An effective budget converts the goals and objectives of management into specific performance targets. The master budget serves as a blueprint that reflects management's plans for the budgeted period. Moreover, the master budget serves as a basis for control in that performance can be evaluated by comparing actual results to budgeted or planned results.

Given the importance of budgeting within a company, the creation of an effective budget is essential for the successful operation of the company. There are several methods of generating budget information that can be employed, all of which require extensive contact with people at various operating levels within the company. The way in which people see their involvement with the budget process is important to the successful use of the budget as a management tool.

In the budget-setting process, budget A was put together by lower management, including sales representatives, purchasing managers, and factory supervisors. Budget \(\mathrm{B}\) was put together by senior management.

\section*{Required}
A. Calculate the cost per unit for the variable costs.
B. Why do you think budget A has high costs and low sales forecasts?
C. Why do you think budget \(B\) has low costs and high sales forecasts? What are the behavioral implications of this top-down approach?
D. How should the two groups participate to come to a consensus on the budget? What are the advantages of this approach?

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Unit sales Dollar sales Less variable expenses: Direct materials A B 10,000 15,000 $2,000,000 $3,000,000 $1,100,000 $1,500,000 220,000 300,000 110,000 Direct labor Variable overhead Variable selling and administrative expense Total variable expenses 88,000 $1,518,000 Contribution margin $ 482,000 Less fixed expenses: Manufacturing overhead Selling and administrative Taxes and interest Total fixed expenses Net income (loss) $ 350,000 200,000 10,000 $ 560,000 $ (78,000) 150,000 120,000 $2,070,000 $ 930,000 $ 300,000 200,000 10,000 $ 510,000 $ 420,000