Since Smart Enterprises inaugurated participative budgeting 10 years ago, everyone in the organization€”from maintenance personnel to the president€™s staff€”has had a voice in the budgeting process.

Until recently, participative budgeting has worked in the best interests of the company as a whole. Now, however, it is becoming evident that some managers are using the practice solely to benefit their own divisions. The budget committee has therefore asked you, the company€™s controller, to analyze this year€™s divisional budgets carefully before incorporating them into the company€™s master budget.
The Gadget Division was the first of the company€™s six divisions to submit its budget request for next year. The division€™s budgeted income statement follows.
1. Recast the Gadget Division€™s budgeted income statement in the following format (round percentages to two decimal places):

2. Actual results for this year revealed the following information about revenues and cost of goods sold:

On the basis of this information and your analysis in 1, what do you think the budget committee should say to the Gadget Division€™s managers? Identify any specific areas of the budget that may need to be revised, and explain why the revision isneeded.

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Smart Enterprises Gadget Division Budgeted Income Statement For the Years Ended December 31 Budget for This Year Budget for Next Year Increase (Decrease Net sales: Radios Appliances Telephones Miscellaneous Net sales 850,000 680,000 270,000 84,400 $1,884,400 750,960 $1,133,440 910,000 740,000 305,000 90,000 $2,045,000 60,000 60,000 35,000 5,600 160,600 (33,460 $194,060 Less cost of goods sold Gross margin Operating expenses: 717,500a $1,327,500 94,500 77,800 69,400 42,650 102,250 84,000 74,400 45,670 $7,750 6,200 5,000 3,020 Warehouse Delivery/shipping Maintenance Salaries: Supervisony 60,000 130,000 17,400 72,400 62,000 96,000 188,440 92,250 164,000 20,500 82,000 4,000b 102,500 204,500 32,250 34,000 Executive Purchases, supplies Maintenance Depreciation Building rent Sales commissions Insurance: 9,600 12,000 16,060 Liability Utilities Taxes 12,670 18,200 14,100 20,500 20,500 15,375 7,830 2,300 1,275 ro Payroll Miscellaneous Total operating expenses 16,600 26,520 4,610 $1,003,290 130,150 41,000 10,250 $1,172,145 $155,355 14,480 5,640 $168,855 25,205 Income from operations Budget for This Year Budget for Next Year Percentage o Net Sales Percentage of Net Sales Account Amount Amount