritative budgeting is better for decision-making control but does not provide a commitment of subordinates. On the other hand, participative budgeting provides more realistic goals, because subordinates have in-depth knowledge of what can be done in the field. Additionally, they become more motivated and less fearful about reaching the targets. However, management should ensure that the goals determined by employees are in line with the long-term goals of top management.
2. Difficulty of Target to Reach: Assignment of an easy target discourages the employees to pay their best efforts, while a very difficult one prevents managers even to try. Instead, a highly achievable target (about 80/85% of all can achieve) works well for companies.
3. Compensation and Budgeted Performance: By using the difference between actual results and fixed targets as a part of the compensation function, employees can be motivated towards reaching and exceeding the targets determined by management. However, this case may lead managers through budgetary slack to make the performance indicators look better.

Direct costing method accepts only direct costs (direct materials cost and direct labor cost)

Activity-based costing (ABC) is a refined version of simple costing system, with increased number of cost pools and allocation bases. In an ABC system, the whole process is considered as a chain of activities and individual activities are the fundamental cost objects. With the most basic definition of the system, costs of individual activities are calculated at first, and then each of these costs are assigned to products to the extent the relevant activities are needed for their production.

At the beginning of the budgeting process, budget director alerts every division to the need for gathering information to help to make predictions about the future. There are several resources for gathering the data. Historical data is also a possible source; however, it is not enough for accurate predictions. For example, the previous year’s production may provide good input for predicting the next year’s production, but unless it is supported by market research, it cannot be a reliable source for predictions.  Some companies apply a bottom-to-top approach and collect sales predictions from individual salespeople and combine together to have the forecast for the company, region or a product line. Then the upper-level managers consider some additional information to improve the accuracy of these sales forecasts; such as general economic conditions, competition, pricing policies, etc. On the other hand, some companies supplement the sales forecasts by using more formal approaches, such as econometric modeling, industry analysis and trend analysis. Budgeting relies on some other factors as usual. Costs and cash-related items, for example, have important roles in the budgeting process. The same factors that are considered in the sales forecast (inflation, exchange rates, competition, etc.) are used in forecasting the costs for the coming period.

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.

Throughput costing method, which is also called as super variable costing, does not have widespread use in practice. Under this method, only the direct material cost is the product cost, while all other manufacturing related expenditures are considered as period expenses to be reported in the income statement.

Throughput costing method, which is also called as super variable costing, does not have widespread use in practice. Under this method, only the direct material cost is the product cost, while all other manufacturing related expenditures are considered as period expenses to be reported in the income statement.

Managers prepare budgets with the objectives of;

• allocating the company’s resources to each operation effectively,
• communicating the objectives and goals to the subordinates,
• motivating the superiors and subordinates towards the goals,
• providing coordination among all divisions or employees,
• comparing the actual and budgeted results, and take corrective actions, if necessary,
• taking necessary precautions for the possible bottlenecks that the company may face in the following period.

Idle time is not related to a particular product; on the contrary, it is related to ordinary and/or extraordinary circumstances. Those circumstances can be lack of orders, machine or computer breakdowns, work delays, poor scheduling, maintenance or repair of the machines.

Production businesses are businesses that use advanced technology in production processes and have to follow technology closely. Accordingly, they allocate shares in their budgets so as to purchase new equipment and machines or to renovate the current ones.

There are several types of standards that can be classified from different perspectives, such as:
a. the level of difficulty,
b. updating frequency,
c. subject of standards, and
d. level of participation to the standard-setting process.

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

It should be Standard Costing Method

As cost information is used within the decisionmaking process and to measure activity, various cost information concepts have emerged. Costs for decision making can be classified as follows (ICAI, 2012: 11):

• Relevant cost
• Sunk cost
• Opportunity cost
• Marginal cost
• Differential cost

Relevant Cost: These are the costs affected by the decisions to be taken and are therefore obligatory to be taken into account in a managerial decision.

A standard cost sheet is a record that specifies the details of standard costs (including both price and quantity) for all manufacturing factors needed for producing one unit.