Question
Pretorious Manufacturing has just hired a new controller, Diana Metcalf. During her first week on the job, Diana was asked to establish a master budget
Pretorious Manufacturing has just hired a new controller, Diana Metcalf. During her first week on the job, Diana was asked to establish a master budget for sales, production, direct materials purchases, direct labor and a cost of goods sold 2016. Since Diana was not yet familiar with the operations of Pretorious Manufacturing, she decided to budget these items 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 2015 and added 4.3 percent. Diana based this percentage on inflation as measured by the consumer price index. Comment on the effectiveness of Dianas budgeting strategy. What is this type of budgeting strategy called? What alternative strategies could she have used? What are the pros and cons of each strategy? How would you advise Diana in the future?
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