Part I

(1) Please share an experience youve had at work where budgets caused employees to act in a manner that hurt the performance or profitability of their organization. (If you have not experienced or observed this firsthand, please discuss what you think could possibly happen where budgets might cause an employee to act in such a manner.)

(2) Consider the following scenario:

Raymond Manufacturing has just hired a new controller, Diana Metcalf. During her first week on the job, Diana was asked to establish a budget for operating expenses in 20Y4. Since Diana was not yet familiar with the operations of Raymond Manufacturing, she decided to budget these expenses using the same procedures as the prior controller. Therefore, in order to establish a budget for operating expenses, Diana started with actual operating expenses incurred in 20Y3 and added 4.3 percent. Diana based this percentage on inflation as measured by the consumer price index.

Please comment on the effectiveness of Dianas budgeting strategy.

Part II

(1) What is a flexible budget and how does it differ from a static budget? What are the strengths and challenges of each system?

(2) Miles Manufacturing has prepared the following sales budget for the first four months of the year:

	January	February	March	April
Sales	20,000	22,000	25,000	21,000

Miles estimates that it will begin the year with 3,000 units in inventory. The company wants to end each month with inventory equal to 25 percent of the next months projected sales. Prepare a production budget for January through March.