C 4. Since Rood 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 Motor Division was the first of the company’s six divisions to submit its budget request for next year. The division’s budgeted income statement appears at the top of the next page.

1. Recast the Motor Division’s budgeted income statement in the following format (round percentages to two places):

On the basis of this information and your analysis in 1, what do you think the budget committee should say to the managers of the Motor Division? Identify any specific areas of the budget that may need to be revised, and explain why the revision is needed.
The Budgeting Process

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Rood Enterprises Motor Division Budgeted Income Statement For the Years Ended December 31 Budget for Budget for This Year Next Year Increase (Decrease) Net sales Radios $ 850,000 $910,000 $ 60,000 Appliances Telephones 680,000 740,000 60,000 270,000 305,000 35,000 Miscellaneous 84,400 90,000 5,600 Net sales $1,884,400 $2,045,000 $160,600 Less cost of goods sold 750,960 717,500* (33,460) Gross margin $1,133,440 $1,327,500 $194,060 Operating expenses Wages Warehouse $ 94,500 $ 102,250 $ 7,750 Purchasing 77,800 84,000 6,200 Delivery/shipping 69,400 74,780 5,380 Maintenance Salaries 42,650 45,670 3,020 Supervisory 60,000 92,250 32,250 Executive 130,000 164,000 34,000 Purchases, supplies 17,400 20,500 3,100 Maintenance 72,400 82,000 9,600 Depreciation 62,000 74,750 12,750 Building rent 96,000 102,500 6,500 Sales commissions 188,440 204,500 16,060 Insurance Fire 12,670 20,500 7,830 Liability 18,200 20,500 2,300 Utilities 14,100 15,375 1,275 Taxes Property 16,600 18,450 1,850 Payroll Miscellaneous Total operating expenses Income from operations *Less expensive merchandise will be purchased in the next year to boost profits. 'Depreciation is increased because additional equipment must be bought to handle increased sales. 26,520 41,000 14,480 4,610 10,250 5,640 $1,003,290 $1,173,275 $169,985 $ 130,150 $ 154,225 $ 24,075