Joakim Keynes is the manager of the Repairs and Maintenance Department of JB Industries. He is responsible for preparing his depart- ment's annual budget. Most managers in the company inflate their budget numbers by at least 10 percent because their bonuses depend upon how much below budget their departments operate. Keynes turned in the following information for his department's budget for next year to the company's budget committee:
Because the figures for next year are 20 percent above those in this year's bud- get, the budget committee questioned them. Keynes defended them by saying that he expects a significant increase in activity in his department next year.
|
Budget This year
|
Actual This year
|
Budget next year
|
|
Supplies
|
$20,000
|
$16,000
|
$24,000
|
|
Labor
|
80,000
|
82,000
|
96,000
|
|
Utilities
|
8,500
|
8,000
|
10,200
|
|
Tools
|
12,500
|
9,000
|
15,000
|
|
Hand-carried equipment
|
25,000
|
16,400
|
30,000
|
|
Cleaning materials
|
4,600
|
4,200
|
5,520
|
|
Miscellaneous
|
2,000
|
2,100
|
2,400
|
|
Totals
|
$152,600
|
$137,700
|
$183,120
|
What do you think are the real reasons for the increase in the budgeted amounts?
What ethical considerations enter into this situation?
Conceptual Understanding: Budgeting for Cash Flows
C3. The nature of a company's business affects its need to budget for cash flows.
¦ H&r Block is a service company whose main business is preparing tax returns. Most tax returns are prepared after January 31 and before April 15. For a fee and inter- est, the company will advance cash to clients who are due refunds. The clients are expected to repay the cash advances when they receive their refunds. Although H&R Block has some revenues throughout the year, it devotes most of the nontax season to training potential employees in tax preparation procedures and to laying the groundwork for the next tax season.
¦ Toys"r"Us is a toy retailer whose sales are concentrated in October, November, and December of one year and January of the next year. Sales continue at a steady but low level during the rest of the year. The company purchases most of its inventory between July and September.
¦ Johnson & Johnson sells the many health care products that it manufactures to retailers, and the retailers sell them to the final customer. Johnson & Johnson offers retailers credit terms.
Discuss the nature of cash receipts and cash disbursements over a calendar year in the three companies we have just described. What are some key estimates that the man- agement of these companies must make when preparing a cash budget?