Chapter 6 - Budgets

<b>1) Which of the following is true of a budget?</b>
A) Budgets are used to express only the operational plans and not the strategic plans of a company.
B) Budgets do not account for nonfinancial aspects of the upcoming period.
C) Budgets are most useful when they are planned independent of the company's strategic plans.
D) Budgets help managers to revise their plans and strategies.
Objective 6.1

D) Budgets help managers to revise their plans and strategies.

<b>2) Which of the following is a financial budget?</b>
A) budgeted balance sheet
B) cash receivables budget
C) production budget
D) cost of goods sold budget
Objective 6.1

A) budgeted balance sheet

<b>3) Budgets are used to ________.</b>
A) increase the book value of its assets
B) communicate with external stakeholders
C) calculate the income tax liability
D) formulate company strategies
Objective 6.1

D) formulate company strategies

<b>4) Which of the following is true of master budgets?</b>
A) They include only financial aspects of a plan and exclude nonfinancial aspects.
B) They aid in coordinating what needs to be done to implement a plan.
C) They aid in quantifying the expectations of all stakeholders.
D) They must be administered rigidly after they are committed to.
Objective 6.1

B) They aid in coordinating what needs to be done to implement a plan.

<b>5) Operating decisions primarily deal with ________.</b>
A) the best use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) satisfying stockholders
Objective 6.1

A) the best use of scarce resources

<b>6) Financing decisions primarily deal with ________.</b>
A) the use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) preparing financial statements for stockholders
Objective 6.1

B) how to obtain funds to acquire resources

<b>7) A master budget ________.</b>
A) is the initial plan of what the company intends to accomplish in the period and evolves from
both the operating and financing decisions
B) is a substitute for the management functions of planning and coordination
C) improves companies' market capitalization and evolves from both the investing and financing decisions
D) provides an ethical framework for decision making
Objective 6.1

A) is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions

<b>8) Which of the following is generally expressed through a short-run budget?</b>
A) operational plans
B) expansion plans
C) strategic plans
D) startup plans
Objective 6.1

A) operational plans

<b>9) Which of the following statements is true of budgets?</b>
A) Master budgets express management's operating and financial plans.
B) Financial budgets are prepared before the master budget is prepared.
C) Operating budgets are prepared independently of the master budget.
D) Financial budgets are working documents at the core of the budgeting process.
Objective 6.1

A) Master budgets express management's operating and financial plans.

<b>10) A master budget forces managers to examine the business as they plan so they can ________.</b>
A) detect inaccurate historical records to avoid errors in budgets
B) set expectations against which actual results can be compared
C) complete the budgeting task on time
D) ensure that only financial risks and opportunities are incorporated
Objective 6.1

B) set expectations against which actual results can be compared

<b>11) TRUE or FALSE: A budget is the quantitative expression of a proposed plan of action by management for a specified period.</b>
Objective 6.1

TRUE

<b>12) TRUE or FALSE: A budget generally includes both financial and nonfinancial aspects of the plan.</b>
Objective 6.1

TRUE

<b>13) TRUE or FALSE: An organization's strategy matches its capabilities with the opportunities in the marketplace to accomplish its objectives.</b>
Objective 6.1

TRUE

<b>14) Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as the number of physical units manufactured.</b>
Objective 6.1

FALSE Explanation: Budgeting includes both financial and nonfinancial aspects of the plan.

<b>15) TRUE or FALSE: Operating plans are generally expressed through long-run budgets.</b>
Objective 6.1

FALSE Explanation: Operating plans are generally expressed through short-run budgets. Strategic plans are expressed through long-run budgets.

<b>16) TRUE or FALSE: A budget aids to coordinate what needs to be done to implement the proposed plan.</b>
Objective 6.1

TRUE

<b>17) TRUE or FALSE: Long-run planning and short-run planning are best performed independently of each other.</b>
Objective 6.1

FALSE Explanation: Long-run planning and short-run planning are inter-dependent.

<b>18) TRUE or FALSE: Financing decisions deal with how to best use the limited resources of an organization.</b>
Objective 6.1

FALSE Explanation: Financing decisions deal with how to obtain funds to acquire resources needed for the organization.

<b>19) TRUE or FALSE: The feedback from budgets can lead to changes in plans and strategies.</b>
Objective 6.1

TRUE

<b>20) TRUE or FALSE: Budgeted financial statements are called pro forma statements.</b>
Objective 6.1

TRUE

<b>21) Describe the benefits of preparing an operating budget to an organization.</b>
Objective 6.1

- A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not "set in stone." If new information or opportunities arise the budget should be adjusted. - A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. - A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. - A well-prepared operating budget can become the performance standard against which firms can compare the actual results.

<b>22) Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was an improper budgeting function. The company made a good product and market potential was great.</b>

Required:
Describe the usual budgeting cycle that well-managed companies adopt?*
Objective 6.1

The usual budgeting cycle that well-managed companies adopt consists of the following three steps: 1. Before the start of the period managers and management accountants work together to develop plans for the company as a whole and the performance of its subunits, taking into account the company's past performance, market feedback, and anticipated future changes. 2. At the beginning of the period, managers are provided with a framework that outlines specific financial or nonfinancial expectations against which actual results will be compared. 3. During the course of the year, management accountants and managers investigate any deviations from plans and take corrective action, if necessary.

<b>1) Which of the following is true of budgets when they are administered thoughtfully?</b>
A) They eliminate subjectivity in performance evaluation.
B) They can eliminate the uncertainty faced by a company.
C) They promote coordination within the subunits of a company.
D) They are a substitute the planning and coordination functions of management.
Objective 6.2

C) They promote coordination within the subunits of a company.

<b>2) A budget is an end product of negotiations among senior and subordinate mangers because ________.</b>
A) budgeting is their mutual responsibility
B) senior managers alone cannot spare the time required for the budgeting process
C) senior managers are responsible for providing information on competitors performance and subordinate managers are responsible for information on external market conditions
D) senior managers want stiffer targets and subordinates want relatively easy targets
Objective 6.2

D) senior managers want stiffer targets and subordinates want relatively easy targets

<b>3) Which of the following is a limitation of using past performance as a basis for judging actual results?</b>
A) It does not account for productivity increases over the periods.
B) It increases the incentive for managers to introduce budgetary slack.
C) It does consider inefficiencies of previous periods.
D) It increases the tendency of senior managers exaggerating changes in future conditions as opposed to changes in current conditions.
Objective 6.2

C) It does consider inefficiencies of previous periods.

<b>4) Challenging budgets tend to ________.</b>
A) discourage out-of-the-box and creative thinking as there is very little room for error
B) set unrealistic expectations and are perceived as overly ambitious and unachievable
C) increase anxiety without motivation not meeting them is viewed as a failure
D) motivate improved performance as employees work more intensely to avoid failure
Objective 6.2

D) motivate improved performance as employees work more intensely to avoid failure

<b>5) A limitation of using past performance as a basis for judging actual results is that ________.</b>
A) future conditions can be different from the past
B) any undervaluation of profits in the past period is likely to continue
C) any subsequent change in accounting treatment will distort performance evaluation
D) they tend to distort results when current and past conditions are similar
Objective 6.2

A) future conditions can be different from the past

<b>6) A company's actual performance should be compared against budgeted amounts for the same accounting period so that ________.</b>
A) adjustments for future conditions can be included
B) to avoid any feedback from the budgets due to past miscues
C) inefficiencies of the past year can be included
D) a rolling budget can be implemented
Objective 6.2

A) adjustments for future conditions can be included

<b>7) Which of the following is a reason why top managers want lower-level managers to participate in the budgeting process?</b>
A) To benefit from their experience with the day-to-day aspects of running the business.
B) To reduce the time and cost expended in the budgeting process.
C) To ensure that they do not introduce any budgetary slack.
D) To ensure that the budgets are administered rigidly given the changing market conditions.
Objective 6.2

A) To benefit from their experience with the day-to-day aspects of running the business.

<b>8) Demanding but achievable targets tend to ________.</b>
A) be set by subordinate managers to create intrinsic reasons to achieve targets
B) create unnecessary anxiety that de-motivates employees
C) improve performance of employees when they are closer to the target
D) be perceived as ambitious with little chance of success in achieving targets
Objective 6.2

C) improve performance of employees when they are closer to the target

<b>9) Which of the following is referred to as the bottom-up aspect of the budgeting process?</b>
A) lower-level managers setting their individual targets that aggregate to be the company-wide target
B) senior managers consulting middle- and lower-level managers to investigate any deviations from the budget
C) lower-level managers implementing the budgets with senior managers monitoring progress and investigating deviations
D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge
Objective 6.2

D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge

<b>10) Participation of employees in the budgeting process helps ________.</b>
A) create greater commitment towards the budget
B) create demanding but achievable budget
C) decrease deviations from the budget
D) secure communication of sensitive information
Objective 6.2

A) create greater commitment towards the budget

<b>11) Managers who feel that top management does not believe in the budget are most likely to ________.</b>
A) pick up the slack and participate in the budgeting process
B) to face little interference in the day-to-day aspects of running the business
C) be inactive participants in the budgeting process
D) convert the budget to a shorter more reasonable time period
Objective 6.2

C) be inactive participants in the budgeting process

<b>12) Which of the following is a benefit of budgeting?</b>
A) It helps investors to value stocks.
B) It helps managers gather information for improving future performance.
C) It helps managers to take marketing decisions.
D) It helps in increasing market capitalization of the company.
Objective 6.2

B) It helps managers gather information for improving future performance.

<b>13) Budgets should ________.</b>
A) be flexible
B) be administered rigidly
C) only be developed for short periods of time
D) include only variable costs
Objective 6.2

A) be flexible

<b>14) TRUE or FALSE: After a budget is agreed upon and finalized by the management team the amounts should NOT be changed for any reason.</b>
Objective 6.2

FALSE Explanation: Budgets should not be administered rigidly but rather should be adjusted for changing conditions.

<b>15) TRUE or FALSE: Even in the face of changing conditions, attaining the original budget is critical.</b>
Objective 6.2

FALSE Explanation: Changing conditions usually call for a change in plans. Attaining the budget should not be an end in itself.

<b>16) TRUE or FALSE: Lower-level managers will not actively participate in the budget process if they perceive upper management does not believe in the process.</b>
Objective 6.2

TRUE

<b>17) TRUE or FALSE: Budgeting helps managers gather information for improving only the budgeted period's performance.</b>
Objective 6.2

FALSE Explanation: Budgeting helps managers gather information which help in improving performance for the budget period and also for the future.

<b>18) TRUE or FALSE: Bottom-up budgets entrusts senior managers to prepare budgets and lower-level managers to execute them.</b>
Objective 6.2

FALSE Explanation: Bottom-up budgets encourage lower-level managers to participate in the budgeting process and hence it is not limited to senior managers alone.

<b>19) TRUE or FALSE: It is best to compare this year's performance with last year's actual performance rather than this year's budget.</b>
Objective 6.2

FALSE Explanation: It is best to compare this year's performance with this year's budget because inefficiencies and different conditions may be reflected in last year's actual performance amounts.

<b>20) TRUE or FALSE: When administered wisely budgets promote communication and coordination among the various subunits of the organization.</b>
Objective 6.2

TRUE

<b>1) Which of the following is a factor while choosing the period of a budget?</b>
A) the frequency of interim financial statements
B) the estimated period required to achieve budget targets
C) the general economic trend
D) the motive for creating the budget
Objective 6.3

D) the motive for creating the budget

<b>2) Which of the following is a component of operating budgets?</b>
A) sales budget
B) budgeted statement of cash flows
C) capital expenditures budget
D) budgeted balance sheet
Objective 6.3

A) sales budget

<b>3) The operating budget process generally concludes with the preparation of the ________.</b>
A) production budget
B) cash flow statement
C) research and development budget
D) budgeted income statement
Objective 6.3

D) budgeted income statement

<b>4) Which of the following best describes a rolling budget?</b>
A) It is a budget that outlines the amount required to roll over debt in a future period.
B) It is a budget that is always available for a specified future time period.
C) It is a budget that outlines budgeted expenses.
D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant.
Objective 6.3

B) It is a budget that is always available for a specified future time period.

<b>5) The ________ is a component of financial budgets.</b>
A) cost of goods sold budget
B) marketing costs budget
C) distribution costs budget
D) cash budget
Objective 6.3

D) cash budget

<b>6) ________ include a budgeted statement of cash flows and a budgeted balance sheet.</b>
A) Revenue budgets
B) Financial budgets
C) Operating budgets
D) Production budgets
Objective 6.3

B) Financial budgets

<b>7) The order to follow when preparing the operating budget is ________.</b>
A) revenues budget production budget, and direct manufacturing labor costs budget
B) costs of goods sold budget, production budget, and cash budget
C) revenues budget, manufacturing overhead costs budget, and production budget
D) cash expenditures budget, revenues budget, and production budget
Objective 6.3

A) revenues budget production budget, and direct manufacturing labor costs budget

<b>8) In which order are the following developed? First to last:</b>
A = Production budget
B = Direct materials costs budget
C = Budgeted income statement
D = Revenues budget

A) ABDC
B) DABC
C) DCAB
D) CABD
Objective 6.3

B) DABC

<b>9) The budgeting process is most strongly influenced by ________.</b>
A) the capital budget
B) the budgeted statement of cash flows
C) the sales forecast
D) the production budget
Objective 6.3

C) the sales forecast

<b>10) ________ is the usual starting point for budgeting.</b>
A) The revenues budget
B) The estimated net income
C) The production budget
D) The cash budget
Objective 6.3

A) The revenues budget

<b>11) The sales forecast should be primarily based on ________.</b>
A) statistical analysis
B) input from sales managers and sales representatives
C) production capacity
D) input from the board of directors
Objective 6.3

B) input from sales managers and sales representatives

<b>12) Costs such as supervision depreciation, maintenance, supplies, and power. are included in the ________.</b>
A) capital expenditures budget
B) distribution costs budget
C) revenues budget
D) manufacturing overhead budget
Objective 6.3

D) manufacturing overhead budget

<b>13) High inventory levels increase the ________.</b>
A) cost of carrying inventory the costs of quality, and shrinkage costs
B) revenues and expected profits
C) cost of equity, cost of debt, and cost of short-term funds
D) cost of materials, the costs of overhead, and opportunity costs
Objective 6.3

A) cost of carrying inventory the costs of quality, and shrinkage costs

<b>14) The revenues budget identifies ________.</b>
A) expected cash flows for each product
B) actual sales from last year for each product
C) the expected level of sales for the company
D) the variance of sales from actual for each product
Objective 6.3

C) the expected level of sales for the company

<b>15) The number of units in the sales budget and the production budget may differ because of a change in ________.</b>
A) finished goods inventory levels
B) overhead charges
C) direct material inventory levels
D) sales returns and allowances
Objective 6.3

A) finished goods inventory levels

<b>16) Which of the following is a benefit of keeping inventory levels low?</b>
A) It reduces setup costs.
B) It reduces shrinkage costs.
C) It reduces the loss from lost sales.
D) It reduces inventory turnover.
Objective 6.3

B) It reduces shrinkage costs.

<b>17) Budgeted production equals ________.</b>
A) beginning finished goods inventory + budgeted unit sales - targeted ending finished goods inventory
B) targeted ending finished goods inventory + beginning finished goods inventory - budgeted unit sales
C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods inventory
D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory
Objective 6.3

C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods inventory

<b>18) Best products an Atlanta based company, is in the midst of its budgeting process. It has already prepared its direct materials usage budget and is now in the process of preparing its direct material purchase budget. In addition to the details gathered to prepare the direct materials usage budget, Best also must know ________.</b>
A) the level of direct material inventory to be maintained
B) the ratio of direct materials to cost of goods sold
C) the beginning direct materials inventory level
D) the quantity of direct materials to be purchased
Objective 6.3

A) the level of direct material inventory to be maintained

<b>19) Total finished units to be produced is based on the ________.</b>
A) direct material purchase budget
B) budgeted sales units
C) direct material usage budget
D) budgeted manufacturing overhead
Objective 6.3

B) budgeted sales units

<b>20) Which of the following is most likely to be a cost driver for the variable portion of marketing costs?</b>
A) percentage of markup on cost
B) number of units produced
C) increase in revenues attributable to such marketing
D) number of units sold
Objective 6.3

D) number of units sold

<b>21) Which of the following is required to arrive at the budgeted units to be produced in a year?</b>
A) estimated direct materials inventory required at the end of the year
B) estimated finished goods inventory required at the end of the year
C) amount of direct materials to be used during the year
D) amount of manufacturing overhead to be incurred
Objective 6.3

B) estimated finished goods inventory required at the end of the year

<b>22) When direct material and direct labor is the limiting factor revenue budgets are usually based on ________.</b>
A) expected demand of the company's products
B) the capital in the budget period
C) the supply of indirect material and labor in the market
D) maximum units that can be manufactured
Objective 6.3

D) maximum units that can be manufactured

<b>23) Which of the following information is required by a company's manager while preparing a manufacturing overhead costs budget?</b>
A) estimated incentives to be paid to marketing personnel
B) estimated expense for office supplies
C) estimated expense for maintenance of factory building
D) rent expense for lease of office building
Objective 6.3

C) estimated expense for maintenance of factory building

<b>24) Esther Baskets Company expects to manufacture and sell 20,000 baskets in 2016 for $5 each. There are 4,000 baskets in beginning finished goods inventory with target ending inventory of 5,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2016 budgeted income statement?</b>
A) $105,000
B) $100,000
C) $95,000
D) $55,000
Objective 6.3

B) $100,000 Explanation: B) Sales revenue = 20,000 baskets × $5 = $100,000

<b>25) Orange Corporation has budgeted sales of 16,000 units, targeted ending finished goods inventory of 4,000 units, and beginning finished goods inventory of 2,000 units. How many units should be produced next year?</b>
A) 22,000 units
B) 20,000 units
C) 18,000 units
D) 16,000 units
Objective 6.3

C) 18,000 units Explanation: C) Number of units to be produced next year = 16,000 units (estimated sales) + 4,000 units (budgeted ending inventory) - 2,000 units (opening inventory) = 18,000 units.

<b>26) For next year, Roberto, Inc., has budgeted sales of 15,000 units, targeted ending finished goods inventory of 750 units, and beginning finished goods inventory of 450 units. All other inventories are zero. How many units should be produced next year?</b>
A) 14,700 units
B) 15,000 units
C) 15,300 units
D) 16,200 units
Objective 6.3

C) 15,300 units Explanation: C) Units to be produced next year = 15,000 units (estimated sales) + 750 units (budgeted ending inventory) - 450 units (opening inventory) = 15,300 units

<b>27) Antique Brass Company has budgeted sales volume of 120,000 units and budgeted production of 108,000 units, while 20,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory?</b>
A) 20,000 units
B) 32,000 units
C) 12,000 units
D) 8,000 units
Objective 6.3

D) 8,000 units Explanation: D) 108,000 units (Budgeted production) + 20,000 units (Beginning finished goods inventory) - 120,000 units (Budgeted sales) = 8,000 units (Budgeted ending finished goods inventory)

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>28) On the 2016 budgeted income statement, what amount will be reported for sales?</b>
A) $246,000
B) $240,000
C) $312,000
D) $318,000
Objective 6.3

B) $240,000 Explanation: B) 20,000 units sold × $12 per pool cue = $240,000

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>29) How many pool cues need to be produced in 2016?</b>
A) 22,500 cues
B) 22,000 cues
C) 20,500 cues
D) 19,500 cues

C) 20,500 cues Explanation: C) 20,000 units (Budgeted sales) + 2,500 (Budgeted ending inventory) - 2,000 (Beginning inventory) = 20,500 cues

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>30) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?</b>
A) $139,800
B) $136,000
C) $132,600
D) $153,000

B) $136,000 Explanation: B) The cost per unit is $6.80 ($2 + $4 + $0.80). Therefore, the total cost of goods sold is $136,000 ($6.80 × 20,000).

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>31) What are the 2016 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?</b>
A) $48,000; $96,000; $19,200
B) $44,000; $88,000; $17,600
C) $41,000; $82,000; $16,400
D) $40,000; $80,000; $16,000

C) $41,000; $82,000; $16,400 Explanation: C) Direct materials = 20,500 × $2.00 = $41,000; Direct manufacturing labor = 20,500 × $4.00 = $82,000; Manufacturing overhead = 20,500 × $0.80 = $16,400

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>32) On the 2016 budgeted income statement, what amount will be reported for sales?</b>
A) $122,000
B) $118,000
C) $140,000
D) $120,000

D) $120,000 Explanation: D) Total sales = 6,000 units × $20 = $120,000.

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>33) How many ceramic vases should be produced in 2016?</b>
A) 5,900 vases
B) 6,100 vases
C) 7,000 vases
D) 6,000 vases

B) 6,100 vases Explanation: B) Number of vases to be produced = 6,000 units (Estimated sales) + 500 units (Budgeted ending inventory) - 400 units (Opening inventory) = 6,100 units.

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>34) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?</b>
A) $105,000
B) $91,500
C) $90,000
D) $88,500

C) $90,000 Explanation: C) Cost of goods sold is $90,000 .

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>35) What are the 2016 budgeted production costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?</b>
A) $12,200; $61,000; $18,300
B) $12,000; $60,000; $18,000
C) $2,000; $10,000; $3,000
D) $2,000; $0; $4,500

A) $12,200; $61,000; $18,300 Explanation: A) Budgeted cost for direct materials = $12,200 . Budgeted cost for direct manufacturing labor = $61,000 . Budgeted manufacturing overhead = $18,300 .

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation a retailer:

Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month

<b>36) For January, budgeted gross margin is ________.</b>
A) $100,000
B) $140,000
C) $60,000
D) $50,000

C) $60,000 Explanation: C) $200 000 - (.70 × $200,000) = $60,000

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation a retailer:

Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month

<b>37) For January, the amount budgeted for the nonmanufacturing costs budget is ________.</b>
A) $78,000
B) $10,000
C) $168,000
D) $18,000

D) $18,000 Explanation: D) $3,000 + $5,000 + $10,000 = $18,000

<b>38) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:</b>

T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80

What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $13.00 per unit?
A) $293,000
B) $90,000
C) $203,000
D) $473,000

A) $293,000 Explanation: A) (60,000 × $1.50) + (35,000 × $5.80) = $293,000

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>39) How many units of Prime watches must be produced in 2016?</b>
A) 3,350 units
B) 3,150 units
C) 3,000 units
D) 2,800 units

B) 3,150 units Explanation: B) Number of units of Prime to be produced = = 3,150 units.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>40) What is the amount budgeted for purchase of Crimpson in 2016?</b>
A) $31,500
B) $10,250
C) $30,500
D) $10,000

B) $10,250 Explanation: B) Budgeted amount for purchase of Crimpson = = $10,250; Number of units of Luxuria to be produced = = 1,125 units.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>41) What is the total budgeted cost of sold for Meridian Industries in 2016?</b>
A) $500,000
B) $600,000
C) $700,000
D) $800,000

B) $600,000 Explanation: B) Budgeted cost of goods sold for Prime = = $300,000. Budgeted cost of goods sold for Luxuria = = $300,000. Total cost of goods sold = $300,000 + $300,000 =$600,000.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>42) What is the total budgeted cost of goods manufactured in 2016?</b>
A) $600,000
B) $625,500
C) $652,500
D) $667,500

C) $652,500 Explanation: C) Budgeted cost of goods manufactured for Prime = = $315,000. Budgeted cost of goods manufactured for Luxuria = = $337,500. Total cost of goods sold = $315,00 + $337,500 =$652,500

Answer the following questions using the information below:

Furniture Inc. estimates the following number of mattress sales for the first four months of 2016:

Month Sales
January 22,000
February 30,800
March 28,600
April 35,200

Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month's sales.

<b>43) How many mattresses need to be produced in January 2016?</b>
A) 15,400 mattresses
B) 21,560 mattresses
C) 28,460 mattresses
D) 34,160 mattresses

B) 21,560 mattresses Explanation: B) Number of mattresses to be produced in January = = 21,560 mattresses.

Answer the following questions using the information below:

Furniture Inc. estimates the following number of mattress sales for the first four months of 2016:

Month Sales
January 22,000
February 30,800
March 28,600
April 35,200

Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month's sales.

<b>44) How many mattresses should be produced in the first quarter of 2016?</b>
A) 88,880 mattresses
B) 81,840 mattresses
C) 60,280 mattresses
D) 51,920 mattresses

B) 81,840 mattresses Explanation: B) January February March Total (For the quarter) Estimated sales 22,000 30,800 28,600 81,400 Less: Opening inventory 6,600 6,160 5,720 6,600 15,400 24,640 22,880 74,800 Add: Closing inventory 6,160 5,720 7,040 7,040 (20% of next month's sales) Budgeted production 21,560 30,360 29,920 81,840

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month's sales, stated at cost.

<b>45) What is the amount of purchases budgeted for January?</b>
A) $63,960
B) $70,440
C) $78,000
D) $92,040

B) $70,440 Explanation: B) Budgeted purchases for January = $70 440 ($78,000 − $21,600 + $14,0400**) *$120,000 × (100% − 35%) = $78,000 **$108,000 × (100% − 35%) × 20% = $14,040

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 1 44,000

The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month's sales, stated at cost.

<b>46) What is the amount of purchases budgeted for February?</b>
A) $32,214
B) $70,200
C) $73,320
D) $95,160

C) $73,320 Explanation: C) Budgeted purchases for February = $73,320 ($70,200 − $14,040 + $17,1600**) *$108,000 × (100% − 35%) = $70,200 **$132,000 × (100% − 35%) × 20% = $17,160

Answer the following questions using the information below:

Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour.

<b>47) The expected number of hours of direct labor for OM362 Bigger is ________.</b>
A) 8,800 hours of assembling; 17,600 hours of polishing
B) 11,200 hours of assembling; 22,400 hours of polishing
C) 17,600 hours of assembling; 8,800 hours of polishing
D) 22,400 hours of assembling; 11,200 hours of polishing

B) 11,200 hours of assembling; 22,400 hours of polishing Explanation: B) 10,000 + 2,000 - 800 = 11,200 (11,200 × 1) = 11,200 hours of assembling; (11,200 × 2) = 22,400 hours of polishing

Answer the following questions using the information below:

Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour.

<b>48) The expected cost of direct labor for OM362 is ________.</b>
A) $350,000
B) $378,000
C) $392,000
D) $420,000

C) $392,000 Explanation: C) Expected cost of direct labor for OM362 = 11,200 units (Estimated units to be manufactured) × = $392,000.

<b>49) Juan Sugita Manufacturing expects to produce and sell 12,000 units of Big, its only product, for $20 each. Direct material cost is $3 per unit, direct labor cost is $10 per unit, and variable manufacturing overhead is $6 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be ________.</b>
A) $13.00 per unit
B) $14.00 per unit
C) $21.00 per unit
D) $18.50 per unit

C) $21.00 per unit Explanation: C) The inventoriable cost as per GAAP is $21 ($3 + $10 + $6 + ($24,000 / 12,000 units)). As per GAAP, variable and fixed selling and administrative overhead costs are not inventoriable.

<b>50) The use of activity-based budgeting is growing because of ________.</b>
A) the increased use of activity-based costing
B) the increased use of kaizen costing
C) increases in work-in-process inventory
D) increases in direct materials inventory

A) the increased use of activity-based costing

<b>51) Activity-based budgeting would separately estimate ________.</b>
A) the cost of overhead for a department
B) a plant-wide cost-driver rate
C) the cost of a setup activity
D) All of these answers are correct.

C) the cost of a setup activity

<b>52) Activity-based-costing analysis makes no distinction between ________.</b>
A) direct-materials inventory and work-in-process inventory
B) short-run variable costs and short-run fixed costs
C) parts of the supply chain
D) components of the value chain

B) short-run variable costs and short-run fixed costs

<b>53) Activity-based budgeting makes it easier to ________.</b>
A) determine a rolling budget
B) prepare pro forma financial statements
C) determine how to reduce costs
D) execute a financial budget

C) determine how to reduce costs

<b>54) Which of the following statements is true about activity-based budgeting?</b>
A) activity-based budgeting estimates total costs more accurately than cost-based budgeting
B) activity-based budgeting provides more detailed information than cost-based budgeting
C) activity-based budgeting is cheaper than cost-based budgeting
D) activity-based budgeting is simpler to implement than cost-based budgeting

B) activity-based budgeting provides more detailed information than cost-based budgeting

<b>55) Activity-based budgeting ________.</b>
A) uses one cost driver such as direct labor-hours
B) uses only output-based cost drivers such as units sold
C) focuses on activities necessary to produce and sell products and services
D) classifies costs by functional area within the value chain

C) focuses on activities necessary to produce and sell products and services

<b>56) Which one of the following is a benefit of activity-based budgeting?</b>
A) It uses a single cost driver for batch-level activities or higher.
B) It is the most convenient method of budgeting as it requires minimal effort.
C) It provides detailed information that improves decision making.
D) It is the most efficient method to budget direct costs and trace them to individual cost objects.

C) It provides detailed information that improves decision making.

<b>57) TRUE or FALSE: A rolling budget is the same as a continuous budget.</b>

TRUE

<b>58) TRUE or FALSE: Cost of goods sold budget takes inputs from both ending inventories budget and nonmanufacturing costs budget.</b>

FALSE Explanation: Cost of goods sold budget does not take any input from nonmanufacturing costs budget.

<b>59) TRUE or FALSE: Preparation of the budgeted statement of cash flows is the final step in preparing the operating budget.</b>

FALSE Explanation: Preparation of the budgeted income statement is the final step in preparing the operating budget.

<b>60) TRUE or FALSE: A company usually prepares a budget for nonmanufacturing costs after preparing all operating budgets.</b>

FALSE Explanation: A company usually prepares a budget for nonmanufacturing costs along with operating budgets.

<b>61) TRUE or FALSE: The use of activity-based cost drivers gives rise to zero-based budgeting.</b>

FALSE Explanation: The use of activity-based cost drivers gives rise to activity-based budgeting.

<b>62) TRUE or FALSE: The revenues budget should be based on the cost of goods sold budget.</b>

FALSE Explanation: The revenues budget provides input to the cost of goods sold budget.

<b>63) TRUE or FALSE: Cost-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.</b>

FALSE Explanation: Activity-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.

<b>64) TRUE or FALSE: The production cost budget identifies how each product is manufactured.</b>

FALSE Explanation: The bill of materials identifies how each product is manufactured specifying all materials, the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centers where the operations are performed.

<b>65) TRUE or FALSE: The manufacturing labor budget depends on wage rates, production methods, and hiring plans.</b>

TRUE

<b>66) TRUE or FALSE: The revenues budget is prepared after all other operating budgets are prepared.</b>

FALSE Explanation: The revenues budget is generally the starting point for preparing operating budgets and is generally the first operating budget to be prepared.

<b>67) TRUE or FALSE: Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced units sold, or revenues).</b>

TRUE

<b>68) TRUE or FALSE: Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.</b>

TRUE

<b>69) TRUE or FALSE: As budgeting is not a cross-functional activity it tends to be accurate and reliable with regard to forecasts.</b>

FALSE Explanation: Budgeting is a cross-functional activity involving inputs from different business functions of the value chain.

<b>70) TRUE or FALSE: Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.</b>

TRUE

<b>71) Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget.</b>

1. Capital expenditures budget
2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement

1. F 6. O 2. O 7. F 3. O 8. O 4. F 9. F 5. O 10. O

<b>72) Prescher Company sells three products with the following seasonal sales pattern:</b>

Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 30%
3 20% 20% 50%
4 10% 30% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per unit to be as follows:

Product Units Selling Price
A 50,000 $ 16
B 125,000 40
C 62,500 24

Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

First Second Third Fourth
Quarter Quarter Quarter Quarter Total

Product A
Sales (in units) 20,000 15,000 10,000 5,000 50,000
- Price per unit $16 $16 $16 $16 $16
Sales (in dollars) $320,000 $240,000 $160,000 $80,000 $800,000

Product B
Sales (in units) 37,500 25,000 25,000 37,500 125,000
- Price per unit $40 $40 $40 $40 $40
Sales (in dollars) $1,500,000 $1,000,000 $1,000,000 $1,500,000 $5,000,000

Product C
Sales (in units) 6,250 18,750 31,250 6,250 62,500
- Price per unit $24 $24 $24 $24 $24
Sales (in dollars) $150,000 $450,000 $750,000 $150,000 $1,500,000

Total sales: First Quarter $1,970,000 Second Quarter $1,690,000 Third Quarter $1,910,000 Fourth Quarter $1,730,000 Total $7,300,000

<b>73) Lubriderm Corporation has the following budgeted unit sales for the next six-month period:</b>

Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.

Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

a. July August September Budgeted sales 120,000 210,000 150,000 Add: Required ending inventory 42,000 30,000 36,000 Total inventory requirements 162,000 240,000 186,000 Less: Beginning inventory 24,000 42,000 30,000 Budgeted production 138,000 198,000 156,000 b. July August September Production in units 138,000 198,000 156,000 Targeted ending inventory in lbs. 297,000 234,000 *252,000 Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month's needs ** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month's needs ** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across

<b>74) Perry Company has provided the following information:</b>

Month Budgeted Sales
March $200,000
April 212,000
May 204,000
June 218,000
July 210,000

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.

Required:
Prepare a purchases budget for April through June.

April May June Total
Desired ending inventory
$36,720 $39,240 $37,800 $113,760
Add: Cost of goods sold
127,200 122,400 130,800 380,400
Total needed 163,920 161,640 168,600 494,160
Less: Opening inventory
38,160 36,720 39,240 114,120

Total purchases budget: $125,760 $124,920 $129,360 $380,040 Explanation: Desired ending inventory is for example for April: $204,000 × .60 × .30=$36,720. Cost of goods sold is for example for April: $212,000 × .60 = $127,200 Opening inventory for example for April: $212,000 × .60 × .30 = $38,160

<b>75) Favata Company has the following information:</b>

Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000

In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales.

Required:
Prepare a purchases budget for July through September.

July Aug Sept Total
Desired ending inventory
$ 8,400 $14,700 $15,120 $15,120
Plus COGS 35,700 28,000 49,000 112,700
Total needed 44,100 42,700 64,120 127,820
Less beginning inventory
10,710 8,400 14,700 10,710

Total purchases $33,390 $34,300 $49,420 $117,110

<b>76) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired.</b>

Required:
a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.

a. Framing Glass Backing Desired ending inventory* 2250 750 750 Production needs (10,000 units)** 40,000 10,000 20,000 Total needs 42,250 10,750 20,750 Less: Beginning inventory 1,500 500 500 Purchases planned 40,750 10,250 20,250 b. Cost of direct materials: Framing (40,750 × $0.90) $36,675.00 Glass (10,250 × $8.00) 82,000.00 Backing (20,250 × $4) 81,000.00 Total $199,675.00 * 1,500 × 1.5 = 2,250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing ** 10,000 × 4 feet of framing = 40,000 feet of framing 10,000 × 1 square foot of glass = 10,000 square feet of glass 10,000 × 2 square feet of backing = 20,000 square feet of backing

<b>77) Christy Enterprises reports the year-end information from 2015 as follows:</b>

Sales (100,000 units) $500,000
Less: Cost of goods sold 300,000
Gross profit 200,000
Operating expenses (includes $20,000 of Depreciation) 120,000
Net income $ 80,000

Christy is developing the 2016 budget. In 2016 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.

Required:
Prepare a budgeted income statement for 2016.

Christy Enterprises Budgeted Income Statement For the Year 2016 Sales (95,000 × $5.50) $522,500 Cost of goods sold (2016 sales × 62%) 323,950 Gross profit 198,550 Less: Operating expenses + $20,000) 115,000 Net income $ 83,550

<b>78) Describe operating and financial budgets and give at least two examples of each discussed in the textbook.</b>

- Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labor management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labor costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. -Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.

<b>79) Discuss the importance of the sales forecast and items that influence its accuracy.</b>

All other budgets are based on information from the sales forecast. The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy changes in the industry, actions of the competition, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast.

<b>80) Rolling budgets help management to ________.</b>
A) better review the past calendar year
B) deal with a 5-year time frame
C) focus on the upcoming budget period
D) rigidly administer the budget

C) focus on the upcoming budget period

<b>1) Financial planning models ________.</b>
A) are not used in the budgeting process
B) are not useful for sensitivity analysis
C) are mathematical representations of the relationships affecting the budget process
D) are used for nonfinancial aspects of budgeting
Objective 6.4

C) are mathematical representations of the relationships

<b>2) Financial planning software packages assist management with ________.</b>
A) assigning responsibility to various levels of management
B) identifying the target customer
C) sensitivity analysis in their planning and budgeting activities
D) achieving greater commitment from lower management
Objective 6.4

C) sensitivity analysis in their planning and budgeting activities

<b>3) ERP systems store vast quantities of information about the materialsmachines and equipment, labor, power, maintenance, and setups needed to manufacture different products. This helps simplify the budgeting process as ERP systems ________.</b>
A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity
B) automatically identify and record changes in processes involved in producing products
C) identify which underlying assumptions are likely to change
D) always use a rolling budget ensuring that a budget is always available for a specified future period
Objective 6.4

A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity

<b>4) When performing a sensitivity analysis if the selling price per unit is increased, then the ________.</b>
A) per unit fixed administrative costs will increase
B) per unit direct materials purchase price will increase
C) total volume of sales will increase
D) total costs for sales commissions and other nonmanufacturing variable costs will increase
Objective 6.4

D) total costs for sales commissions and other nonmanufacturing variable costs will increase

<b>5) Sensitivity analysis helps managers evaluate risks ________.</b>
A) by showing the effects of changes to the original data or an underlying assumption
B) by identifying inconsistencies in underlying assumptions and actual conditions
C) by removing the effects of foreign currency exposure and other uncontrollable factors
D) by identifying gaps in the production process using information on setups needed to manufacture products
Objective 6.4

A) by showing the effects of changes to the original data or an underlying assumption

Answer the following questions using the information below:

Kramer Enterprises reports year-end information from 2015 as follows:

Sales (160,000 units) $960,000
Cost of goods sold 640,000
Gross margin 320,000
Operating expenses 260,000
Operating income $60,000

Kramer is developing the 2016 budget. In 2016 the company would like to increase selling prices by 12.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost.

<b>6) What is budgeted sales for 2016?</b>
A) $1,080,000
B) $1,000,000
C) $982,800
D) $873,600
Objective 6.4

C) $982,800 Explanation: C) Budgeted sales = $960,000 × 1.125 × 0.91 = $982,800

<b>7) What is budgeted cost of goods sold for 2016?</b>
A) $720,000
B) $582,400
C) $691,200
D) $640,000
Objective 6.4

B) $582,400 Explanation: B) Cost of goods sold in 2015 per unit: $640,000/160,000 units = $4 per unit Number of units sold in 2016 = 160,000 × 0.91 = 145,600 units × $4 per unit = $582,400.

<b>8) Should Kramer increase the selling price in 2016?</b>
A) Yes, because operating income increases for 2016.
B) Yes, because sales revenue increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because gross margin decreases for 2016.
Objective 6.4

A) Yes, because operating income increases for 2016. Explanation: A) Yes, because it would result in an increase in operating income compared to 2015 ( 2016 operating income would be: $982,800 -$582,400 (COGS)-$260,000 (operating expenses, which are fixed) = $140,400 compared to $60,000 in 2015.

Answer the following questions using the information below:

Violet Sales Corp reports the year-end information from 2016 as follows:

Sales (35,000 units) $280,000
Cost of goods sold 105,000
Gross margin 175,000
Operating expenses 150,000
Operating income $ 25,000

Violet is developing the 2016 budget. In 2016 the company would like to increase selling prices by 3.5%, and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost.

<b>9) What is budgeted sales for 2016?</b>
A) $291,200
B) $246,330
C) $302,400
D) $322,000
Objective 6.4

B) $246,330 Explanation: B) Budgeted sales in 2016: Selling prices in 2015 were $8 per unit ($280,000/35,000 units); increase selling price by 3.5% in 2016 means new selling price per unit in 2016 is $8.28 per unit; 2016 sales volume will be 35,000 units × .85 = 29,750 units times $8.28 per unit = $246,330

<b>10) What is budgeted cost of goods sold for 2016?</b>
A) $89,250
B) $98,250
C) $15,750
D) $257,040
Objective 6.4

A) $89,250 Explanation: A) Budgeted cost of goods sold = $105,000 × 0.85 = $89,250

<b>11) Should Violet increase the selling price in 2016?</b>
A) Yes, because sales revenue increases for 2016.
B) Yes, because gross margin increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because operating income decreases for 2016.
Objective 6.4

D) No, because operating income decreases for 2016. Explanation: D) $257,040 - $89,250 = $167,790 (Gross margin); $167,790 - $150,000 = $17,790 (Operating income). No, because there would be a decrease in operating income compared to 2016.

<b>12) TRUE or FALSE:Computer-based systems, like ERP, help managers budget for all manufacturing costs but lack the ability to help managers budget for non-manufacturing costs.</b>
Objective 6.4

FALSE Explanation: Computer-based systems like ERP, not only help managers budget for manufacturing costs but also for non-manufacturing costs

<b>13) TRUE or FALSE: Financial planning models are non-mathematical, abstract representations of the relationships among operating activities, financing activities, and other factors that affect the master budget.</b>
Objective 6.4

FALSE . Explanation: Financial planning models are mathematical models representing the relationships among operating activities financing activities, and other factors that affect the master budget.

<b>14) TRUE or FALSE: Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis.</b>
Objective 6.4

FALSE Explanation: Computer-based financial planning models easily assist management with sensitivity (what-if) analysis.

<b>15) TRUE or FALSE: Sensitivity analysis is a useful tool that helps managers evaluate risks.</b>
Objective 6.4

TRUE

<b>16) TRUE or FALSE: Computer-based systems such as ERP systems, cannot perform calculations for financial planning models.</b>
Objective 6.4

FALSE Explanation: Managers can use computer-based systems such as enterprise resource planning (ERP) systems, to perform calculations for financial planning models.

<b>17) Economics suggests that a decrease in the selling price of a product will decrease revenue.</b>
Objective 6.4

FALSE Explanation: If there is a decrease in the selling price of a product there may either be an increase in total revenue or a decrease in total revenue due to the uncertain effect of price change on demand.

<b>18) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice.</b>
Objective 6.4

Sensitivity analysis is a "what-if" technique that examines how results will change if the original predicted data are not achieved or if an underlying assumption changes. Managers often use financial planning models which are mathematical representations of relationships among the factors that influence the master budget. It is possible, using these models, to examine the financial impact of one or more parameters that influence a master budget, for example selling price and material cost. Management could consider three levels of each of these two parameters, resulting in nine scenarios of different selling prices and material costs. The financial model could then present a master budget based on each of these changes, and demonstrate the financial impact on the original data given changes in selling prices and/or material costs. Management could use these predictions to make contingency plans, change their strategies, or simply update the budgets as environmental conditions change.

<b>1) Which of the following is true of responsibility accounting?</b>
A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.
B) It is an arrangement of lines of responsibility and authority within a responsibility center.
C) It explicitly incorporates continuous improvement and changes due to learning curve.
D) It examines how a result will change if the original plan is not achieved.
Objective 6.5

A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.

<b>2) Which of the following departments is most likely to be a cost center?</b>
A) sales department of a company selling industrial tools
B) call center of a company that serves customers and cross-sells other products
C) maintenance department of a luxury resort
D) research department of a company providing consultancy services
Objective 6.5

C) maintenance department of a luxury resort

<b>3) Which of the following departments is most likely to be a profit center?</b>
A) the accounting department of a company that also assists in budgeting process
B) the research and development department of a company
C) the sales department of a company whose objective is to maximize the revenues
D) the consulting department of a law firm
Objective 6.5

D) the consulting department of a law firm

<b>4) A maintenance manager of a theatre is most likely to be responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

C) cost center

<b>5) The regional sales office manager of a national firm is most likely responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

A) revenue center

<b>6) A regional manager of a restaurant chain in charge of finding additional locations for expansion is most likely responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

B) investment center

<b>7) Silas has been recently promoted to head his department. He is responsible for maximizing the profits of the department and to ensure that the earnings are ploughed back into the business. Silas is most likely to head a (n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

B) investment center

<b>8) A manager of a revenue center is responsible ________.</b>
A) for only the profits of his center
B) for investments revenues, and costs
C) for only the revenues of his center
D) for both, the revenues and costs of his center
Objective 6.5

C) for only the revenues of his center

<b>9) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time.</b>
A) controlled
B) influenced
C) segregated
D) excluded
Objective 6.5

B) influenced

<b>10) Which of the following statements is true about responsibility accounting statements?</b>
A) Responsibility accounting excludes controllable costs.
B) Responsibility accounting segregates fixed costs and variable costs.
C) Responsibility accounting excludes fixed costs and variable costs.
D) Responsibility accounting segregates uncontrollable costs from controllable costs.
Objective 6.5

D) Responsibility accounting segregates uncontrollable costs from controllable costs.

<b>11) Which of the following is the fundamental purpose of responsibility accounting?</b>
A) to penalize managers for inefficiency
B) to gather information that will enable future improvement
C) to create an efficient and centralized organization
D) to evaluate the performance of managers
Objective 6.5

B) to gather information that will enable future improvement

<b>12) A company using responsibility accounting system decides to exclude all uncontrollable costs from a manager's performance report. Jenson is the machine supervisor. Which of the following costs will impact Jenson's performance report?</b>
A) rent and taxes paid on by the company
B) cost of materials used in manufacture
C) machine maintenance cost
D) cost of power consumed by the plant
Objective 6.5

C) machine maintenance cost

<b>13) Responsibility accounting ________.</b>
A) emphasizes controllability
B) focuses on who should be asked about the information
C) attempts to assign blame for problems to a specific manager
D) attempts to create a decentralized organization
Objective 6.5

B) focuses on who should be asked about the information

<b>14) A primary consideration in assigning a cost to a responsibility center is ________.</b>
A) whether the cost is fixed or variable
B) whether the cost is direct or indirect
C) who can best control the change in that cost
D) where in the organizational structure the cost was incurred
Objective 6.5

B) whether the cost is direct or indirect

*15) TRUE or FALSE: A responsibility center is a part segment, or subunit of an organization, whose manager is accountable for a specified set of activities.
Objective 6.5

TRUE

<b>16) TRUE or FALSE: Performance reports for responsibility centers are sometimes designed to change managers' behavior in the direction top managers desire even if the reports decrease controllability.</b>
Objective 6.5

TRUE

<b>17) TRUE or FALSE: In a cost center a manager is responsible for investments, revenues, and costs.</b>
Objective 6.5

FALSE Explanation: In a cost center a manager is responsible for costs, but not revenues or investments.

<b>18) TRUE or FALSE: A packaging department is most likely a profit center.</b>
Objective 6.5

FALSE Explanation: A packaging department is most likely a cost center.

<b>19) TRUE or FALSE: Variances between actual and budgeted amounts inform management about performance relative to the budget.</b>
Objective 6.5

TRUE

<b>20) TRUE or FALSE: Each manager regardless of level, is in charge of a responsibility center.</b>
Objective 6.5

TRUE

<b>21) TRUE or FALSE: A responsibility center is a part segment, or subunit of an organization whose manager is accountable for a specified set of activities.</b>
Objective 6.5

TRUE

<b>22) TRUE or FALSE: Management will most likely behave the same way if a department is structured as a cost center or if the same department is structured as a profit center.</b>
Objective 6.5

FALSE Explanation: Management will most likely behave differently if a department is structured as a cost center than if the same department is structured as a profit center due to the incentives to control costs as well as revenues in a profit center.

<b>23) TRUE or FALSE: Responsibility accounting focuses on control NOT on information and knowledge.</b>
Objective 6.5

FALSE Explanation: Responsibility accounting focuses on information and knowledge not on control.

<b>24) TRUE or FALSE: The sales department in any organization is usually a profit center.</b>
Objective 6.5

FALSE Explanation: The sales department is a revenue center because the sales manager is responsible primarily for revenues and the department's budget is primarily based on revenues.

<b>25) Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?</b>
Objective 6.5

Although no revenue or cost can be totally controlled a cost or revenue is a controllable item when a manager has significant influence over the amount of a cost or revenue. It is uncontrollable if this is not the case. A manager's ability to influence costs and revenues depends on two factors: (1) the manager's level of authority, and (2) the time period involved. Costs and revenue contracts, the economic costs of disposing of fixed assets, and the economy are three conditions that are likely to affect the period of time during which an item is not controllable.

<b>1) The Japanese use the term kaizen when referring to________.</b>
A) scarce resources
B) pro forma financial statements
C) continuous improvement
D) the sales forecast
Objective 6.6

C) continuous improvement

<b>2) Kaizen refers to incorporating cost reductions ________.</b>
A) in each successive budgeting period
B) in each successive sales forecast
C) in all customer service centers
D) in all areas of the organization
Objective 6.6

A) in each successive budgeting period

<b>3) Tom Magic Company manufactures various kinds of toys for different age groups. The company's flagship product is Rx. The company currently requires 8.50 labor hours to manufacture per unit of Rx. The company believes that because of numerous small improvements in the process it will require 0.10 labor-hours less and hence will only 8.40 labor-hours in the next quarter. It will require 8.35 and 8.25 labor-hours in third and fourth quarter. The company has adopted ________.</b>
A) activity based budgeting
B) kaizen budgeting
C) zero-based budgeting
D) cost-based budgeting
Objective 6.6

B) kaizen budgeting

<b>4) Kaizen budgeting involves ________.</b>
A) large cost reductions
B) management directed improvements
C) continual small cost reductions
D) continual small revenue increases
Objective 6.6

C) continual small cost reductions

<b>5) Kaizen budgeting is driven by ________.</b>
A) management
B) employees
C) stockholders
D) creditors
Objective 6.6

B) employees

Answer the following questions using the information below:

Sherry and John Enterprises are using the kaizen approach to budgeting for 2015. The budgeted income statement for January 2015 is as follows:

Sales (168,000 units) $1,000,000
Less: Cost of goods sold 600,000
Gross margin 400,000
Operating expenses 300,000
(includes $50,000 of fixed costs)
Operating income $ 100,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

<b>6) What is budgeted cost of goods sold for March 2015?</b>
A) $588,060
B) $592,000
C) $600,000
D) $594,000
Objective 6.6

A) $588,060 Explanation: A) Cost of goods sold in February is $594,000 ($600,000 × 0.99) and March = $588,060 ($594,000 × 0.99).

<b>7) What is budgeted gross margin for March 2015?</b>
A) $392,040
B) $396,000
C) $408,040
D) $411,940
Objective 6.6

D) $411,940 Explanation: D) Sales = $1,000,000. The cost of goods sold for the month of March = $588,060 ($600,000 × 0.99 × 0.99). Therefore, the budgeted gross margin for March is $411,940.

<b>8) What is the budgeted operating income for February 2015?</b>
A) $206,000
B) $297,500
C) $116,915
D) $594,000
Objective 6.6

C) $116,915 Explanation: C) Sales = $1,000,000. The cost of goods sold = $588,060 ($600,000 × 0.99 × 0.99). Budgeted gross margin for March = $411,940. Budgeted operating expenses = $295,025 (($250,000 × 0.99 × 0.99) + $50,000). Budgeted operating income = $116,915 ($411,940 − $295,025).

<b>9) To reduce budgetary slack management may ________.</b>
A) incorporate stretch or challenge targets
B) use external benchmark performance measures
C) award bonuses for achieving budgeted amounts
D) reduce projected cost targets by 10% across all areas
Objective 6.6

B) use external benchmark performance measures

<b>10) A stretch budget is a budget that ________.</b>
A) crosses more than one responsibility center
B) represents a challenging but achievable level of performance
C) is impossible to implement in a cost center
D) is designed to include the effects of exchange rate fluctuations
Objective 6.6

B) represents a challenging but achievable level of performance

<b>11) TRUE or FALSE: Rolling budgets help in reducing budgetary slack.</b>
Objective 6.6

TRUE

<b>12) TRUE or FALSE: Budgetary slack is the practice of underestimating costs so as to project an optimistic future outlook.</b>
Objective 6.6

FALSE Explanation: Budgetary slack is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve.

<b>13) TRUE or FALSE: Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better.</b>
Objective 6.6

TRUE

<b>14) TRUE or FALSE: The Japanese use kaizen to mean financing alternatives.</b>
Objective 6.6

FALSE Explanation: The Japanese use kaizen to mean continuous improvement.

<b>15) TRUE or FALSE: Kaizen budgeting does NOT make sense for cost centers.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting can be used in any type of responsibility center.

<b>16) TRUE or FALSE: Kaizen budgeting encourages dramatic improvements and substantial reduction in costs.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting encourages small incremental changes rather than major improvements.

<b>17) TRUE or FALSE: Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting allows for budgeting of small incremental decreases in costs each budgeting period.

<b>18) Budgeting is a mechanical tool because the budgeting techniques are free of emotions.</b>
Objective 6.6

TRUE

<b>19) TRUE or FALSE: Budgetary slack provides management with a hedge against planned adverse circumstances.</b>
Objective 6.6

FALSE Explanation: Budgetary slack provides management with a hedge against unexpected adverse circumstances.

<b>20) TRUE or FALSE: Most costs can be easily controlled because they are under the sole influence of one manager.</b>
Objective 6.6

FALSE Explanation: Few costs are clearly under the sole influence of one manager.

<b>21) TRUE or FALSE: Kaizen budgeting can be applied to activities such as setups with the goal of reducing setup time and setup costs.</b>
Objective 6.6

TRUE

*22) TRUE or FALSE: When the operating budget is used as a control device managers are less likely to be motivated to budget higher sales than actually anticipated.
Objective 6.6

TRUE

<b>23) TRUE or FALSE: Budgeting based on cost for specific activities is a key building block of the master budget for companies that use the Kaizen approach.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting for specific activities is a key building block of the master budget for companies that use the Kaizen approach.

<b>24) TRUE or FALSE: Administration of budgets is free of emotions as budgets are mechanical tools.</b>
Objective 6.6

FALSE Explanation: Administration of budgeting requires education persuasion, and intelligent interpretation.

<b>25) TRUE or FALSE: Budgets are not remedies for weak management talent, faulty organization, or a poor accounting system.</b>
Objective 6.6

TRUE

<b>26) Allscott Company is developing its budgets for 2016 and for the first time, will use the kaizen approach. The initial 2016 income statement, based on static data from 2015, is as follows:</b>

Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000

Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000

Net income $28,000
Selling prices for 2016 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%.

Required:
Prepare a kaizen-based budgeted income statement for 2016.
Objective 6.6

Sales (126,000 × $3.24) $408,240 Less: COGS (126,000 × $1.80) 226,800 Gross margin 181,440 Operating expenses ($28,000 + $79,800) 107,800 Net income $ 73,640

<b>27) Steve Corporation is using the kaizen approach to budgeting for 2015. The budgeted income statement for January 2015 is as follows:</b>

Sales (240,000 units) $360,000
Less: Cost of goods sold 240,000

Gross margin 120,000
Operating expenses (includes $32,000 of fixed costs) 96,000

Net income $ 24,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

Required:
Prepare a kaizen-based budgeted income statement for March of 2015.

Sales $360,000 Less: Cost of goods sold ($240,000 × 0.99 × 0.99) 235,224 Gross margin 124,776 Operating expenses 94,726 Net income $ 30,050

<b>28) Describe the concept of kaizen budgeting.</b>

Kaizen budgeting explicitly incorporates continuous improvement in cost reduction anticipated during the budget period. Much of the cost reduction arises from many small improvements rather than large one time improvements. Most of the improvements come from employee suggestions. Companies that employ kaizen budgeting create a culture where employee suggestions are valued recognized, and rewarded.

<b>29) Describe some of the drawbacks of using the operating budget as a control device.</b>

When the operating budget is used as a control device it can lead to behavior that is actually detrimental to the organization. The major problem with the budget performance report is not the report itself but rather the way it is used. In general, managers are rewarded for favorable variances, and disciplined for unfavorable variances. This encourages managers to set lax standards for both sales and costs so favorable variances result. It can also lead to "budget games." Another drawback is that once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future. If used properly, however, the operating budget can be a tremendous benefit to any company.

<b>30) What is budgetary slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?</b>

Budgetary slack occurs when subordinates (a) ask for excess resources above and beyond what they need to accomplish budget objectives and (b) distort information by claiming they are not as efficient or effective at what they do thus lowering management's performance expectations of them. Employee's point of view: There are two benefits from this point of view. First, the subordinate may be able to obtain excess resources to achieve desired goals. This may take a lot of pressure off the subordinate and reduce job anxiety. Second, the subordinate may be able to convince senior management to lower their work expectations of him or her. This may also lead to lower pressure on the subordinate to perform. Both of these types of slack building are designed to reduce job stress for the subordinate. However, if incentives are graduated in such a way that achieving higher and higher goals provides the subordinate with more and more compensation in the form of bonuses, then the subordinate may lose income by selecting lower goals. Senior management's point of view: When subordinates build in slack, they are either using unnecessary resources to achieve a goal that they should have been able to achieve with fewer resources, or they are understating their performance capabilities. Thus, the organization is either not running as efficiently as it can, or is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that subordinates build in slack to relieve job pressure. If burnout of employees has been happening in the organization, then perhaps senior management may be more forgiving and view some slack building as necessary to keep their employees from quitting.

<b>31) How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic?</b>
Objective 6.7

Budgeting for a multinational corporation is made far more complex than budgeting for a domestic corporation because the multinational corporation often has subunits operating in many different countries resulting in less familiar business environments and many different currencies. Multinational corporations need to understand many different business environments with significant political, legal, and economic environments. Multinational companies earn their revenues and incur their expenses in many different currencies, and must report their results a single currency. Additionally, management accountants in different countries need to budget for foreign exchange rates and anticipate changes that might take place during the year in the face of constantly fluctuating exchange rates.

<b>1) Which of the following is a reason why budgets in multinational companies are not used to evaluate the firm's performance relative to its budgets?</b>
A) Evaluations based on budgets can be meaningless due to factors such as exchange rate risk and other volatility.
B) Evaluations based on budgets are not possible because of cultural differences in the budgeting approach.
C) Evaluations based on relative regional performance are considered more meaningful as compared to evaluations against budgets.
D) Evaluations based on budgets are harder when managers use sophisticated techniques to minimize foreign currency exposure.
Objective 6.7

A) Evaluations based on budgets can be meaningless due to factors such as exchange rate risk and other volatility.

<b>2) Which of the following statements is true in the case of budgeting for multinational companies?</b>
A) While budgeting for multinational companies managers consider difference in tax statutes as an uncontrollable factor.
B) While budgeting for multinational companies, managers do not account for foreign exchange fluctuations as the operating profits are reported in different currencies.
C) While budgeting for multinational companies, managers must be aware that budgets will not be used for evaluating performance.
D) While budgeting for multinational companies, managers are not concerned about the domestic factors of the different countries in which they operate.
Objective 6.7

C) While budgeting for multinational companies, managers must be aware that budgets will not be used for evaluating performance.

<b>3) TRUE or FALSE: Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations.</b>
Objective 6.7

TRUE

<b>4) TRUE or FALSE: The possibility of exchange rate fluctuations does NOT influence the budgeting procedures in a multinational corporation.</b>
Objective 6.7

FALSE Explanation: The possibility of exchange rate fluctuations influences the budgeting procedures in a multinational corporation.

<b>5) TRUE or FALSE: In a multinational company budgeting is primarily done to evaluate the firm's performance relative to its budgets.</b>
Objective 6.7

FALSE Explanation: In case of a multinational company budgeting is not done so much to evaluate the firm's performance relative to its budgets as it is to help managers adapt their plans and coordinate the actions a company needs to take.

<b>1) The ________ is required to prepare the cash budget of an organization.</b>
A) statement of shareholder's equity
B) budgeted balance sheet
C) capital expenditures budget
D) budgeted statement of cash flow
Objective 6.A

C) capital expenditures budget

<b>2) Financial analysts use the projected cash flow statement to ________.</b>
A) determine the tax effect of cash expenses
B) plan for short-term cash investments
C) analyze the impact of non-cash expense on income statement
D) project depreciation expense
Objective 6.A

B) plan for short-term cash investments

<b>3) The cash flow statement includes ________.</b>
A) cash discount on sales
B) cash outflow towards insurance premium
C) sales revenues of the organization
D) interest accrued on an investment
Objective 6.A

C) sales revenues of the organization

<b>4) The cash budget is a schedule of expected cash receipts and disbursements that ________.</b>
A) requires an aging of accounts receivable and accounts payable
B) is a self-liquidating cycle
C) is prepared immediately after the sales forecast
D) predicts the effect on the cash position at given levels of operations
Objective 6.A

D) predicts the effect on the cash position at given levels of operations

Answer the following questions using the information below:

The following information pertains to Hepburn Company:

Month Sales Purchases
January $60,000 $32,000
February $80,000 $40,000
March $100,000 $56,000

∙ Cash is collected from customers in the following manner:
Month of sale 30%
Month following the sale 70%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
∙ Labor costs are 20% of sales. Other operating costs are $30,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred.
∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.

<b>5) How much cash will be collected from customers in March?</b>
A) $94,000
B) $86,000
C) $100,000
D) $110,000
Objective 6.A

B) $86,000 Explanation: B) ($80,000 × 70%) + ($100,000 × 30%) = $86,000

<b>6) How much cash will be paid to suppliers in March?</b>
A) $46,400
B) $56,000
C) $88,000
D) $92,000
Objective 6.A

A) $46,400 Explanation: A) ($40,000 × 60%) + ($56,000 × 40%) = $46,400

<b>7) How much cash will be disbursed in total in March?</b>
A) $42,000
B) $50,000
C) $88,400
D) $96,400
Objective 6.A

C) $88,400 Explanation: C) ($40,000 × 60%) + ($56,000 × 40%) + ($100,000 × 20%) + ($30,000 - $8,000) = $88,400

<b>8) What is the ending cash balance for March?</b>
A) ($50,000)
B) $6,000
C) $5,600
D) $6,600
Objective 6.A

D) $6,600 Explanation: D) $8,000 + $86,000 - $88,400 + $1,000 = $6,600

Answer the following questions using the information below:

Finmin Company has the following sales budget for the last six months of 2015:

July $200,000 October $180,000
August 160,000 November 200,000
September 200,000 December 180,000

Sales are immediately due, however the cash collection of sales, historically, has been as follows:
65% of sales collected in the month of sale,
25% of sales collected in the month following the sale,
8% of sales collected in the second month following the sale, and
2% of sales are uncollectible.

<b>9) Cash collections for September are ________.</b>
A) $143,000
B) $170,000
C) $186,000
D) $204,000
Objective 6.A

C) $186,000 Explanation: C) September sales ($200,000 × 0.65) + August sales ($160,000 × 0.25) + July sales ($200,000 × 0.08) = $186,000

<b>10) What is the ending balance of accounts receivable for the end of September, assuming uncollectible balances are written off at the end of the second month following the sale?</b>
A) $199,000
B) $97,000
C) $89,800
D) $86,000
Objective 6.A

D) $86,000 Explanation: D) September ($200,000 × 0.35) + August ($160,000 × 0.10) = $86,000

11) Cash collections for October are ________.
A) $117,000
B) $179,800
C) $194,000
D) $176,400
Objective 6.A

B) $179,800 Explanation: B) October sales ($180,000 × 0.65) + September sales ($200,000 × 0.25) + August sales ($160,000 × 0.08) = $179,800

Answer the following questions using the information below:

Estate Corp. has the following information:

Month Budgeted Purchases
January $26,800
February 29,000
March 28,500
April 29,480
May 26,680

Purchases are paid for in the following manner:
10% of the purchase amount in the month of purchase
50% of the purchase amount in the month after purchase
40% of the purchase amount in the second month after purchase

<b>12) What is the expected balance in Accounts Payable as of March 31?</b>
A) $37,250
B) $18,312
C) $2,900
D) $30,520
Objective 6.A

A) $37,250 Explanation: A) March ($28, 500 × 0.9) + February ($29,000 × 0.4) = $37,250

<b>13) What is the expected balance in Accounts Payable as of April 30?</b>
A) $37,250
B) $37,932
C) $28,500
D) $17,688
Objective 6.A

B) $37,932 Explanation: B) April ($29, 480 × 0.9) + March ($28,500 × 0.4) = $37,932

14) What is the expected Accounts Payable balance as of May 31?
A) $41,792
B) $37,932
C) $35,804
D) $2,948
Objective 6.A

C) $35,804 Explanation: C) May ($26, 680 × 0.9) + April ($29,480 × 0.4) = $35,804

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation.

∙ Budgeted sales for January $200, 000 and February $100,000.
∙ Collections for sales are 60% in the month of sale and 40% the next month.
∙ Gross margin is 30% of sales.
∙ Administrative costs are $10,000 each month.
∙ Beginning accounts receivable is $20,000.
∙ Beginning inventory is $14,000.
∙ Beginning accounts payable is $65,000. (All from inventory purchases.)
∙ Purchases are paid in full the following month.
∙ Desired ending inventory is 20% of next month's cost of goods sold (COGS).

<b>15) For January, budgeted cash collections are ________.</b>
A) $200,000
B) $140,000
C) $120,000
D) $20,000
Objective 6.A

B) $140,000 Explanation: B) Budgeted cash collections = $20,000 + ($200,000 × 60%) = $140,000

<b>16) At the end of January, budgeted accounts receivable is ________.</b>
A) $40,000
B) $80,000
C) $120,000
D) $160,000
Objective 6.A

B) $80,000 Explanation: B) Budgeted accounts receivable at the end of January = $200,000 × 40% = $80,000

<b>17) For January, budgeted cost of goods sold is ________.</b>
A) $200,000
B) $140,000
C) $126,000
D) $112,000
Objective 6.A

B) $140,000 Explanation: B) Budgeted cost of goods sold = $200,000 × 70% = $140,000

<b>18) For January, budgeted net income is ________.</b>
A) $60,000
B) $50,000
C) $40,000
D) $30,000
Objective 6.A

B) $50,000 Explanation: A) Budgeted net income for January = $200, 000 - $140,000 - $10,000 = $50,000

<b>19) For January, budgeted cash payments for purchases are ________.</b>
A) $100,000
B) $70,000
C) $65,000
D) $50,000
Objective 6.A

C) $65,000 Explanation: C) Accounts payable $65,000 as stated

<b>20) At the end of January, budgeted ending inventory is ________.</b>
A) $10,000
B) $14,000
C) $20,000
D) $22,000
Objective 6.A

B) $14,000 Explanation: B) Budgeted ending inventory at the end of January = $100,000 × 70% × 20% = $14,000

<b>21) TRUE or FALSE: The cash budget is a schedule of expected cash receipts and disbursements.</b>
Objective 6.A

TRUE

<b>22) TRUE or FALSE: Cash budgets help avoid unnecessary idle cash and unexpected cash deficiencies.</b>
Objective 6.A

TRUE

<b>23) Russell Company has the following projected account balances for June 30, 2015:</b>

Accounts payable $80,000 Sales $1,600,000
Accounts receivable 200,000 Capital stock 800,000
Depreciation, factory 48,000 Retained earnings ?
Inventories (5/31 &amp; 6/30) 360,000 Cash 112,000
Direct materials used 400,000 Equipment, net 480,000
Office salaries 160,000 Buildings, net 800,000
Insurance, factory 8,000 Utilities, factory 32,000
Plant wages 280,000 Selling expenses 120,000
Bonds payable 320,000 Maintenance, factory 56,000

Required:
a. Prepare a budgeted income statement for June 2015
b. Prepare a budgeted balance sheet as of June 30, 2015.

Objective 6.A

a. Russell Company Budgeted Income Statement For the Month of June 2015 Sales $1, 600,000 Cost of goods sold: Materials used $400,000 Wages 280,000 Depreciation 48,000 Insurance 8,000 Maintenance 56,000 Utilities 32,000 824,000 Gross profit 776,000 Operating expenses: Selling expenses $120,000 Office salaries 160,000 280,000 Net income $496,000 b. Russell Company Budgeted Balance Sheet June 30, 2015 Assets: Liabilities and Owners' Equity: Cash $ 112,000 Accounts payable $ 80,000 Accounts receivable 200,000 Bonds payable 320,000 Inventories 360,000 Capital stock 800,000 Equipment, net 480,000 Retained earnings* 752,000 Buildings, net 800,000 Total $1,952,000 Total $1,952,000 *$1,952,000 - ($80,000 + $320,000 + $800,000) = $752,000

<b>24) Duffy Corporation has prepared the following sales budget:</b>

Month Cash Sales Credit Sales
May $16,000 $68,000
June 20,000 80,000
July 18,000 74,000
August 24,000 92,000
September 22,000 76,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible.

Required:
Prepare a schedule of cash collections for July through September.

Objective 6.A

July August September Total Cash sales $18, 000 $24,000 $22,000 $64,000 Collections of credit sales from: Current month 29,600 36,800 30,400 96,800 Previous month 36,000 33,300 41,400 110,700 Two months ago 6,800 8,000 7,400 22,200 Total collections $90,400 $102,100 $101,200 $293,700

<b>25) The following information pertains to Amigo Corporation:</b>

Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000

∙ Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required:
a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.

Objective 6.A

a. Cash collections Oct $36, 448 + Nov $40,812 + Dec $47,940 = $125,200 October November December August $ 5,100 September 19,000 5,700 October 12,348 21,000 6,300 November 14,112 24,000 December 17,640 -------- --------- -------- $36,448 $40,812 $47,940 b. Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400 October November December September 8,400 October 6,400 9,600 November 7,200 10,800 December 8,000 -------- --------- -------- $14,800 $16,800 $18,800

Chapter 6 - Budgets - Subjecto.com

Chapter 6 – Budgets

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<b>1) Which of the following is true of a budget?</b>
A) Budgets are used to express only the operational plans and not the strategic plans of a company.
B) Budgets do not account for nonfinancial aspects of the upcoming period.
C) Budgets are most useful when they are planned independent of the company’s strategic plans.
D) Budgets help managers to revise their plans and strategies.
Objective 6.1

D) Budgets help managers to revise their plans and strategies.

<b>2) Which of the following is a financial budget?</b>
A) budgeted balance sheet
B) cash receivables budget
C) production budget
D) cost of goods sold budget
Objective 6.1

A) budgeted balance sheet

<b>3) Budgets are used to ________.</b>
A) increase the book value of its assets
B) communicate with external stakeholders
C) calculate the income tax liability
D) formulate company strategies
Objective 6.1

D) formulate company strategies

<b>4) Which of the following is true of master budgets?</b>
A) They include only financial aspects of a plan and exclude nonfinancial aspects.
B) They aid in coordinating what needs to be done to implement a plan.
C) They aid in quantifying the expectations of all stakeholders.
D) They must be administered rigidly after they are committed to.
Objective 6.1

B) They aid in coordinating what needs to be done to implement a plan.

<b>5) Operating decisions primarily deal with ________.</b>
A) the best use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) satisfying stockholders
Objective 6.1

A) the best use of scarce resources

<b>6) Financing decisions primarily deal with ________.</b>
A) the use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) preparing financial statements for stockholders
Objective 6.1

B) how to obtain funds to acquire resources

<b>7) A master budget ________.</b>
A) is the initial plan of what the company intends to accomplish in the period and evolves from
both the operating and financing decisions
B) is a substitute for the management functions of planning and coordination
C) improves companies’ market capitalization and evolves from both the investing and financing decisions
D) provides an ethical framework for decision making
Objective 6.1

A) is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions

<b>8) Which of the following is generally expressed through a short-run budget?</b>
A) operational plans
B) expansion plans
C) strategic plans
D) startup plans
Objective 6.1

A) operational plans

<b>9) Which of the following statements is true of budgets?</b>
A) Master budgets express management’s operating and financial plans.
B) Financial budgets are prepared before the master budget is prepared.
C) Operating budgets are prepared independently of the master budget.
D) Financial budgets are working documents at the core of the budgeting process.
Objective 6.1

A) Master budgets express management’s operating and financial plans.

<b>10) A master budget forces managers to examine the business as they plan so they can ________.</b>
A) detect inaccurate historical records to avoid errors in budgets
B) set expectations against which actual results can be compared
C) complete the budgeting task on time
D) ensure that only financial risks and opportunities are incorporated
Objective 6.1

B) set expectations against which actual results can be compared

<b>11) TRUE or FALSE: A budget is the quantitative expression of a proposed plan of action by management for a specified period.</b>
Objective 6.1

TRUE

<b>12) TRUE or FALSE: A budget generally includes both financial and nonfinancial aspects of the plan.</b>
Objective 6.1

TRUE

<b>13) TRUE or FALSE: An organization’s strategy matches its capabilities with the opportunities in the marketplace to accomplish its objectives.</b>
Objective 6.1

TRUE

<b>14) Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as the number of physical units manufactured.</b>
Objective 6.1

FALSE Explanation: Budgeting includes both financial and nonfinancial aspects of the plan.

<b>15) TRUE or FALSE: Operating plans are generally expressed through long-run budgets.</b>
Objective 6.1

FALSE Explanation: Operating plans are generally expressed through short-run budgets. Strategic plans are expressed through long-run budgets.

<b>16) TRUE or FALSE: A budget aids to coordinate what needs to be done to implement the proposed plan.</b>
Objective 6.1

TRUE

<b>17) TRUE or FALSE: Long-run planning and short-run planning are best performed independently of each other.</b>
Objective 6.1

FALSE Explanation: Long-run planning and short-run planning are inter-dependent.

<b>18) TRUE or FALSE: Financing decisions deal with how to best use the limited resources of an organization.</b>
Objective 6.1

FALSE Explanation: Financing decisions deal with how to obtain funds to acquire resources needed for the organization.

<b>19) TRUE or FALSE: The feedback from budgets can lead to changes in plans and strategies.</b>
Objective 6.1

TRUE

<b>20) TRUE or FALSE: Budgeted financial statements are called pro forma statements.</b>
Objective 6.1

TRUE

<b>21) Describe the benefits of preparing an operating budget to an organization.</b>
Objective 6.1

– A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not "set in stone." If new information or opportunities arise the budget should be adjusted. – A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. – A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. – A well-prepared operating budget can become the performance standard against which firms can compare the actual results.

<b>22) Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company’s main problem was an improper budgeting function. The company made a good product and market potential was great.</b>

Required:
Describe the usual budgeting cycle that well-managed companies adopt?*
Objective 6.1

The usual budgeting cycle that well-managed companies adopt consists of the following three steps: 1. Before the start of the period managers and management accountants work together to develop plans for the company as a whole and the performance of its subunits, taking into account the company’s past performance, market feedback, and anticipated future changes. 2. At the beginning of the period, managers are provided with a framework that outlines specific financial or nonfinancial expectations against which actual results will be compared. 3. During the course of the year, management accountants and managers investigate any deviations from plans and take corrective action, if necessary.

<b>1) Which of the following is true of budgets when they are administered thoughtfully?</b>
A) They eliminate subjectivity in performance evaluation.
B) They can eliminate the uncertainty faced by a company.
C) They promote coordination within the subunits of a company.
D) They are a substitute the planning and coordination functions of management.
Objective 6.2

C) They promote coordination within the subunits of a company.

<b>2) A budget is an end product of negotiations among senior and subordinate mangers because ________.</b>
A) budgeting is their mutual responsibility
B) senior managers alone cannot spare the time required for the budgeting process
C) senior managers are responsible for providing information on competitors performance and subordinate managers are responsible for information on external market conditions
D) senior managers want stiffer targets and subordinates want relatively easy targets
Objective 6.2

D) senior managers want stiffer targets and subordinates want relatively easy targets

<b>3) Which of the following is a limitation of using past performance as a basis for judging actual results?</b>
A) It does not account for productivity increases over the periods.
B) It increases the incentive for managers to introduce budgetary slack.
C) It does consider inefficiencies of previous periods.
D) It increases the tendency of senior managers exaggerating changes in future conditions as opposed to changes in current conditions.
Objective 6.2

C) It does consider inefficiencies of previous periods.

<b>4) Challenging budgets tend to ________.</b>
A) discourage out-of-the-box and creative thinking as there is very little room for error
B) set unrealistic expectations and are perceived as overly ambitious and unachievable
C) increase anxiety without motivation not meeting them is viewed as a failure
D) motivate improved performance as employees work more intensely to avoid failure
Objective 6.2

D) motivate improved performance as employees work more intensely to avoid failure

<b>5) A limitation of using past performance as a basis for judging actual results is that ________.</b>
A) future conditions can be different from the past
B) any undervaluation of profits in the past period is likely to continue
C) any subsequent change in accounting treatment will distort performance evaluation
D) they tend to distort results when current and past conditions are similar
Objective 6.2

A) future conditions can be different from the past

<b>6) A company’s actual performance should be compared against budgeted amounts for the same accounting period so that ________.</b>
A) adjustments for future conditions can be included
B) to avoid any feedback from the budgets due to past miscues
C) inefficiencies of the past year can be included
D) a rolling budget can be implemented
Objective 6.2

A) adjustments for future conditions can be included

<b>7) Which of the following is a reason why top managers want lower-level managers to participate in the budgeting process?</b>
A) To benefit from their experience with the day-to-day aspects of running the business.
B) To reduce the time and cost expended in the budgeting process.
C) To ensure that they do not introduce any budgetary slack.
D) To ensure that the budgets are administered rigidly given the changing market conditions.
Objective 6.2

A) To benefit from their experience with the day-to-day aspects of running the business.

<b>8) Demanding but achievable targets tend to ________.</b>
A) be set by subordinate managers to create intrinsic reasons to achieve targets
B) create unnecessary anxiety that de-motivates employees
C) improve performance of employees when they are closer to the target
D) be perceived as ambitious with little chance of success in achieving targets
Objective 6.2

C) improve performance of employees when they are closer to the target

<b>9) Which of the following is referred to as the bottom-up aspect of the budgeting process?</b>
A) lower-level managers setting their individual targets that aggregate to be the company-wide target
B) senior managers consulting middle- and lower-level managers to investigate any deviations from the budget
C) lower-level managers implementing the budgets with senior managers monitoring progress and investigating deviations
D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge
Objective 6.2

D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge

<b>10) Participation of employees in the budgeting process helps ________.</b>
A) create greater commitment towards the budget
B) create demanding but achievable budget
C) decrease deviations from the budget
D) secure communication of sensitive information
Objective 6.2

A) create greater commitment towards the budget

<b>11) Managers who feel that top management does not believe in the budget are most likely to ________.</b>
A) pick up the slack and participate in the budgeting process
B) to face little interference in the day-to-day aspects of running the business
C) be inactive participants in the budgeting process
D) convert the budget to a shorter more reasonable time period
Objective 6.2

C) be inactive participants in the budgeting process

<b>12) Which of the following is a benefit of budgeting?</b>
A) It helps investors to value stocks.
B) It helps managers gather information for improving future performance.
C) It helps managers to take marketing decisions.
D) It helps in increasing market capitalization of the company.
Objective 6.2

B) It helps managers gather information for improving future performance.

<b>13) Budgets should ________.</b>
A) be flexible
B) be administered rigidly
C) only be developed for short periods of time
D) include only variable costs
Objective 6.2

A) be flexible

<b>14) TRUE or FALSE: After a budget is agreed upon and finalized by the management team the amounts should NOT be changed for any reason.</b>
Objective 6.2

FALSE Explanation: Budgets should not be administered rigidly but rather should be adjusted for changing conditions.

<b>15) TRUE or FALSE: Even in the face of changing conditions, attaining the original budget is critical.</b>
Objective 6.2

FALSE Explanation: Changing conditions usually call for a change in plans. Attaining the budget should not be an end in itself.

<b>16) TRUE or FALSE: Lower-level managers will not actively participate in the budget process if they perceive upper management does not believe in the process.</b>
Objective 6.2

TRUE

<b>17) TRUE or FALSE: Budgeting helps managers gather information for improving only the budgeted period’s performance.</b>
Objective 6.2

FALSE Explanation: Budgeting helps managers gather information which help in improving performance for the budget period and also for the future.

<b>18) TRUE or FALSE: Bottom-up budgets entrusts senior managers to prepare budgets and lower-level managers to execute them.</b>
Objective 6.2

FALSE Explanation: Bottom-up budgets encourage lower-level managers to participate in the budgeting process and hence it is not limited to senior managers alone.

<b>19) TRUE or FALSE: It is best to compare this year’s performance with last year’s actual performance rather than this year’s budget.</b>
Objective 6.2

FALSE Explanation: It is best to compare this year’s performance with this year’s budget because inefficiencies and different conditions may be reflected in last year’s actual performance amounts.

<b>20) TRUE or FALSE: When administered wisely budgets promote communication and coordination among the various subunits of the organization.</b>
Objective 6.2

TRUE

<b>1) Which of the following is a factor while choosing the period of a budget?</b>
A) the frequency of interim financial statements
B) the estimated period required to achieve budget targets
C) the general economic trend
D) the motive for creating the budget
Objective 6.3

D) the motive for creating the budget

<b>2) Which of the following is a component of operating budgets?</b>
A) sales budget
B) budgeted statement of cash flows
C) capital expenditures budget
D) budgeted balance sheet
Objective 6.3

A) sales budget

<b>3) The operating budget process generally concludes with the preparation of the ________.</b>
A) production budget
B) cash flow statement
C) research and development budget
D) budgeted income statement
Objective 6.3

D) budgeted income statement

<b>4) Which of the following best describes a rolling budget?</b>
A) It is a budget that outlines the amount required to roll over debt in a future period.
B) It is a budget that is always available for a specified future time period.
C) It is a budget that outlines budgeted expenses.
D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant.
Objective 6.3

B) It is a budget that is always available for a specified future time period.

<b>5) The ________ is a component of financial budgets.</b>
A) cost of goods sold budget
B) marketing costs budget
C) distribution costs budget
D) cash budget
Objective 6.3

D) cash budget

<b>6) ________ include a budgeted statement of cash flows and a budgeted balance sheet.</b>
A) Revenue budgets
B) Financial budgets
C) Operating budgets
D) Production budgets
Objective 6.3

B) Financial budgets

<b>7) The order to follow when preparing the operating budget is ________.</b>
A) revenues budget production budget, and direct manufacturing labor costs budget
B) costs of goods sold budget, production budget, and cash budget
C) revenues budget, manufacturing overhead costs budget, and production budget
D) cash expenditures budget, revenues budget, and production budget
Objective 6.3

A) revenues budget production budget, and direct manufacturing labor costs budget

<b>8) In which order are the following developed? First to last:</b>
A = Production budget
B = Direct materials costs budget
C = Budgeted income statement
D = Revenues budget

A) ABDC
B) DABC
C) DCAB
D) CABD
Objective 6.3

B) DABC

<b>9) The budgeting process is most strongly influenced by ________.</b>
A) the capital budget
B) the budgeted statement of cash flows
C) the sales forecast
D) the production budget
Objective 6.3

C) the sales forecast

<b>10) ________ is the usual starting point for budgeting.</b>
A) The revenues budget
B) The estimated net income
C) The production budget
D) The cash budget
Objective 6.3

A) The revenues budget

<b>11) The sales forecast should be primarily based on ________.</b>
A) statistical analysis
B) input from sales managers and sales representatives
C) production capacity
D) input from the board of directors
Objective 6.3

B) input from sales managers and sales representatives

<b>12) Costs such as supervision depreciation, maintenance, supplies, and power. are included in the ________.</b>
A) capital expenditures budget
B) distribution costs budget
C) revenues budget
D) manufacturing overhead budget
Objective 6.3

D) manufacturing overhead budget

<b>13) High inventory levels increase the ________.</b>
A) cost of carrying inventory the costs of quality, and shrinkage costs
B) revenues and expected profits
C) cost of equity, cost of debt, and cost of short-term funds
D) cost of materials, the costs of overhead, and opportunity costs
Objective 6.3

A) cost of carrying inventory the costs of quality, and shrinkage costs

<b>14) The revenues budget identifies ________.</b>
A) expected cash flows for each product
B) actual sales from last year for each product
C) the expected level of sales for the company
D) the variance of sales from actual for each product
Objective 6.3

C) the expected level of sales for the company

<b>15) The number of units in the sales budget and the production budget may differ because of a change in ________.</b>
A) finished goods inventory levels
B) overhead charges
C) direct material inventory levels
D) sales returns and allowances
Objective 6.3

A) finished goods inventory levels

<b>16) Which of the following is a benefit of keeping inventory levels low?</b>
A) It reduces setup costs.
B) It reduces shrinkage costs.
C) It reduces the loss from lost sales.
D) It reduces inventory turnover.
Objective 6.3

B) It reduces shrinkage costs.

<b>17) Budgeted production equals ________.</b>
A) beginning finished goods inventory + budgeted unit sales – targeted ending finished goods inventory
B) targeted ending finished goods inventory + beginning finished goods inventory – budgeted unit sales
C) budgeted unit sales + targeted ending finished goods inventory – beginning finished goods inventory
D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory
Objective 6.3

C) budgeted unit sales + targeted ending finished goods inventory – beginning finished goods inventory

<b>18) Best products an Atlanta based company, is in the midst of its budgeting process. It has already prepared its direct materials usage budget and is now in the process of preparing its direct material purchase budget. In addition to the details gathered to prepare the direct materials usage budget, Best also must know ________.</b>
A) the level of direct material inventory to be maintained
B) the ratio of direct materials to cost of goods sold
C) the beginning direct materials inventory level
D) the quantity of direct materials to be purchased
Objective 6.3

A) the level of direct material inventory to be maintained

<b>19) Total finished units to be produced is based on the ________.</b>
A) direct material purchase budget
B) budgeted sales units
C) direct material usage budget
D) budgeted manufacturing overhead
Objective 6.3

B) budgeted sales units

<b>20) Which of the following is most likely to be a cost driver for the variable portion of marketing costs?</b>
A) percentage of markup on cost
B) number of units produced
C) increase in revenues attributable to such marketing
D) number of units sold
Objective 6.3

D) number of units sold

<b>21) Which of the following is required to arrive at the budgeted units to be produced in a year?</b>
A) estimated direct materials inventory required at the end of the year
B) estimated finished goods inventory required at the end of the year
C) amount of direct materials to be used during the year
D) amount of manufacturing overhead to be incurred
Objective 6.3

B) estimated finished goods inventory required at the end of the year

<b>22) When direct material and direct labor is the limiting factor revenue budgets are usually based on ________.</b>
A) expected demand of the company’s products
B) the capital in the budget period
C) the supply of indirect material and labor in the market
D) maximum units that can be manufactured
Objective 6.3

D) maximum units that can be manufactured

<b>23) Which of the following information is required by a company’s manager while preparing a manufacturing overhead costs budget?</b>
A) estimated incentives to be paid to marketing personnel
B) estimated expense for office supplies
C) estimated expense for maintenance of factory building
D) rent expense for lease of office building
Objective 6.3

C) estimated expense for maintenance of factory building

<b>24) Esther Baskets Company expects to manufacture and sell 20,000 baskets in 2016 for $5 each. There are 4,000 baskets in beginning finished goods inventory with target ending inventory of 5,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2016 budgeted income statement?</b>
A) $105,000
B) $100,000
C) $95,000
D) $55,000
Objective 6.3

B) $100,000 Explanation: B) Sales revenue = 20,000 baskets × $5 = $100,000

<b>25) Orange Corporation has budgeted sales of 16,000 units, targeted ending finished goods inventory of 4,000 units, and beginning finished goods inventory of 2,000 units. How many units should be produced next year?</b>
A) 22,000 units
B) 20,000 units
C) 18,000 units
D) 16,000 units
Objective 6.3

C) 18,000 units Explanation: C) Number of units to be produced next year = 16,000 units (estimated sales) + 4,000 units (budgeted ending inventory) – 2,000 units (opening inventory) = 18,000 units.

<b>26) For next year, Roberto, Inc., has budgeted sales of 15,000 units, targeted ending finished goods inventory of 750 units, and beginning finished goods inventory of 450 units. All other inventories are zero. How many units should be produced next year?</b>
A) 14,700 units
B) 15,000 units
C) 15,300 units
D) 16,200 units
Objective 6.3

C) 15,300 units Explanation: C) Units to be produced next year = 15,000 units (estimated sales) + 750 units (budgeted ending inventory) – 450 units (opening inventory) = 15,300 units

<b>27) Antique Brass Company has budgeted sales volume of 120,000 units and budgeted production of 108,000 units, while 20,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory?</b>
A) 20,000 units
B) 32,000 units
C) 12,000 units
D) 8,000 units
Objective 6.3

D) 8,000 units Explanation: D) 108,000 units (Budgeted production) + 20,000 units (Beginning finished goods inventory) – 120,000 units (Budgeted sales) = 8,000 units (Budgeted ending finished goods inventory)

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>28) On the 2016 budgeted income statement, what amount will be reported for sales?</b>
A) $246,000
B) $240,000
C) $312,000
D) $318,000
Objective 6.3

B) $240,000 Explanation: B) 20,000 units sold × $12 per pool cue = $240,000

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>29) How many pool cues need to be produced in 2016?</b>
A) 22,500 cues
B) 22,000 cues
C) 20,500 cues
D) 19,500 cues

C) 20,500 cues Explanation: C) 20,000 units (Budgeted sales) + 2,500 (Budgeted ending inventory) – 2,000 (Beginning inventory) = 20,500 cues

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>30) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?</b>
A) $139,800
B) $136,000
C) $132,600
D) $153,000

B) $136,000 Explanation: B) The cost per unit is $6.80 ($2 + $4 + $0.80). Therefore, the total cost of goods sold is $136,000 ($6.80 × 20,000).

Answer the following questions using the information below:

Kason Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2016:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units

<b>31) What are the 2016 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?</b>
A) $48,000; $96,000; $19,200
B) $44,000; $88,000; $17,600
C) $41,000; $82,000; $16,400
D) $40,000; $80,000; $16,000

C) $41,000; $82,000; $16,400 Explanation: C) Direct materials = 20,500 × $2.00 = $41,000; Direct manufacturing labor = 20,500 × $4.00 = $82,000; Manufacturing overhead = 20,500 × $0.80 = $16,400

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>32) On the 2016 budgeted income statement, what amount will be reported for sales?</b>
A) $122,000
B) $118,000
C) $140,000
D) $120,000

D) $120,000 Explanation: D) Total sales = 6,000 units × $20 = $120,000.

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>33) How many ceramic vases should be produced in 2016?</b>
A) 5,900 vases
B) 6,100 vases
C) 7,000 vases
D) 6,000 vases

B) 6,100 vases Explanation: B) Number of vases to be produced = 6,000 units (Estimated sales) + 500 units (Budgeted ending inventory) – 400 units (Opening inventory) = 6,100 units.

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>34) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?</b>
A) $105,000
B) $91,500
C) $90,000
D) $88,500

C) $90,000 Explanation: C) Cost of goods sold is $90,000 [6,000 × ($2 + $10 + $3)].

Answer the following questions using the information below:

Elton Inc. expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2016:

Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units

<b>35) What are the 2016 budgeted production costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?</b>
A) $12,200; $61,000; $18,300
B) $12,000; $60,000; $18,000
C) $2,000; $10,000; $3,000
D) $2,000; $0; $4,500

A) $12,200; $61,000; $18,300 Explanation: A) Budgeted cost for direct materials = $12,200 [6,100 units × $2]. Budgeted cost for direct manufacturing labor = $61,000 [6,100 units × $10]. Budgeted manufacturing overhead = $18,300 [6,100 × $3].

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation a retailer:

Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month

<b>36) For January, budgeted gross margin is ________.</b>
A) $100,000
B) $140,000
C) $60,000
D) $50,000

C) $60,000 Explanation: C) $200 000 – (.70 × $200,000) = $60,000

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation a retailer:

Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month

<b>37) For January, the amount budgeted for the nonmanufacturing costs budget is ________.</b>
A) $78,000
B) $10,000
C) $168,000
D) $18,000

D) $18,000 Explanation: D) $3,000 + $5,000 + $10,000 = $18,000

<b>38) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:</b>

T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80

What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $13.00 per unit?
A) $293,000
B) $90,000
C) $203,000
D) $473,000

A) $293,000 Explanation: A) (60,000 × $1.50) + (35,000 × $5.80) = $293,000

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>39) How many units of Prime watches must be produced in 2016?</b>
A) 3,350 units
B) 3,150 units
C) 3,000 units
D) 2,800 units

B) 3,150 units Explanation: B) Number of units of Prime to be produced = [3,000 units (Estimated sales) + 350 units (Budgeted ending inventory) – 200 units (Opening inventory)] = 3,150 units.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>40) What is the amount budgeted for purchase of Crimpson in 2016?</b>
A) $31,500
B) $10,250
C) $30,500
D) $10,000

B) $10,250 Explanation: B) Budgeted amount for purchase of Crimpson = [$10 × (1125 units (Luxuria units produced) – 100 units (Units in hand)] = $10,250; Number of units of Luxuria to be produced = [1,000 units (Estimated sales) + 200 units (Budgeted ending inventory) – 75 units (Opening inventory)] = 1,125 units.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>41) What is the total budgeted cost of sold for Meridian Industries in 2016?</b>
A) $500,000
B) $600,000
C) $700,000
D) $800,000

B) $600,000 Explanation: B) Budgeted cost of goods sold for Prime = [3,000 units (Estimated sales) × $100 (Cost per unit)] = $300,000. Budgeted cost of goods sold for Luxuria = [1,000 units (Estimated sales) × $300 (Cost per unit)] = $300,000. Total cost of goods sold = $300,000 + $300,000 =$600,000.

Answer the following questions using the information below:

Meridian Industries manufactures and sells two models of watches Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:

Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100

Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200 units of Luxuria.

Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of Crimpson at the end of 2016.

<b>42) What is the total budgeted cost of goods manufactured in 2016?</b>
A) $600,000
B) $625,500
C) $652,500
D) $667,500

C) $652,500 Explanation: C) Budgeted cost of goods manufactured for Prime = [3,150 units (Estimated units to be manufactured) × $100 (Cost per unit)] = $315,000. Budgeted cost of goods manufactured for Luxuria = [1,125 units (Estimated units to be manufactured) × $300 (Cost per unit)] = $337,500. Total cost of goods sold = $315,00 + $337,500 =$652,500

Answer the following questions using the information below:

Furniture Inc. estimates the following number of mattress sales for the first four months of 2016:

Month Sales
January 22,000
February 30,800
March 28,600
April 35,200

Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month’s sales.

<b>43) How many mattresses need to be produced in January 2016?</b>
A) 15,400 mattresses
B) 21,560 mattresses
C) 28,460 mattresses
D) 34,160 mattresses

B) 21,560 mattresses Explanation: B) Number of mattresses to be produced in January = [22,000 units (Estimated sales) + 6,160 units (Budgeted ending inventory for January × 20%) – 6,600 units (Beginning inventory)] = 21,560 mattresses.

Answer the following questions using the information below:

Furniture Inc. estimates the following number of mattress sales for the first four months of 2016:

Month Sales
January 22,000
February 30,800
March 28,600
April 35,200

Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is 20% of the next month’s sales.

<b>44) How many mattresses should be produced in the first quarter of 2016?</b>
A) 88,880 mattresses
B) 81,840 mattresses
C) 60,280 mattresses
D) 51,920 mattresses

B) 81,840 mattresses Explanation: B) January February March Total (For the quarter) Estimated sales 22,000 30,800 28,600 81,400 Less: Opening inventory 6,600 6,160 5,720 6,600 15,400 24,640 22,880 74,800 Add: Closing inventory 6,160 5,720 7,040 7,040 (20% of next month’s sales) Budgeted production 21,560 30,360 29,920 81,840

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month’s sales, stated at cost.

<b>45) What is the amount of purchases budgeted for January?</b>
A) $63,960
B) $70,440
C) $78,000
D) $92,040

B) $70,440 Explanation: B) Budgeted purchases for January = $70 440 ($78,000 − $21,600 + $14,0400**) *$120,000 × (100% − 35%) = $78,000 **$108,000 × (100% − 35%) × 20% = $14,040

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 1 44,000

The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month’s sales, stated at cost.

<b>46) What is the amount of purchases budgeted for February?</b>
A) $32,214
B) $70,200
C) $73,320
D) $95,160

C) $73,320 Explanation: C) Budgeted purchases for February = $73,320 ($70,200 − $14,040 + $17,1600**) *$108,000 × (100% − 35%) = $70,200 **$132,000 × (100% − 35%) × 20% = $17,160

Answer the following questions using the information below:

Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour.

<b>47) The expected number of hours of direct labor for OM362 Bigger is ________.</b>
A) 8,800 hours of assembling; 17,600 hours of polishing
B) 11,200 hours of assembling; 22,400 hours of polishing
C) 17,600 hours of assembling; 8,800 hours of polishing
D) 22,400 hours of assembling; 11,200 hours of polishing

B) 11,200 hours of assembling; 22,400 hours of polishing Explanation: B) 10,000 + 2,000 – 800 = 11,200 (11,200 × 1) = 11,200 hours of assembling; (11,200 × 2) = 22,400 hours of polishing

Answer the following questions using the information below:

Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per assembling hour and the direct labor rate for polishing is $12.50 per polishing hour.

<b>48) The expected cost of direct labor for OM362 is ________.</b>
A) $350,000
B) $378,000
C) $392,000
D) $420,000

C) $392,000 Explanation: C) Expected cost of direct labor for OM362 = 11,200 units (Estimated units to be manufactured) × [($10 (assembling) + ($12.50 × 2) (polishing)] = $392,000.

<b>49) Juan Sugita Manufacturing expects to produce and sell 12,000 units of Big, its only product, for $20 each. Direct material cost is $3 per unit, direct labor cost is $10 per unit, and variable manufacturing overhead is $6 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be ________.</b>
A) $13.00 per unit
B) $14.00 per unit
C) $21.00 per unit
D) $18.50 per unit

C) $21.00 per unit Explanation: C) The inventoriable cost as per GAAP is $21 ($3 + $10 + $6 + ($24,000 / 12,000 units)). As per GAAP, variable and fixed selling and administrative overhead costs are not inventoriable.

<b>50) The use of activity-based budgeting is growing because of ________.</b>
A) the increased use of activity-based costing
B) the increased use of kaizen costing
C) increases in work-in-process inventory
D) increases in direct materials inventory

A) the increased use of activity-based costing

<b>51) Activity-based budgeting would separately estimate ________.</b>
A) the cost of overhead for a department
B) a plant-wide cost-driver rate
C) the cost of a setup activity
D) All of these answers are correct.

C) the cost of a setup activity

<b>52) Activity-based-costing analysis makes no distinction between ________.</b>
A) direct-materials inventory and work-in-process inventory
B) short-run variable costs and short-run fixed costs
C) parts of the supply chain
D) components of the value chain

B) short-run variable costs and short-run fixed costs

<b>53) Activity-based budgeting makes it easier to ________.</b>
A) determine a rolling budget
B) prepare pro forma financial statements
C) determine how to reduce costs
D) execute a financial budget

C) determine how to reduce costs

<b>54) Which of the following statements is true about activity-based budgeting?</b>
A) activity-based budgeting estimates total costs more accurately than cost-based budgeting
B) activity-based budgeting provides more detailed information than cost-based budgeting
C) activity-based budgeting is cheaper than cost-based budgeting
D) activity-based budgeting is simpler to implement than cost-based budgeting

B) activity-based budgeting provides more detailed information than cost-based budgeting

<b>55) Activity-based budgeting ________.</b>
A) uses one cost driver such as direct labor-hours
B) uses only output-based cost drivers such as units sold
C) focuses on activities necessary to produce and sell products and services
D) classifies costs by functional area within the value chain

C) focuses on activities necessary to produce and sell products and services

<b>56) Which one of the following is a benefit of activity-based budgeting?</b>
A) It uses a single cost driver for batch-level activities or higher.
B) It is the most convenient method of budgeting as it requires minimal effort.
C) It provides detailed information that improves decision making.
D) It is the most efficient method to budget direct costs and trace them to individual cost objects.

C) It provides detailed information that improves decision making.

<b>57) TRUE or FALSE: A rolling budget is the same as a continuous budget.</b>

TRUE

<b>58) TRUE or FALSE: Cost of goods sold budget takes inputs from both ending inventories budget and nonmanufacturing costs budget.</b>

FALSE Explanation: Cost of goods sold budget does not take any input from nonmanufacturing costs budget.

<b>59) TRUE or FALSE: Preparation of the budgeted statement of cash flows is the final step in preparing the operating budget.</b>

FALSE Explanation: Preparation of the budgeted income statement is the final step in preparing the operating budget.

<b>60) TRUE or FALSE: A company usually prepares a budget for nonmanufacturing costs after preparing all operating budgets.</b>

FALSE Explanation: A company usually prepares a budget for nonmanufacturing costs along with operating budgets.

<b>61) TRUE or FALSE: The use of activity-based cost drivers gives rise to zero-based budgeting.</b>

FALSE Explanation: The use of activity-based cost drivers gives rise to activity-based budgeting.

<b>62) TRUE or FALSE: The revenues budget should be based on the cost of goods sold budget.</b>

FALSE Explanation: The revenues budget provides input to the cost of goods sold budget.

<b>63) TRUE or FALSE: Cost-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.</b>

FALSE Explanation: Activity-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services.

<b>64) TRUE or FALSE: The production cost budget identifies how each product is manufactured.</b>

FALSE Explanation: The bill of materials identifies how each product is manufactured specifying all materials, the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centers where the operations are performed.

<b>65) TRUE or FALSE: The manufacturing labor budget depends on wage rates, production methods, and hiring plans.</b>

TRUE

<b>66) TRUE or FALSE: The revenues budget is prepared after all other operating budgets are prepared.</b>

FALSE Explanation: The revenues budget is generally the starting point for preparing operating budgets and is generally the first operating budget to be prepared.

<b>67) TRUE or FALSE: Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced units sold, or revenues).</b>

TRUE

<b>68) TRUE or FALSE: Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.</b>

TRUE

<b>69) TRUE or FALSE: As budgeting is not a cross-functional activity it tends to be accurate and reliable with regard to forecasts.</b>

FALSE Explanation: Budgeting is a cross-functional activity involving inputs from different business functions of the value chain.

<b>70) TRUE or FALSE: Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.</b>

TRUE

<b>71) Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget.</b>

1. Capital expenditures budget
2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement

1. F 6. O 2. O 7. F 3. O 8. O 4. F 9. F 5. O 10. O

<b>72) Prescher Company sells three products with the following seasonal sales pattern:</b>

Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 30%
3 20% 20% 50%
4 10% 30% 10%

The annual sales budget shows forecasts for the different products and their expected selling price per unit to be as follows:

Product Units Selling Price
A 50,000 $ 16
B 125,000 40
C 62,500 24

Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

First Second Third Fourth
Quarter Quarter Quarter Quarter Total

Product A
Sales (in units) 20,000 15,000 10,000 5,000 50,000
– Price per unit $16 $16 $16 $16 $16
Sales (in dollars) $320,000 $240,000 $160,000 $80,000 $800,000

Product B
Sales (in units) 37,500 25,000 25,000 37,500 125,000
– Price per unit $40 $40 $40 $40 $40
Sales (in dollars) $1,500,000 $1,000,000 $1,000,000 $1,500,000 $5,000,000

Product C
Sales (in units) 6,250 18,750 31,250 6,250 62,500
– Price per unit $24 $24 $24 $24 $24
Sales (in dollars) $150,000 $450,000 $750,000 $150,000 $1,500,000

Total sales: First Quarter $1,970,000 Second Quarter $1,690,000 Third Quarter $1,910,000 Fourth Quarter $1,730,000 Total $7,300,000

<b>73) Lubriderm Corporation has the following budgeted unit sales for the next six-month period:</b>

Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.

Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

a. July August September Budgeted sales 120,000 210,000 150,000 Add: Required ending inventory 42,000 30,000 36,000 Total inventory requirements 162,000 240,000 186,000 Less: Beginning inventory 24,000 42,000 30,000 Budgeted production 138,000 198,000 156,000 b. July August September Production in units 138,000 198,000 156,000 Targeted ending inventory in lbs. 297,000 234,000 *252,000 Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month’s needs ** (180,000 + 24,000 – 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across Production needs in lbs.*** 690,000 990,000 780,000 Total requirements in lbs. 987,000 1,224,000 1,032,000 Less: Beginning inventory in lbs. ****207,000 297,000 234,000 Purchases needed in lbs. 780,000 927,000 798,000 Cost ($8 per lb.) × $8 × $8 × $8 Total material purchases $6,240,000 $7,416,000 $6,384,000 * 0.3 times next month’s needs ** (180,000 + 24,000 – 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across

<b>74) Perry Company has provided the following information:</b>

Month Budgeted Sales
March $200,000
April 212,000
May 204,000
June 218,000
July 210,000

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month’s cost of sales.

Required:
Prepare a purchases budget for April through June.

April May June Total
Desired ending inventory
$36,720 $39,240 $37,800 $113,760
Add: Cost of goods sold
127,200 122,400 130,800 380,400
Total needed 163,920 161,640 168,600 494,160
Less: Opening inventory
38,160 36,720 39,240 114,120

Total purchases budget: $125,760 $124,920 $129,360 $380,040 Explanation: Desired ending inventory is for example for April: $204,000 × .60 × .30=$36,720. Cost of goods sold is for example for April: $212,000 × .60 = $127,200 Opening inventory for example for April: $212,000 × .60 × .30 = $38,160

<b>75) Favata Company has the following information:</b>

Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000

In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month’s cost of sales.

Required:
Prepare a purchases budget for July through September.

July Aug Sept Total
Desired ending inventory
$ 8,400 $14,700 $15,120 $15,120
Plus COGS 35,700 28,000 49,000 112,700
Total needed 44,100 42,700 64,120 127,820
Less beginning inventory
10,710 8,400 14,700 10,710

Total purchases $33,390 $34,300 $49,420 $117,110

<b>76) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired.</b>

Required:
a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.

a. Framing Glass Backing Desired ending inventory* 2250 750 750 Production needs (10,000 units)** 40,000 10,000 20,000 Total needs 42,250 10,750 20,750 Less: Beginning inventory 1,500 500 500 Purchases planned 40,750 10,250 20,250 b. Cost of direct materials: Framing (40,750 × $0.90) $36,675.00 Glass (10,250 × $8.00) 82,000.00 Backing (20,250 × $4) 81,000.00 Total $199,675.00 * 1,500 × 1.5 = 2,250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing ** 10,000 × 4 feet of framing = 40,000 feet of framing 10,000 × 1 square foot of glass = 10,000 square feet of glass 10,000 × 2 square feet of backing = 20,000 square feet of backing

<b>77) Christy Enterprises reports the year-end information from 2015 as follows:</b>

Sales (100,000 units) $500,000
Less: Cost of goods sold 300,000
Gross profit 200,000
Operating expenses (includes $20,000 of Depreciation) 120,000
Net income $ 80,000

Christy is developing the 2016 budget. In 2016 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.

Required:
Prepare a budgeted income statement for 2016.

Christy Enterprises Budgeted Income Statement For the Year 2016 Sales (95,000 × $5.50) $522,500 Cost of goods sold (2016 sales × 62%) 323,950 Gross profit 198,550 Less: Operating expenses [($1.00 × 95,000] + $20,000) 115,000 Net income $ 83,550

<b>78) Describe operating and financial budgets and give at least two examples of each discussed in the textbook.</b>

– Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labor management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labor costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. -Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.

<b>79) Discuss the importance of the sales forecast and items that influence its accuracy.</b>

All other budgets are based on information from the sales forecast. The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy changes in the industry, actions of the competition, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast.

<b>80) Rolling budgets help management to ________.</b>
A) better review the past calendar year
B) deal with a 5-year time frame
C) focus on the upcoming budget period
D) rigidly administer the budget

C) focus on the upcoming budget period

<b>1) Financial planning models ________.</b>
A) are not used in the budgeting process
B) are not useful for sensitivity analysis
C) are mathematical representations of the relationships affecting the budget process
D) are used for nonfinancial aspects of budgeting
Objective 6.4

C) are mathematical representations of the relationships

<b>2) Financial planning software packages assist management with ________.</b>
A) assigning responsibility to various levels of management
B) identifying the target customer
C) sensitivity analysis in their planning and budgeting activities
D) achieving greater commitment from lower management
Objective 6.4

C) sensitivity analysis in their planning and budgeting activities

<b>3) ERP systems store vast quantities of information about the materialsmachines and equipment, labor, power, maintenance, and setups needed to manufacture different products. This helps simplify the budgeting process as ERP systems ________.</b>
A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity
B) automatically identify and record changes in processes involved in producing products
C) identify which underlying assumptions are likely to change
D) always use a rolling budget ensuring that a budget is always available for a specified future period
Objective 6.4

A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity

<b>4) When performing a sensitivity analysis if the selling price per unit is increased, then the ________.</b>
A) per unit fixed administrative costs will increase
B) per unit direct materials purchase price will increase
C) total volume of sales will increase
D) total costs for sales commissions and other nonmanufacturing variable costs will increase
Objective 6.4

D) total costs for sales commissions and other nonmanufacturing variable costs will increase

<b>5) Sensitivity analysis helps managers evaluate risks ________.</b>
A) by showing the effects of changes to the original data or an underlying assumption
B) by identifying inconsistencies in underlying assumptions and actual conditions
C) by removing the effects of foreign currency exposure and other uncontrollable factors
D) by identifying gaps in the production process using information on setups needed to manufacture products
Objective 6.4

A) by showing the effects of changes to the original data or an underlying assumption

Answer the following questions using the information below:

Kramer Enterprises reports year-end information from 2015 as follows:

Sales (160,000 units) $960,000
Cost of goods sold 640,000
Gross margin 320,000
Operating expenses 260,000
Operating income $60,000

Kramer is developing the 2016 budget. In 2016 the company would like to increase selling prices by 12.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost.

<b>6) What is budgeted sales for 2016?</b>
A) $1,080,000
B) $1,000,000
C) $982,800
D) $873,600
Objective 6.4

C) $982,800 Explanation: C) Budgeted sales = $960,000 × 1.125 × 0.91 = $982,800

<b>7) What is budgeted cost of goods sold for 2016?</b>
A) $720,000
B) $582,400
C) $691,200
D) $640,000
Objective 6.4

B) $582,400 Explanation: B) Cost of goods sold in 2015 per unit: $640,000/160,000 units = $4 per unit Number of units sold in 2016 = 160,000 × 0.91 = 145,600 units × $4 per unit = $582,400.

<b>8) Should Kramer increase the selling price in 2016?</b>
A) Yes, because operating income increases for 2016.
B) Yes, because sales revenue increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because gross margin decreases for 2016.
Objective 6.4

A) Yes, because operating income increases for 2016. Explanation: A) Yes, because it would result in an increase in operating income compared to 2015 ( 2016 operating income would be: $982,800 -$582,400 (COGS)-$260,000 (operating expenses, which are fixed) = $140,400 compared to $60,000 in 2015.

Answer the following questions using the information below:

Violet Sales Corp reports the year-end information from 2016 as follows:

Sales (35,000 units) $280,000
Cost of goods sold 105,000
Gross margin 175,000
Operating expenses 150,000
Operating income $ 25,000

Violet is developing the 2016 budget. In 2016 the company would like to increase selling prices by 3.5%, and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost.

<b>9) What is budgeted sales for 2016?</b>
A) $291,200
B) $246,330
C) $302,400
D) $322,000
Objective 6.4

B) $246,330 Explanation: B) Budgeted sales in 2016: Selling prices in 2015 were $8 per unit ($280,000/35,000 units); increase selling price by 3.5% in 2016 means new selling price per unit in 2016 is $8.28 per unit; 2016 sales volume will be 35,000 units × .85 = 29,750 units times $8.28 per unit = $246,330

<b>10) What is budgeted cost of goods sold for 2016?</b>
A) $89,250
B) $98,250
C) $15,750
D) $257,040
Objective 6.4

A) $89,250 Explanation: A) Budgeted cost of goods sold = $105,000 × 0.85 = $89,250

<b>11) Should Violet increase the selling price in 2016?</b>
A) Yes, because sales revenue increases for 2016.
B) Yes, because gross margin increases for 2016.
C) No, because sales volume decreases for 2016.
D) No, because operating income decreases for 2016.
Objective 6.4

D) No, because operating income decreases for 2016. Explanation: D) $257,040 – $89,250 = $167,790 (Gross margin); $167,790 – $150,000 = $17,790 (Operating income). No, because there would be a decrease in operating income compared to 2016.

<b>12) TRUE or FALSE:Computer-based systems, like ERP, help managers budget for all manufacturing costs but lack the ability to help managers budget for non-manufacturing costs.</b>
Objective 6.4

FALSE Explanation: Computer-based systems like ERP, not only help managers budget for manufacturing costs but also for non-manufacturing costs

<b>13) TRUE or FALSE: Financial planning models are non-mathematical, abstract representations of the relationships among operating activities, financing activities, and other factors that affect the master budget.</b>
Objective 6.4

FALSE . Explanation: Financial planning models are mathematical models representing the relationships among operating activities financing activities, and other factors that affect the master budget.

<b>14) TRUE or FALSE: Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis.</b>
Objective 6.4

FALSE Explanation: Computer-based financial planning models easily assist management with sensitivity (what-if) analysis.

<b>15) TRUE or FALSE: Sensitivity analysis is a useful tool that helps managers evaluate risks.</b>
Objective 6.4

TRUE

<b>16) TRUE or FALSE: Computer-based systems such as ERP systems, cannot perform calculations for financial planning models.</b>
Objective 6.4

FALSE Explanation: Managers can use computer-based systems such as enterprise resource planning (ERP) systems, to perform calculations for financial planning models.

<b>17) Economics suggests that a decrease in the selling price of a product will decrease revenue.</b>
Objective 6.4

FALSE Explanation: If there is a decrease in the selling price of a product there may either be an increase in total revenue or a decrease in total revenue due to the uncertain effect of price change on demand.

<b>18) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice.</b>
Objective 6.4

Sensitivity analysis is a "what-if" technique that examines how results will change if the original predicted data are not achieved or if an underlying assumption changes. Managers often use financial planning models which are mathematical representations of relationships among the factors that influence the master budget. It is possible, using these models, to examine the financial impact of one or more parameters that influence a master budget, for example selling price and material cost. Management could consider three levels of each of these two parameters, resulting in nine scenarios of different selling prices and material costs. The financial model could then present a master budget based on each of these changes, and demonstrate the financial impact on the original data given changes in selling prices and/or material costs. Management could use these predictions to make contingency plans, change their strategies, or simply update the budgets as environmental conditions change.

<b>1) Which of the following is true of responsibility accounting?</b>
A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.
B) It is an arrangement of lines of responsibility and authority within a responsibility center.
C) It explicitly incorporates continuous improvement and changes due to learning curve.
D) It examines how a result will change if the original plan is not achieved.
Objective 6.5

A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center.

<b>2) Which of the following departments is most likely to be a cost center?</b>
A) sales department of a company selling industrial tools
B) call center of a company that serves customers and cross-sells other products
C) maintenance department of a luxury resort
D) research department of a company providing consultancy services
Objective 6.5

C) maintenance department of a luxury resort

<b>3) Which of the following departments is most likely to be a profit center?</b>
A) the accounting department of a company that also assists in budgeting process
B) the research and development department of a company
C) the sales department of a company whose objective is to maximize the revenues
D) the consulting department of a law firm
Objective 6.5

D) the consulting department of a law firm

<b>4) A maintenance manager of a theatre is most likely to be responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

C) cost center

<b>5) The regional sales office manager of a national firm is most likely responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

A) revenue center

<b>6) A regional manager of a restaurant chain in charge of finding additional locations for expansion is most likely responsible for a(n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

B) investment center

<b>7) Silas has been recently promoted to head his department. He is responsible for maximizing the profits of the department and to ensure that the earnings are ploughed back into the business. Silas is most likely to head a (n) ________.</b>
A) revenue center
B) investment center
C) cost center
D) profit center
Objective 6.5

B) investment center

<b>8) A manager of a revenue center is responsible ________.</b>
A) for only the profits of his center
B) for investments revenues, and costs
C) for only the revenues of his center
D) for both, the revenues and costs of his center
Objective 6.5

C) for only the revenues of his center

<b>9) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time.</b>
A) controlled
B) influenced
C) segregated
D) excluded
Objective 6.5

B) influenced

<b>10) Which of the following statements is true about responsibility accounting statements?</b>
A) Responsibility accounting excludes controllable costs.
B) Responsibility accounting segregates fixed costs and variable costs.
C) Responsibility accounting excludes fixed costs and variable costs.
D) Responsibility accounting segregates uncontrollable costs from controllable costs.
Objective 6.5

D) Responsibility accounting segregates uncontrollable costs from controllable costs.

<b>11) Which of the following is the fundamental purpose of responsibility accounting?</b>
A) to penalize managers for inefficiency
B) to gather information that will enable future improvement
C) to create an efficient and centralized organization
D) to evaluate the performance of managers
Objective 6.5

B) to gather information that will enable future improvement

<b>12) A company using responsibility accounting system decides to exclude all uncontrollable costs from a manager’s performance report. Jenson is the machine supervisor. Which of the following costs will impact Jenson’s performance report?</b>
A) rent and taxes paid on by the company
B) cost of materials used in manufacture
C) machine maintenance cost
D) cost of power consumed by the plant
Objective 6.5

C) machine maintenance cost

<b>13) Responsibility accounting ________.</b>
A) emphasizes controllability
B) focuses on who should be asked about the information
C) attempts to assign blame for problems to a specific manager
D) attempts to create a decentralized organization
Objective 6.5

B) focuses on who should be asked about the information

<b>14) A primary consideration in assigning a cost to a responsibility center is ________.</b>
A) whether the cost is fixed or variable
B) whether the cost is direct or indirect
C) who can best control the change in that cost
D) where in the organizational structure the cost was incurred
Objective 6.5

B) whether the cost is direct or indirect

*15) TRUE or FALSE: A responsibility center is a part segment, or subunit of an organization, whose manager is accountable for a specified set of activities.
Objective 6.5

TRUE

<b>16) TRUE or FALSE: Performance reports for responsibility centers are sometimes designed to change managers’ behavior in the direction top managers desire even if the reports decrease controllability.</b>
Objective 6.5

TRUE

<b>17) TRUE or FALSE: In a cost center a manager is responsible for investments, revenues, and costs.</b>
Objective 6.5

FALSE Explanation: In a cost center a manager is responsible for costs, but not revenues or investments.

<b>18) TRUE or FALSE: A packaging department is most likely a profit center.</b>
Objective 6.5

FALSE Explanation: A packaging department is most likely a cost center.

<b>19) TRUE or FALSE: Variances between actual and budgeted amounts inform management about performance relative to the budget.</b>
Objective 6.5

TRUE

<b>20) TRUE or FALSE: Each manager regardless of level, is in charge of a responsibility center.</b>
Objective 6.5

TRUE

<b>21) TRUE or FALSE: A responsibility center is a part segment, or subunit of an organization whose manager is accountable for a specified set of activities.</b>
Objective 6.5

TRUE

<b>22) TRUE or FALSE: Management will most likely behave the same way if a department is structured as a cost center or if the same department is structured as a profit center.</b>
Objective 6.5

FALSE Explanation: Management will most likely behave differently if a department is structured as a cost center than if the same department is structured as a profit center due to the incentives to control costs as well as revenues in a profit center.

<b>23) TRUE or FALSE: Responsibility accounting focuses on control NOT on information and knowledge.</b>
Objective 6.5

FALSE Explanation: Responsibility accounting focuses on information and knowledge not on control.

<b>24) TRUE or FALSE: The sales department in any organization is usually a profit center.</b>
Objective 6.5

FALSE Explanation: The sales department is a revenue center because the sales manager is responsible primarily for revenues and the department’s budget is primarily based on revenues.

<b>25) Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?</b>
Objective 6.5

Although no revenue or cost can be totally controlled a cost or revenue is a controllable item when a manager has significant influence over the amount of a cost or revenue. It is uncontrollable if this is not the case. A manager’s ability to influence costs and revenues depends on two factors: (1) the manager’s level of authority, and (2) the time period involved. Costs and revenue contracts, the economic costs of disposing of fixed assets, and the economy are three conditions that are likely to affect the period of time during which an item is not controllable.

<b>1) The Japanese use the term kaizen when referring to________.</b>
A) scarce resources
B) pro forma financial statements
C) continuous improvement
D) the sales forecast
Objective 6.6

C) continuous improvement

<b>2) Kaizen refers to incorporating cost reductions ________.</b>
A) in each successive budgeting period
B) in each successive sales forecast
C) in all customer service centers
D) in all areas of the organization
Objective 6.6

A) in each successive budgeting period

<b>3) Tom Magic Company manufactures various kinds of toys for different age groups. The company’s flagship product is Rx. The company currently requires 8.50 labor hours to manufacture per unit of Rx. The company believes that because of numerous small improvements in the process it will require 0.10 labor-hours less and hence will only 8.40 labor-hours in the next quarter. It will require 8.35 and 8.25 labor-hours in third and fourth quarter. The company has adopted ________.</b>
A) activity based budgeting
B) kaizen budgeting
C) zero-based budgeting
D) cost-based budgeting
Objective 6.6

B) kaizen budgeting

<b>4) Kaizen budgeting involves ________.</b>
A) large cost reductions
B) management directed improvements
C) continual small cost reductions
D) continual small revenue increases
Objective 6.6

C) continual small cost reductions

<b>5) Kaizen budgeting is driven by ________.</b>
A) management
B) employees
C) stockholders
D) creditors
Objective 6.6

B) employees

Answer the following questions using the information below:

Sherry and John Enterprises are using the kaizen approach to budgeting for 2015. The budgeted income statement for January 2015 is as follows:

Sales (168,000 units) $1,000,000
Less: Cost of goods sold 600,000
Gross margin 400,000
Operating expenses 300,000
(includes $50,000 of fixed costs)
Operating income $ 100,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

<b>6) What is budgeted cost of goods sold for March 2015?</b>
A) $588,060
B) $592,000
C) $600,000
D) $594,000
Objective 6.6

A) $588,060 Explanation: A) Cost of goods sold in February is $594,000 ($600,000 × 0.99) and March = $588,060 ($594,000 × 0.99).

<b>7) What is budgeted gross margin for March 2015?</b>
A) $392,040
B) $396,000
C) $408,040
D) $411,940
Objective 6.6

D) $411,940 Explanation: D) Sales = $1,000,000. The cost of goods sold for the month of March = $588,060 ($600,000 × 0.99 × 0.99). Therefore, the budgeted gross margin for March is $411,940.

<b>8) What is the budgeted operating income for February 2015?</b>
A) $206,000
B) $297,500
C) $116,915
D) $594,000
Objective 6.6

C) $116,915 Explanation: C) Sales = $1,000,000. The cost of goods sold = $588,060 ($600,000 × 0.99 × 0.99). Budgeted gross margin for March = $411,940. Budgeted operating expenses = $295,025 (($250,000 × 0.99 × 0.99) + $50,000). Budgeted operating income = $116,915 ($411,940 − $295,025).

<b>9) To reduce budgetary slack management may ________.</b>
A) incorporate stretch or challenge targets
B) use external benchmark performance measures
C) award bonuses for achieving budgeted amounts
D) reduce projected cost targets by 10% across all areas
Objective 6.6

B) use external benchmark performance measures

<b>10) A stretch budget is a budget that ________.</b>
A) crosses more than one responsibility center
B) represents a challenging but achievable level of performance
C) is impossible to implement in a cost center
D) is designed to include the effects of exchange rate fluctuations
Objective 6.6

B) represents a challenging but achievable level of performance

<b>11) TRUE or FALSE: Rolling budgets help in reducing budgetary slack.</b>
Objective 6.6

TRUE

<b>12) TRUE or FALSE: Budgetary slack is the practice of underestimating costs so as to project an optimistic future outlook.</b>
Objective 6.6

FALSE Explanation: Budgetary slack is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve.

<b>13) TRUE or FALSE: Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better.</b>
Objective 6.6

TRUE

<b>14) TRUE or FALSE: The Japanese use kaizen to mean financing alternatives.</b>
Objective 6.6

FALSE Explanation: The Japanese use kaizen to mean continuous improvement.

<b>15) TRUE or FALSE: Kaizen budgeting does NOT make sense for cost centers.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting can be used in any type of responsibility center.

<b>16) TRUE or FALSE: Kaizen budgeting encourages dramatic improvements and substantial reduction in costs.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting encourages small incremental changes rather than major improvements.

<b>17) TRUE or FALSE: Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting allows for budgeting of small incremental decreases in costs each budgeting period.

<b>18) Budgeting is a mechanical tool because the budgeting techniques are free of emotions.</b>
Objective 6.6

TRUE

<b>19) TRUE or FALSE: Budgetary slack provides management with a hedge against planned adverse circumstances.</b>
Objective 6.6

FALSE Explanation: Budgetary slack provides management with a hedge against unexpected adverse circumstances.

<b>20) TRUE or FALSE: Most costs can be easily controlled because they are under the sole influence of one manager.</b>
Objective 6.6

FALSE Explanation: Few costs are clearly under the sole influence of one manager.

<b>21) TRUE or FALSE: Kaizen budgeting can be applied to activities such as setups with the goal of reducing setup time and setup costs.</b>
Objective 6.6

TRUE

*22) TRUE or FALSE: When the operating budget is used as a control device managers are less likely to be motivated to budget higher sales than actually anticipated.
Objective 6.6

TRUE

<b>23) TRUE or FALSE: Budgeting based on cost for specific activities is a key building block of the master budget for companies that use the Kaizen approach.</b>
Objective 6.6

FALSE Explanation: Kaizen budgeting for specific activities is a key building block of the master budget for companies that use the Kaizen approach.

<b>24) TRUE or FALSE: Administration of budgets is free of emotions as budgets are mechanical tools.</b>
Objective 6.6

FALSE Explanation: Administration of budgeting requires education persuasion, and intelligent interpretation.

<b>25) TRUE or FALSE: Budgets are not remedies for weak management talent, faulty organization, or a poor accounting system.</b>
Objective 6.6

TRUE

<b>26) Allscott Company is developing its budgets for 2016 and for the first time, will use the kaizen approach. The initial 2016 income statement, based on static data from 2015, is as follows:</b>

Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000

Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000

Net income $28,000
Selling prices for 2016 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%.

Required:
Prepare a kaizen-based budgeted income statement for 2016.
Objective 6.6

Sales (126,000 × $3.24) $408,240 Less: COGS (126,000 × $1.80) 226,800 Gross margin 181,440 Operating expenses ($28,000 + $79,800) 107,800 Net income $ 73,640

<b>27) Steve Corporation is using the kaizen approach to budgeting for 2015. The budgeted income statement for January 2015 is as follows:</b>

Sales (240,000 units) $360,000
Less: Cost of goods sold 240,000

Gross margin 120,000
Operating expenses (includes $32,000 of fixed costs) 96,000

Net income $ 24,000

Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

Required:
Prepare a kaizen-based budgeted income statement for March of 2015.

Sales $360,000 Less: Cost of goods sold ($240,000 × 0.99 × 0.99) 235,224 Gross margin 124,776 Operating expenses [($64,000 × 0.99 × 0.99) + $32,000] 94,726 Net income $ 30,050

<b>28) Describe the concept of kaizen budgeting.</b>

Kaizen budgeting explicitly incorporates continuous improvement in cost reduction anticipated during the budget period. Much of the cost reduction arises from many small improvements rather than large one time improvements. Most of the improvements come from employee suggestions. Companies that employ kaizen budgeting create a culture where employee suggestions are valued recognized, and rewarded.

<b>29) Describe some of the drawbacks of using the operating budget as a control device.</b>

When the operating budget is used as a control device it can lead to behavior that is actually detrimental to the organization. The major problem with the budget performance report is not the report itself but rather the way it is used. In general, managers are rewarded for favorable variances, and disciplined for unfavorable variances. This encourages managers to set lax standards for both sales and costs so favorable variances result. It can also lead to "budget games." Another drawback is that once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future. If used properly, however, the operating budget can be a tremendous benefit to any company.

<b>30) What is budgetary slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?</b>

Budgetary slack occurs when subordinates (a) ask for excess resources above and beyond what they need to accomplish budget objectives and (b) distort information by claiming they are not as efficient or effective at what they do thus lowering management’s performance expectations of them. Employee’s point of view: There are two benefits from this point of view. First, the subordinate may be able to obtain excess resources to achieve desired goals. This may take a lot of pressure off the subordinate and reduce job anxiety. Second, the subordinate may be able to convince senior management to lower their work expectations of him or her. This may also lead to lower pressure on the subordinate to perform. Both of these types of slack building are designed to reduce job stress for the subordinate. However, if incentives are graduated in such a way that achieving higher and higher goals provides the subordinate with more and more compensation in the form of bonuses, then the subordinate may lose income by selecting lower goals. Senior management’s point of view: When subordinates build in slack, they are either using unnecessary resources to achieve a goal that they should have been able to achieve with fewer resources, or they are understating their performance capabilities. Thus, the organization is either not running as efficiently as it can, or is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that subordinates build in slack to relieve job pressure. If burnout of employees has been happening in the organization, then perhaps senior management may be more forgiving and view some slack building as necessary to keep their employees from quitting.

<b>31) How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic?</b>
Objective 6.7

Budgeting for a multinational corporation is made far more complex than budgeting for a domestic corporation because the multinational corporation often has subunits operating in many different countries resulting in less familiar business environments and many different currencies. Multinational corporations need to understand many different business environments with significant political, legal, and economic environments. Multinational companies earn their revenues and incur their expenses in many different currencies, and must report their results a single currency. Additionally, management accountants in different countries need to budget for foreign exchange rates and anticipate changes that might take place during the year in the face of constantly fluctuating exchange rates.

<b>1) Which of the following is a reason why budgets in multinational companies are not used to evaluate the firm’s performance relative to its budgets?</b>
A) Evaluations based on budgets can be meaningless due to factors such as exchange rate risk and other volatility.
B) Evaluations based on budgets are not possible because of cultural differences in the budgeting approach.
C) Evaluations based on relative regional performance are considered more meaningful as compared to evaluations against budgets.
D) Evaluations based on budgets are harder when managers use sophisticated techniques to minimize foreign currency exposure.
Objective 6.7

A) Evaluations based on budgets can be meaningless due to factors such as exchange rate risk and other volatility.

<b>2) Which of the following statements is true in the case of budgeting for multinational companies?</b>
A) While budgeting for multinational companies managers consider difference in tax statutes as an uncontrollable factor.
B) While budgeting for multinational companies, managers do not account for foreign exchange fluctuations as the operating profits are reported in different currencies.
C) While budgeting for multinational companies, managers must be aware that budgets will not be used for evaluating performance.
D) While budgeting for multinational companies, managers are not concerned about the domestic factors of the different countries in which they operate.
Objective 6.7

C) While budgeting for multinational companies, managers must be aware that budgets will not be used for evaluating performance.

<b>3) TRUE or FALSE: Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations.</b>
Objective 6.7

TRUE

<b>4) TRUE or FALSE: The possibility of exchange rate fluctuations does NOT influence the budgeting procedures in a multinational corporation.</b>
Objective 6.7

FALSE Explanation: The possibility of exchange rate fluctuations influences the budgeting procedures in a multinational corporation.

<b>5) TRUE or FALSE: In a multinational company budgeting is primarily done to evaluate the firm’s performance relative to its budgets.</b>
Objective 6.7

FALSE Explanation: In case of a multinational company budgeting is not done so much to evaluate the firm’s performance relative to its budgets as it is to help managers adapt their plans and coordinate the actions a company needs to take.

<b>1) The ________ is required to prepare the cash budget of an organization.</b>
A) statement of shareholder’s equity
B) budgeted balance sheet
C) capital expenditures budget
D) budgeted statement of cash flow
Objective 6.A

C) capital expenditures budget

<b>2) Financial analysts use the projected cash flow statement to ________.</b>
A) determine the tax effect of cash expenses
B) plan for short-term cash investments
C) analyze the impact of non-cash expense on income statement
D) project depreciation expense
Objective 6.A

B) plan for short-term cash investments

<b>3) The cash flow statement includes ________.</b>
A) cash discount on sales
B) cash outflow towards insurance premium
C) sales revenues of the organization
D) interest accrued on an investment
Objective 6.A

C) sales revenues of the organization

<b>4) The cash budget is a schedule of expected cash receipts and disbursements that ________.</b>
A) requires an aging of accounts receivable and accounts payable
B) is a self-liquidating cycle
C) is prepared immediately after the sales forecast
D) predicts the effect on the cash position at given levels of operations
Objective 6.A

D) predicts the effect on the cash position at given levels of operations

Answer the following questions using the information below:

The following information pertains to Hepburn Company:

Month Sales Purchases
January $60,000 $32,000
February $80,000 $40,000
March $100,000 $56,000

∙ Cash is collected from customers in the following manner:
Month of sale 30%
Month following the sale 70%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
∙ Labor costs are 20% of sales. Other operating costs are $30,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred.
∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.

<b>5) How much cash will be collected from customers in March?</b>
A) $94,000
B) $86,000
C) $100,000
D) $110,000
Objective 6.A

B) $86,000 Explanation: B) ($80,000 × 70%) + ($100,000 × 30%) = $86,000

<b>6) How much cash will be paid to suppliers in March?</b>
A) $46,400
B) $56,000
C) $88,000
D) $92,000
Objective 6.A

A) $46,400 Explanation: A) ($40,000 × 60%) + ($56,000 × 40%) = $46,400

<b>7) How much cash will be disbursed in total in March?</b>
A) $42,000
B) $50,000
C) $88,400
D) $96,400
Objective 6.A

C) $88,400 Explanation: C) ($40,000 × 60%) + ($56,000 × 40%) + ($100,000 × 20%) + ($30,000 – $8,000) = $88,400

<b>8) What is the ending cash balance for March?</b>
A) ($50,000)
B) $6,000
C) $5,600
D) $6,600
Objective 6.A

D) $6,600 Explanation: D) $8,000 + $86,000 – $88,400 + $1,000 = $6,600

Answer the following questions using the information below:

Finmin Company has the following sales budget for the last six months of 2015:

July $200,000 October $180,000
August 160,000 November 200,000
September 200,000 December 180,000

Sales are immediately due, however the cash collection of sales, historically, has been as follows:
65% of sales collected in the month of sale,
25% of sales collected in the month following the sale,
8% of sales collected in the second month following the sale, and
2% of sales are uncollectible.

<b>9) Cash collections for September are ________.</b>
A) $143,000
B) $170,000
C) $186,000
D) $204,000
Objective 6.A

C) $186,000 Explanation: C) September sales ($200,000 × 0.65) + August sales ($160,000 × 0.25) + July sales ($200,000 × 0.08) = $186,000

<b>10) What is the ending balance of accounts receivable for the end of September, assuming uncollectible balances are written off at the end of the second month following the sale?</b>
A) $199,000
B) $97,000
C) $89,800
D) $86,000
Objective 6.A

D) $86,000 Explanation: D) September ($200,000 × 0.35) + August ($160,000 × 0.10) = $86,000

11) Cash collections for October are ________.
A) $117,000
B) $179,800
C) $194,000
D) $176,400
Objective 6.A

B) $179,800 Explanation: B) October sales ($180,000 × 0.65) + September sales ($200,000 × 0.25) + August sales ($160,000 × 0.08) = $179,800

Answer the following questions using the information below:

Estate Corp. has the following information:

Month Budgeted Purchases
January $26,800
February 29,000
March 28,500
April 29,480
May 26,680

Purchases are paid for in the following manner:
10% of the purchase amount in the month of purchase
50% of the purchase amount in the month after purchase
40% of the purchase amount in the second month after purchase

<b>12) What is the expected balance in Accounts Payable as of March 31?</b>
A) $37,250
B) $18,312
C) $2,900
D) $30,520
Objective 6.A

A) $37,250 Explanation: A) March ($28, 500 × 0.9) + February ($29,000 × 0.4) = $37,250

<b>13) What is the expected balance in Accounts Payable as of April 30?</b>
A) $37,250
B) $37,932
C) $28,500
D) $17,688
Objective 6.A

B) $37,932 Explanation: B) April ($29, 480 × 0.9) + March ($28,500 × 0.4) = $37,932

14) What is the expected Accounts Payable balance as of May 31?
A) $41,792
B) $37,932
C) $35,804
D) $2,948
Objective 6.A

C) $35,804 Explanation: C) May ($26, 680 × 0.9) + April ($29,480 × 0.4) = $35,804

Answer the following questions using the information below:

The following information pertains to the January operating budget for Casey Corporation.

∙ Budgeted sales for January $200, 000 and February $100,000.
∙ Collections for sales are 60% in the month of sale and 40% the next month.
∙ Gross margin is 30% of sales.
∙ Administrative costs are $10,000 each month.
∙ Beginning accounts receivable is $20,000.
∙ Beginning inventory is $14,000.
∙ Beginning accounts payable is $65,000. (All from inventory purchases.)
∙ Purchases are paid in full the following month.
∙ Desired ending inventory is 20% of next month’s cost of goods sold (COGS).

<b>15) For January, budgeted cash collections are ________.</b>
A) $200,000
B) $140,000
C) $120,000
D) $20,000
Objective 6.A

B) $140,000 Explanation: B) Budgeted cash collections = $20,000 + ($200,000 × 60%) = $140,000

<b>16) At the end of January, budgeted accounts receivable is ________.</b>
A) $40,000
B) $80,000
C) $120,000
D) $160,000
Objective 6.A

B) $80,000 Explanation: B) Budgeted accounts receivable at the end of January = $200,000 × 40% = $80,000

<b>17) For January, budgeted cost of goods sold is ________.</b>
A) $200,000
B) $140,000
C) $126,000
D) $112,000
Objective 6.A

B) $140,000 Explanation: B) Budgeted cost of goods sold = $200,000 × 70% = $140,000

<b>18) For January, budgeted net income is ________.</b>
A) $60,000
B) $50,000
C) $40,000
D) $30,000
Objective 6.A

B) $50,000 Explanation: A) Budgeted net income for January = $200, 000 – $140,000 – $10,000 = $50,000

<b>19) For January, budgeted cash payments for purchases are ________.</b>
A) $100,000
B) $70,000
C) $65,000
D) $50,000
Objective 6.A

C) $65,000 Explanation: C) Accounts payable $65,000 as stated

<b>20) At the end of January, budgeted ending inventory is ________.</b>
A) $10,000
B) $14,000
C) $20,000
D) $22,000
Objective 6.A

B) $14,000 Explanation: B) Budgeted ending inventory at the end of January = $100,000 × 70% × 20% = $14,000

<b>21) TRUE or FALSE: The cash budget is a schedule of expected cash receipts and disbursements.</b>
Objective 6.A

TRUE

<b>22) TRUE or FALSE: Cash budgets help avoid unnecessary idle cash and unexpected cash deficiencies.</b>
Objective 6.A

TRUE

<b>23) Russell Company has the following projected account balances for June 30, 2015:</b>

Accounts payable $80,000 Sales $1,600,000
Accounts receivable 200,000 Capital stock 800,000
Depreciation, factory 48,000 Retained earnings ?
Inventories (5/31 &amp; 6/30) 360,000 Cash 112,000
Direct materials used 400,000 Equipment, net 480,000
Office salaries 160,000 Buildings, net 800,000
Insurance, factory 8,000 Utilities, factory 32,000
Plant wages 280,000 Selling expenses 120,000
Bonds payable 320,000 Maintenance, factory 56,000

Required:
a. Prepare a budgeted income statement for June 2015
b. Prepare a budgeted balance sheet as of June 30, 2015.

Objective 6.A

a. Russell Company Budgeted Income Statement For the Month of June 2015 Sales $1, 600,000 Cost of goods sold: Materials used $400,000 Wages 280,000 Depreciation 48,000 Insurance 8,000 Maintenance 56,000 Utilities 32,000 824,000 Gross profit 776,000 Operating expenses: Selling expenses $120,000 Office salaries 160,000 280,000 Net income $496,000 b. Russell Company Budgeted Balance Sheet June 30, 2015 Assets: Liabilities and Owners’ Equity: Cash $ 112,000 Accounts payable $ 80,000 Accounts receivable 200,000 Bonds payable 320,000 Inventories 360,000 Capital stock 800,000 Equipment, net 480,000 Retained earnings* 752,000 Buildings, net 800,000 Total $1,952,000 Total $1,952,000 *$1,952,000 – ($80,000 + $320,000 + $800,000) = $752,000

<b>24) Duffy Corporation has prepared the following sales budget:</b>

Month Cash Sales Credit Sales
May $16,000 $68,000
June 20,000 80,000
July 18,000 74,000
August 24,000 92,000
September 22,000 76,000

Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible.

Required:
Prepare a schedule of cash collections for July through September.

Objective 6.A

July August September Total Cash sales $18, 000 $24,000 $22,000 $64,000 Collections of credit sales from: Current month 29,600 36,800 30,400 96,800 Previous month 36,000 33,300 41,400 110,700 Two months ago 6,800 8,000 7,400 22,200 Total collections $90,400 $102,100 $101,200 $293,700

<b>25) The following information pertains to Amigo Corporation:</b>

Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000

∙ Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required:
a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.

Objective 6.A

a. Cash collections Oct $36, 448 + Nov $40,812 + Dec $47,940 = $125,200 October November December August $ 5,100 September 19,000 5,700 October 12,348 21,000 6,300 November 14,112 24,000 December 17,640 ——– ——— ——– $36,448 $40,812 $47,940 b. Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400 October November December September 8,400 October 6,400 9,600 November 7,200 10,800 December 8,000 ——– ——— ——– $14,800 $16,800 $18,800

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