PROBLEM 6-17: PANARUDE AIRFREIGHT: Panarude Airfreight is an international air f

Question

PROBLEM 6-17: PANARUDE AIRFREIGHT:

Panarude Airfreight is an international air freight hauler with more than 45 jet aircraft operating in the United States and the Pacific Rim. The firm is headquartered in Melbourne, Australia, and is organized into five geographic areas: Australia, Japan, Taiwan, Korea, and the United States. Supporting these areas are several centralized corporate function services (cost centers): human resources, data processing, fleet acquisition and maintenance, and telecommunications. Each responsibility center has a budget, negotiated at the beginning of the year with the vice president of finance. Funds unspent at the end of the year do not carry over to the next fiscal year. The firm is on a January-to-December fiscal year.
After reviewing the month-to-month variances, Panarude senior management became concerned about the increased spending occurring in the last three months of each fiscal year. In particular, in the first nine months of the year, expenditure accounts typically show favorable variances (actual spending is less than budget), but in the last three months, unfavorable variances are the norm. In an attempt to smooth out these spending patterns, each responsibility center is reviewed at the end of each calendar quarter and any unspent funds can be deleted from the budget for the remainder of the year. The accompanying table shows the budget and actual spending in the telecommunications department for the first quarter of this year.

At the end of the first quarter, telecommunications

Explanation / Answer

The budgeting scheme would engender the behavior in the responsibility center managers are as follows; As each responsibility center has a budget, negotiated at the beginning of the year with the vice president of finance. Funds unspent at the end of the year do not carry over to the next fiscal year. responsibility center is reviewed at the end of each calendar quarter and any unspent funds can be deleted from the budget for the remainder of the year. Advantages: - Cost control system will be effctive. - Additional costs can be controlled. - Profit maximizing can be determined. - Services can be provided at a lowest prices to increase the sales. - consistency in the revenue can be maintained. Disadvantages: - Leads to unfavorable variance. - leads to decrease in the short run income. - may affect the long run profitasbility.

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