Cost Accounting A Managerial Emphasis 14th Edition By Horngren - Test Bank

Cost Accounting A Managerial Emphasis 14th Edition By Horngren – Test Bank

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Cost Accounting, 14e (Horngren/Datar/Rajan)

Chapter 6 Master Budget and Responsibility Accounting

Objective 6.1

1) A budget:

is the quantitative expression of a proposed plan of action by management
is an aid to coordinate what needs to be done
generally includes both financial and nonfinancial aspects of the plan
All of the above are correct.

Answer: D

Diff: 1

Terms: budget

Objective: 1

AACSB: Reflective thinking

2) A budget

is the quantitative expression of a proposed plan of action.
aids in coordinating what needs to be done.
includes both financial and nonfinancial aspects.
All of these answers are correct.

Answer: D

Diff: 1

Terms: budget

Objective: 1

AACSB: Reflective thinking

Budgeting is used to help companies: A) plan to better satisfy customers

B) anticipate potential problems C) focus on opportunities

D) All of these answers are correct. Answer: D

Diff: 2

Terms: master budget

Objective: 1

AACSB: Communication

A master budget:

includes only financial aspects of a plan and excludes nonfinancial aspects
is an aid to coordinating what needs to be done to implement a plan
includes broad expectations and visionary results
should not be altered after it has been agreed upon

Answer: B

Diff: 2

Terms: master budget

Objective: 1

AACSB: Reflective thinking

Operating decisions primarily deal with: A) the use of scarce resources

B) how to obtain funds to acquire resources C) acquiring equipment and buildings

D) satisfying stockholders Answer: A

Diff: 2

Terms: operating budget

Objective: 1

AACSB: Reflective thinking

Financing decisions primarily deal with: 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 Answer: B

Diff: 2

Terms: financial budget

Objective: 1

AACSB: Reflective thinking

Budgeting provides all of the following EXCEPT:

a means to communicate the organization’s short-term goals to its members
support for the management functions of planning and coordination
a means to anticipate problems
an ethical framework for decision making

Answer: D

Diff: 2

Terms: master budget

Objective: 1

AACSB: Communication

If initial budgets prove UNACCEPTABLE, planners achieve the most benefit from: A) planning again in light of feedback and current conditions

B) deciding not to budget this year C) accepting an unbalanced budget D) using last year’s budget Answer: A

Diff: 2

Terms: master budget

Objective: 1

AACSB: Communication

Operating budgets and financial budgets: A) combined form the master budget

B) are prepared before the master budget C) are prepared after the master budget

D) have nothing to do with the master budget Answer: A

Diff: 1

Terms: operating budget, financial budget, master budget

Objective: 1

AACSB: Reflective thinking

A good budgeting system forces managers to examine the business as they plan, so they can: A) detect inaccurate historical records

B) set specific expectations against which actual results can be compared C) complete the budgeting task on time

D) get promoted for doing a good job Answer: B

Diff: 2

Terms: master budget

Objective: 1

AACSB: Communication

A budget is the quantitative expression of a proposed plan of action by management

for a specified period.

Answer: TRUE

Diff: 1

Terms: budget

Objective: 1

AACSB: Analytical skills

A budget generally includes both financial and nonfinancial aspects of the plan.

Answer: TRUE

Diff: 1

Terms: budget

Objective: 1

AACSB: Communication

Budgeted financial statements are also referred to as pro forma statements. Answer: TRUE

Diff: 1

Terms: financial budget

Objective: 1

AACSB: Reflective thinking

Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as the number of physical units manufactured.

Answer: FALSE

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

Diff: 2

Terms: financial budget

Objective: 1

AACSB: Reflective thinking

Budgeting helps management anticipate and adjust for trouble spots in advance.

Answer: TRUE

Diff: 1

Terms: budget

Objective: 1

AACSB: Reflective thinking

Budgets can play both planning and control roles for management. Answer: TRUE

Diff: 1

Terms: budget

Objective: 1

AACSB: Reflective thinking

Long-run planning and short-run planning are best performed independently of each other. Answer: FALSE

Explanation: Long-run planning and short-run planning are best performed as a part of an overall strategic planning process since they influence each other.

Diff: 2

Terms: planning

Objective: 1

AACSB: Reflective thinking

Financing decisions deal with how to best use the limited resources of an organization. Answer: FALSE

Explanation: Financing decisions deal with how to obtain the funds to acquire those resources.

Diff: 2

Terms: master budget

Objective: 1

AACSB: Ethical reasoning

Operating decisions deal with how to obtain the funds to acquire resources.

Answer: FALSE

Explanation: Financing decisions deal with obtaining funds.

Diff: 2

Terms: master budget

Objective: 1

AACSB: Ethical reasoning

Budgeted financial statements are called pro forma statements. Answer: TRUE

Diff: 2

Terms: pro forma statements

Objective: 1

AACSB: Reflective thinking

Describe the benefits to an organization of preparing an operating budget.

Answer: 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.

Diff: 2

Terms: operating budget

Objective: 1

AACSB: Reflective thinking

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 the lack of any financial planning. The company made a good product and market potential was great.

Required:

Explain why a company needs a good budgeting plan. Specifically address the need for a master budget. Answer: The master budget is a series of interrelated budgets that quantify management’s expectations about a company’s revenues, expenses, net income, cash flows, and financial position. When administered wisely, a budget:

provides a framework for judging performance,
motivates managers and employees, and
promotes coordination and communication among subunits within the company.

Diff: 2

Terms: operating budget

Objective: 1

AACSB: Reflective thinking

Objective 6.2

A budget can do all of the following EXCEPT: A) promote coordination among subunits

B) determine actual profitability C) motivate managers

D) motivate employees Answer: B

Diff: 2

Terms: budget

Objective: 2

AACSB: Reflective thinking

A budget should/can do all of the following EXCEPT:

be prepared by managers from different functional areas working independently of each other
be adjusted if new opportunities become available during the year
help management allocate limited resources

become the performance standard against which firms can compare the actual results Answer: A

Diff: 3

Terms: master budget

Objective: 2

AACSB: Reflective thinking

A limitation of comparing a company’s performance against actual results of last year is that: A) it includes adjustments for future conditions

B) feedback is no longer a possibility

C) past results can contain inefficiencies of the past year D) the budgeting time period is set at one year Answer: C

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

Challenging budgets tend to:

decrease line-management participation in attaining corporate goals
increase failure
increase anxiety without motivation
motivate improved performance

Answer: D

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

Actual results should NOT be compared against past performance because: A) past results may contain mistakes and substandard performance

B) past results will never happen again

C) past performance is an indicator of future performance D) future conditions will be similar to past conditions Answer: A

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

A company’s actual performance should be compared against budgeted amounts for the same accounting period so that:

A) adjustments for future conditions can be included B) no feedback is possible

C) inefficiencies of the past year can be included D) a rolling budget can be implemented Answer: A

Diff: 2

Terms: master budget

Objective: 2

AACSB: Ethical reasoning

It is advantageous to coordinate budgets with:

suppliers
customers
the marketing and production departments
All of these answers are correct.

Answer: D

Diff: 3

Terms: master budget

Objective: 2

AACSB: Reflective thinking

A budget can help implement: A) strategic planning

B) long-run planning C) short-run planning

D) All of these answers are correct. Answer: D

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

To gain the benefits of budgeting ________ must understand and support the budget. A) senior management

B) middle management C) line employees

D) All of these answers are correct. Answer: D

Diff: 3

Terms: master budget

Objective: 2

AACSB: Communication

Participation of employees in the budgeting process helps to create:

greater commitment
greater anxiety
less commitment

better past performance Answer: A

Diff: 2

Terms: master budget

Objective: 2

AACSB: Communication

Line managers who feel that top management does NOT believe in the budget are most likely to: A) pick up the slack and participate in the budgeting process

B) be motivated by the budget
C) spend little time on the budgeting process

D) convert the budget to a shorter more reasonable time period Answer: C

Diff: 2

Terms: master budget

Objective: 2

AACSB: Communication

The time coverage of a budget should be:

one year
guided by the purpose of the budget
cover design through manufacture and sale of the product
shorter rather than longer

Answer: B

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

Rolling budgets help management to: 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 Answer: C

Diff: 2

Terms: rolling budget

Objective: 2

AACSB: Reflective thinking

Budgets should:

be flexible
be administered rigidly
only be developed for short periods of time
include only variable costs

Answer: A

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

After a budget is agreed upon and finalized by the management team, the amounts should NOT be changed for any reason.

Answer: FALSE

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

Diff: 2

Terms: master budget

Objective: 2

AACSB: Ethical reasoning

Even in the face of changing conditions, attaining the original budget is critical.

Answer: FALSE

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

an end in itself.

Diff: 3

Terms: master budget

Objective: 2

AACSB: Reflective thinking

Lower-level managers will not actively participate in the budget process if they perceive upper management does NOT believe in the process.

Answer: TRUE

Diff: 3

Terms: master budget

Objective: 2

AACSB: Communication

Coordination is meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals. Answer: TRUE

Diff: 2

Terms: coordination

Objective: 2

AACSB: Reflective thinking

Research shows that challenging budgets improve employee performance because employees view falling short of budgeted numbers as a failure.

Answer: TRUE

Diff: 2

Terms: master budget

Objective: 2

AACSB: Reflective thinking

It is best to compare this year’s performance with last year’s actual performance rather than this year’s budget.

Answer: 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.

Diff: 3

Terms: master budget

Objective: 2

AACSB: Reflective thinking

When administered wisely, budgets promote communication and coordination among the various subunits of the organization.

Answer: TRUE

Diff: 2

Terms: budget

Objective: 2

AACSB: Communication

Objective 6.3

Operating budgets include all of the following EXCEPT: A) the revenues budget

B) the budgeted income statement C) the administrative costs budget D) the budgeted balance sheet Answer: D

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Operating budgets include the: A) budgeted balance sheet

B) budgeted income statement C) capital expenditures budget

D) budgeted statement of cash flows Answer: B

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The operating budget process generally concludes with the preparation of the: A) production budget

B) distribution budget

C) research and development budget D) budgeted income statement Answer: D

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Which budget is NOT necessary to prepare the budgeted balance sheet?

cash budget
budgeted statement of cash flows
budgeted income statement
revenues budget

Answer: B

Diff: 1

Terms: master budget

Objective: 3

AACSB: Reflective thinking

Financial budgets include the all of the following EXCEPT: A) capital expenditures budget

B) budgeted income statement C) budgeted balance sheet

D) budgeted statement of cash flows Answer: B

Diff: 1

Terms: financial budget

Objective: 3

AACSB: Reflective thinking

________ includes a budgeted statement of cash flows and a budgeted balance sheet. A) An annual report

B) The financial budget C) The operating budget

D) The capital expenditures budget Answer: B

Diff: 1

Terms: financial budget

Objective: 3

AACSB: Reflective thinking

The order to follow when preparing the operating budget is:

revenues budget, production budget, and direct manufacturing labor costs budget
costs of goods sold budget, production budget, and cash budget
revenues budget, manufacturing overhead costs budget, and production budget
cash expenditures budget, revenues budget, and production budget.

Answer: A

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

In which order are the following developed? First to last: A = Production budget

B = Direct materials costs budget

C = Budgeted income statement

D = Revenues budget

ABDC
DABC
DCAB

CABD Answer: B Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The budgeting process is most strongly influenced by: A) the capital budget

B) the budgeted statement of cash flows C) the sales forecast

D) the production budget Answer: C

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

________ is the usual starting point for budgeting. A) The revenues budget

B) Net income

C) The production budget D) The cash budget Answer: A

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The sales forecast should be primarily based on: A) statistical analysis.

B) input from sales managers and sales representatives C) production capacity

D) input from the board of directors Answer: B

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The sales forecast is influenced by:

advertising and sales promotions
competition
general economic conditions

All of these answers are correct. Answer: D

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

13) A sales forecast is:

often the outcome of elaborate information gathering and discussions among sales managers
developed primarily to prepare next year’s marketing campaign
solely based on sales of the previous year
a summary of product costs that influence pricing decisions

Answer: A

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

14) The revenues budget identifies:

expected cash flows for each product
actual sales from last year for each product
the expected level of sales for the company

the variance of sales from actual for each product Answer: C

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The number of units in the sales budget and the production budget may differ because of a change

in:

A) finished goods inventory levels B) overhead charges

C) direct material inventory levels D) sales returns and allowances Answer: A

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Production is primarily based on:

projected inventory levels
the revenues budget
the administrative costs budget

the capital expenditures budget Answer: B

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

17) Budgeted production equals:

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

budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory Answer: C

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The direct materials usage budget is based on: A) the units to be produced during a period

B) budgeted sales dollars

C) the predetermined factory overhead rate D) the amount of labor-hours worked Answer: A

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Direct material purchases equal:

production needs
production needs plus target ending inventories
production needs plus beginning inventories

production needs plus target ending inventories less beginning inventories Answer: D

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Individual budgeted amounts included in the manufacturing overhead costs budget are based on input from:

A) operating personnel
B) costs incurred in prior years

C) cost changes expected in the future D) All of these answers are correct. Answer: D

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The manufacturing overhead costs budget includes budgeted amounts for:

indirect materials
indirect manufacturing labor
depreciation on factory equipment

All of these answers are correct. Answer: D

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Budgeted manufacturing overhead costs include all types of factory expenses EXCEPT: A) fixed items such as depreciation of manufacturing machinery

B) variable items such as plant supplies

C) indirect labor such as the salary of the plant supervisor D) direct labor and direct materials

Answer: D

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The cost of goods sold budget requires all of the following budgets EXCEPT:

direct material cost budget
manufacturing overhead cost budget
distribution cost budget

direct manufacturing labor cost budget Answer: C

Diff: 2

Terms: master budget

Objective: 3

AACSB: Reflective thinking

Grandma’s Baskets Company expects to manufacture and sell 50,000 baskets in 2011 for $5 each. There are 4,000 baskets in beginning finished goods inventory with target ending inventory of 4,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2011 budgeted income statement?

A) $246,000 B) $250,000 C) $254,000 D) $258,000 Answer: B

Explanation: B) 50,000 × $5 = $250,000

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Basile Corporation has budgeted sales of 36,000 units, target ending finished goods inventory of

6,000 units, and beginning finished goods inventory of 1,800 units. How many units should be produced next year?

A) 43,800 units B) 40,200 units C) 31,800 units D) 36,000 units Answer: B

Explanation: B) 36,000 + 6,000 – 1,800 = 40,200 units

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

For next year, Manzo, Inc., has budgeted sales of 30,000 units, target ending finished goods inventory of 1,500 units, and beginning finished goods inventory of 900 units. All other inventories are zero. How many units should be produced next year?

A) 29,400 units B) 30,000 units C) 30,600 units D) 32,400 units Answer: C

Explanation: C) 30,000 + 1,500 – 900 = 30,600 units

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Wilcox Company has budgeted sales volume of 60,000 units and budgeted production of 54,000 units, while 10,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory?

A) 10,000 units B) 16,000 units C) 6,000 units D) 4,000 units Answer: D

Explanation: D) 10,000 + 54,000 – 60,000 =4,000

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Answer the following questions using the information below:

Kason, Inc., expects to sell 20,000 pool cues for $24.00 each. Direct materials costs are $4.00, direct manufacturing labor is $8.00, and manufacturing overhead is $1.60 per pool cue. The following inventory levels apply to 2011:

	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

On the 2012 budgeted income statement, what amount will be reported for sales? A) $492,000

B) $480,000 C) $624,000 D) $636,000 Answer: B

Explanation: B) 20,000 × $24 = $480,000

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

How many pool cues need to be produced in 2012?

22,500 cues
22,000 cues
20,500 cues

19,500 cues Answer: C

Explanation: C) 20,000 + 2,500 – 2,000 = 20,500 cues

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

On the 2012 budgeted income statement, what amount will be reported for cost of goods sold? A) $278,800

B) $272,000 C) $265,200 D) $306,000 Answer: B

Explanation: B) 20,000 × ($8.00 + $4.00 + $1.60) = $272,000

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

What are the 2012 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?

A) $0; $192,000; $38,400

B) $78,000; $156,000; $31,200 C) $160,000; $80,000; $32,000 D) $82,000; $164,000; $32,800 Answer: D

Explanation: D) 20,500 × $4.00 = $82,000; 20,500 × $8.00 = $164,000; 20,500 × $1.60 = $32,800

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Answer the following questions using the information below:

Elton, Inc., expects to sell 6,000 ceramic vases for $40 each. Direct materials costs are $4, direct manufacturing labor is $20, and manufacturing overhead is $6 per vase. The following inventory levels apply to 2011:

	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

On the 2012 budgeted income statement, what amount will be reported for sales? A) $244,000

B) $236,000 C) $280,000 D) $240,000 Answer: D

Explanation: D) 6,000 × $40 = $240,000

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

How many ceramic vases need to be produced in 2012?

5,900 vases
6,100 vases
7,000 vases

6,000 vases Answer: B

Explanation: B) 6,000 + 500 – 400 = 6,100 vases

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

On the 2012 budgeted income statement, what amount will be reported for cost of goods sold? A) $183,000

B) $210,000 C) $180,000 D) $177,000 Answer: C

Explanation: C) 6,000 × ($4 + $20 + $6) = $180,000

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

What are the 2012 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?

A) $24,400; $122,000; $36,600 B) $24,000; $120,000; $36,000 C) $4,000; $20,000; $6,000 D) $4,000; $0; $9,000 Answer: A

Explanation: A) 6,100 × $4 = $24,400; 6,100 × $20 = $122,000; 6,100 × $6 = $36,600

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

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

For January, budgeted gross margin is: A) $100,000

B) $140,000 C) $60,000 D) $50,000 Answer: C

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

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

For January, the amount budgeted for the nonmanufacturing costs budget is: A) $78,000

B) $10,000 C) $168,000 D) $18,000 Answer: D

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

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:

		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 projected operating income if direct materials costs of T-Shirts increase to $4.00 per unit and direct labor costs of Sweatshirts increase to $8.20 per unit.

$293,000
$90,000
$203,000

$473,000 Answer: A

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

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Answer the following questions using the information below:

Beat, Inc., expects to sell 60,000 athletic uniforms for $80 each in 2012. Direct materials costs are $20, direct manufacturing labor is $8, and manufacturing overhead is $6 for each uniform. The following inventory levels apply to 2011:

	Beginning inventory		Ending inventory
Direct materials		24,000 units	18,000 units
Work-in-process inventory		0 units	0 units
Finished goods inventory		12,000 units	10,000 units

How many uniforms need to be produced in 2012? A) 52,000 uniforms

B) 68,000 uniforms C) 60,000 uniforms D) 58,000 uniforms Answer: D

Explanation: D) 60,000 + 10,000 – 12,000 = 58,000 uniforms

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

What is the amount budgeted for direct material purchases in 2012? A) $1,040,000

B) $1,200,000 C) $1,160,000 D) $1,520,000 Answer: A

Explanation: A) (60,000 +10,000 – 12,000) units + 18,000 units – 24,000 units = Purchases 52,000 units × $20 = $1,040,000

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

What is the amount budgeted for cost of goods manufactured in 2012?

$2,040,000
$1,972,000
$2,312,000

$2,380,000 Answer: B

Explanation: B) (60,000 + 10,000 – 12,000) × ($20 + $8 + $6) = $1,972,000

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

What is the amount budgeted for cost of goods sold in 2012? A) $2,312,000

B) $1,972,000 C) $2,040,000 D) $4,800,000 Answer: C

Explanation: C) 60,000 × ($20 + $8 + $6) = $2,040,000

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Answer the following questions using the information below:

Furniture, Inc., estimates the following number of mattress sales for the first four months of 2012:

Month Sales

January 10,000

February 14,000

March 13,000

April 16,000

Finished goods inventory at the end of December is 3,000 units. Target ending finished goods inventory is 30% of the next month’s sales.

How many mattresses need to be produced in January 2012? A) 8,800 mattresses

B) 11,200 mattresses C) 13,000 mattresses D) 14,200 mattresses Answer: B

Explanation: B) 12,000 + (14,000 × 0.30) – 3,000 = 11,200 mattresses

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

How many mattresses need to be produced in the first quarter (January, February, March) of 2012? A) 37,000 mattresses

B) 38,800 mattresses C) 41,800 mattresses D) 44,800 mattresses Answer: B

Explanation: B) 10,000 + 14,000 + 13,000 + (16,000 × 0.30) -3,000 = 38,800 mattresses

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

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 40% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 30% of next month’s sales, stated at cost.

Purchases budgeted for January total: A) $130,800

B) $72,000 C) $69,840 D) $74,160 Answer: C

Explanation: C) ($120,000 × 0.6) + ($108,000 × 0.6 × 0.3) – $21,600 = $69,840

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Purchases budgeted for February total:

$69,120
$60,480
$115,200

$64,800 Answer: A

Explanation: A) ($108,000 × 0.6) + ($132,000 × 0.6 × 0.3) – ($108,000 × 0.6 × 0.3) = $69,120

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected cost of direct labor for Bigger is:

A) $224,000 B) $560,000 C) $616,000 D) $784,000 Answer: D

Explanation: D) 10,000 + 2,000 – 800 = 11,200

(11,200 × 1 × $20) + (11,200 × 2 × $25) = $784,000 Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected number of hours of direct labor for Bigger is:

A) 8,800 hours of molding; 17,600 hours of polishing B) 11,200 hours of molding; 22,400 hours of polishing C) 17,600 hours of molding; 8,800 hours of polishing D) 22,400 hours of molding; 11,200 hours of polishing Answer: B

Explanation: B) 10,000 + 2,000 – 800 = 11,200

(11,200 × 1) = 11,200 hours of molding; (11,200 × 2) = 22,400 hours of polishing Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Claire Manufacturing expects to produce and sell 6,000 units of Big, its only product, for $20 each. Direct material cost is $2 per unit, direct labor cost is $8 per unit, and variable manufacturing overhead is $3 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: A) $13.00 per unit

B) $14.00 per unit C) $17.00 per unit D) $18.50 per unit Answer: C

Explanation: C) $2 + $8 +$3 +($24,000 / 6,000) = $17

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

The use of activity-based budgeting is growing because of:

the increased use of activity-based costing
the increased use of kaizen costing
increases in work-in-process inventory

increases in direct materials inventory Answer: A

Diff: 1

Terms: activity-based budgeting

Objective: 3

AACSB: Analytical skills

Activity-based budgeting would separately estimate: 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. Answer: C

Diff: 2

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based-costing analysis makes no distinction between: 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 Answer: B

Diff: 3

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting makes it easier to: A) determine a rolling budget

B) prepare pro forma financial statements C) determine how to reduce costs

D) execute a financial budget Answer: C

Diff: 3

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting does NOT require: A) knowledge of the organization’s activities

B) specialized expertise in financial management and control C) knowledge about how activities affect costs

D) the ability to see how the organization’s different activities fit together Answer: B

Diff: 3

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting:

uses one cost driver such as direct labor-hours
uses only output-based cost drivers such as units sold
focuses on activities necessary to produce and sell products and services
classifies costs by functional area within the value chain

Answer: C

Diff: 1

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting includes all the following steps EXCEPT: A) determining demands for activities from sales and production targets B) computing the cost of performing activities

C) determining a separate cost-driver rate for each department

D) describing the budget as costs of activities rather than costs of functions Answer: C

Diff: 2

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

A rolling budget is the same as a continuous budget.

Answer: TRUE

Diff: 2

Terms: rolling budget

Objective: 3

AACSB: Reflective thinking

The cash budget and the budgeted income statement are necessary to prepare the budgeted balance sheet and budgeted statement of cash flows.

Answer: TRUE

Diff: 2

Terms: master budget

Objective: 3

AACSB: Reflective thinking

Preparation of the budgeted statement of cash flows is the final step in preparing the operating budget.

Answer: FALSE

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

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The sales forecast should primarily be based on statistical analysis with secondary input from sales managers and sales representatives.

Answer: FALSE

Explanation: The sales forecast should be primarily based on input from sales managers and sales representatives with secondary input from statistical analysis.

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The usual starting point in budgeting is to forecast net income.

Answer: FALSE

Explanation: The usual starting point in budgeting is to forecast sales demand and revenues.

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The revenues budget should be based on the production budget. Answer: FALSE

Explanation: The production budget should be based on the revenues budget.

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The financial budget is that part of the master budget that includes the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.

Answer: TRUE

Diff: 1

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Since fixed manufacturing overhead is fixed, it is NOT normally included in the operating budget. Answer: FALSE

Explanation: Fixed manufacturing is normally included in the operating budget.

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The manufacturing labor budget depends on wage rates, production methods, and hiring plans. Answer: TRUE

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

The manufacturing labor budget depends on wage rates, production methods, and hiring plans. Answer: TRUE

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

If inventoriable costs in the operating budget are going to be in accordance with Generally Accepted Accounting Principles (GAAP), they include only variable manufacturing costs.

Answer: FALSE

Explanation: If inventoriable costs in the operating budget are going to be in accordance with Generally Accepted Accounting Principles (GAAP), they include variable and fixed manufacturing costs.

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced, units sold, or revenues).

Answer: TRUE

Diff: 2

Terms: activity-based budgeting

Objective: 3

AACSB: Communication

Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.

Answer: TRUE

Diff: 3

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting (ABB) focuses on the budgeting cost of activities necessary to produce and sell products and services.

Answer: TRUE

Diff: 1

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.

Answer: TRUE

Diff: 2

Terms: activity-based budgeting

Objective: 3

AACSB: Reflective thinking

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.

Capital expenditures budget
Cost of goods sold budget
Revenues budget
Budgeted statement of cash flows
Distribution costs budget
Marketing costs budget
Cash budget
Direct materials cost budget
Budgeted balance sheet
Budgeted income statement

Answer:
1.	F	6.	O
2.	O	7.	F
3.	O	8.	O
4.	F	9.	F
5.	O	10.	O
Diff: 3
Terms: master budget
Objective:		3
AACSB: Analytical skills

73) Nittany Company sells three products with the following seasonal sales pattern:

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

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

Product		Units		Selling Price
A	50,000		$ 8
B	125,000		20
C	62,500		12

Required:

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

Answer:			First		Second		Third		Fourth
		Quarter			Quarter		Quarter		Quarter		Total
Product A:
Sales (units)			20,000	15,000		10,000		5,000		50,000
Price			× $8	× $8		× $8		× $8		× $8
Sales	$160,000			$120,000		$80,000		$40,000		$400,000
Product B:
Sales (units)			37,500	25,000		25,000		37,500		125,000
Price			× $20	× $20		× $20		× $20		× $20
Sales	$750,000			$500,000		$500,000		$750,000		$2,500,000
Product C:
Sales (units)			6,250	25,000		25,000		6,250		62,500
Price			× $12	× $12		× $12		× $12		× $12
Sales			$75,000	$300,000		$300,000		$75,000		$750,000
Total	$985,000			$920,000		$880,000		$865,000		$3,650,000
Diff: 2
Terms: operating budget
Objective:	3
AACSB: Analytical skills

74) Lubriderm Corporation has the following budgeted sales for the next six-month period:

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:

Prepare production budgets in units for July, August, and September.

Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

Answer:
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

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

Diff: 3

Terms: operating budget

Objective: 3

AACSB: Analytical skills

75) Perry Company has the following information:

Month	Budgeted Sales
March	$100,000
April	106,000
May	102,000
June	109,000
July	105,000

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.
Answer:		April		May		June			Total
Desired ending inventory	$ 18,360		$ 19,620		$ 18,900		$ 18,900
Plus COGS		63,600		61,200		65,400		190,200
Total needed	81,960		80,820		84,300		209,100
Less beginning inventory		19,080		18,360		19,620			19,080
Total purchases	$62,880		$62,460		$64,680		$ 190,020
Diff: 2
Diff: 2
Terms: operating budget
Objective: 3
AACSB: Analytical skills

76) Favata Company has the following information:

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.
Answer:		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
Diff: 2
Diff: 2
Terms: operating budget
Objective: 3

AACSB: Analytical skills

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 $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired.

Required:

Determine the quantity of framing, glass, and backing that is to be purchased during August.

Determine the total costs of direct materials for August purchases.

Answer:

Framing

Glass

Backing

Desired ending inventory*

2,250

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

Purchases planned

40,750

10,250

20,250

Cost of direct materials:

Framing (40,750 × $0.30)

$12,225.00

Glass (10,250 × $6.00)

61,500.00

Backing (20,250 × $2.25)

45,562.50

Total

$119,287.50

1,500 × 1.5

= 2,250 framing

500 × 1.5

= 750 glass

500 × 1.5

= 750 backing

**10,000 × 4 = 40,000 framing

10,000 × 1 = 10,000 glass

10,000 × 2 = 20,000 backing

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

78) Christy Enterprises reports the year-end information from 2011 as follows:

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 2012 budget. In 2012 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 2012.

Answer:	Christy Enterprises
	Budgeted Income Statement
	For the Year 2012
Sales (95,000 × $5.50)		$522,500
Cost of goods sold (2012 sales × 62%)			323,950
Gross profit		198,550
Less: Operating expenses [($1.00 × 95,000] + $20,000)			115,000
Net income		$ 83,550
Diff: 2
Diff: 2
Terms: operating budget
Objective:	3

AACSB: Analytical skills

Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labor operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labor rate for molders is $20 per molding hour, and the direct labor rate for polishers is $25 per polishing hour.

Required:

Prepare a direct labor budget in hours and dollars for each product.

Answer: Desired Production:
				Big		Bigger				Total
Expected sales	20,000				10,000
Desired ending inventory			4,000				2,000
Production needs	24,000				12,000
Less: beginning inventory			1,000					800
Desired production		23,000				11,200

Direct Labor Budget for Big:	Molding				Polishing
Desired Production of Big	23,000				23,000
Hours of Labor Required per unit	1				1
Total Hours of Labor Required	23,000				23,000
Direct Labor Rate				$20				$25
Cost of Direct Labor for Big	$460,000				$575,000				$1,035,000
Direct Labor Budget for Bigger:	Molding				Polishing
Desired Production of Bigger	11,200				11,200
Hours of Labor Required per unit	1				2
Total Hours of Labor Required	11,200				22,400
Direct Labor Rate				$20				$25
Cost of Direct Labor for Bigger	$224,000				$560,000					$784,000
Total Direct Labor Costs	$684,000				$1,135,000				$1,819,000
Diff: 2
Diff: 2

Terms: operating budget

Objective: 3

AACSB: Analytical skills

Describe operating and financial budgets and give at least two examples of each discussed in the textbook.

Answer: 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.

Diff: 2

Terms: operating budget, financial budget

Objective: 3

AACSB: Reflective thinking

Discuss the importance of the sales forecast and items that influence its accuracy. Answer: 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.

Diff: 2

Terms: operating budget

Objective: 3

AACSB: Reflective thinking

Objective 6.4

1) Financial planning models:

are not used in the budgeting process
are not useful for sensitivity analysis
are mathematical representations of the relationships affecting the budget process
are used for nonfinancial aspects of budgeting

Answer: C

Diff: 2

Terms: financial planning models

Objective: 4

AACSB: Reflective thinking

Financial planning software packages assist management with: 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 Answer: C

Diff: 2

Terms: financial planning models

Objective: 4

AACSB: Use of Information Technology

________ uses a “what-if” technique that examines how results will change if the originally predicted data changes.

A) A sales forecast
B) A sensitivity analysis

C) A pro forma financial statement D) The statement of cash flows Answer: B

Diff: 1

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

When performing a sensitivity analysis, if the selling price per unit is increased, then the:

per unit fixed administrative costs will increase
per unit direct materials purchase price will increase
total volume of sales will increase

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

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

Sensitivity analysis is useful for examining all of the following EXCEPT: A) changes in employee satisfaction

B) changes in direct material cost C) changes in sales price

D) changes in direct labor cost Answer: A

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

Answer the following questions using the information below:

Kramer Enterprises reports year-end information from 2010 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 2011 budget. In 2011 the company would like to increase selling prices by 8%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

What is budgeted sales for 2011? A) $1,036,800

B) $1,066,666 C) $933,120 D) $864,000 Answer: C

Explanation: C) $960,000 × 1.08 × 0.90 = $933,120

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

What is budgeted cost of goods sold for 2011? A) $622,080

B) $576,000 C) $691,200 D) $640,000 Answer: B

Explanation: B) $640,000 × 0.90 = $576,000

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

Should Kramer increase the selling price in 2011?

A) Yes, because operating income is increased for 2011. B) Yes, because sales revenue is increased for 2011.

C) No, because sales volume decreases for 2011. D) No, because gross margin decreases for 2011. Answer: A

Explanation: A) $933,120 – $576,000 – 260,000 = $97,120; Yes, because it would result in an increase in operating income compared to 2010.

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

Answer the following questions using the information below:

Brent Enterprises reports the year-end information from 2011 as follows:

Sales (35,000 units)	$280,000
Cost of goods sold		105,000
Gross margin	175,000
Operating expenses		100,000
Operating income	$ 75,000

Brent is developing the 2012 budget. In 2012 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

What is budgeted sales for 2012? A) $291,200

B) $262,080 C) $252,000 D) $280,000 Answer: B

Explanation: B) $280,000 × 1.04 × 0.90 = $262,080

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

What is budgeted cost of goods sold for 2012? A) $94,500

B) $98,280 C) $109,200 D) $105,000 Answer: A

Explanation: A) $105,000 × 0.90 = $94,500

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

Should Brent increase the selling price in 2012? A) Yes, because sales revenue is increased for 2012.

B) Yes, because operating income is increased for 2012. C) No, because sales volume decreases for 2012.

D) No, because gross margin decreases for 2012. Answer: D

Explanation: D) $262,080 – $94,500 = $167,580 gross margin – $100,000 = $67,580 operating income. No, because there would be a decrease in gross margin and operating income compared to 2011.

Diff: 3

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

If budgeted amounts change, sensitivity analysis can be used to examine changes in the budgeted results.

Answer: TRUE

Diff: 2

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

Computer-based financial planning models are mathematical statements of the interrelationships among operating activities, financial activities, and other factors that affect the budget.

Answer: TRUE

Diff: 1

Terms: financial planning models

Objective: 4

AACSB: Use of Information Technology

Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis.

Answer: FALSE

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

Diff: 2

Terms: financial planning models, sensitivity analysis

Objective: 4

AACSB: Use of Information Technology

Sensitivity analysis is a “what-if” technique that examines how a result will change if the original prediction or assumptions change.

Answer: TRUE

Diff: 2

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

If we increase the selling price of our product, we should probably expect an increase in the number of these products sold.

Answer: FALSE

Explanation: If we increase the selling price of our product, we should probably expect a decrease in the number of these products sold.

Diff: 2

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

If we decrease the selling price of our product, we can always expect a decrease in total revenue. Answer: FALSE

Explanation: If we decrease the selling price of our product, we may experience either an increase in total revenue or a decrease in total revenue due to the uncertain effect of the price decrease on the quantity demanded.

Diff: 2

Terms: sensitivity analysis

Objective: 4

AACSB: Analytical skills

Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice.

Answer: 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. Diff: 2

Terms: sensitivity analysis

Objective: 4

AACSB: Reflective thinking

Objective 6.5

1) Responsibility accounting:

is a system that measures the plans, budgets, actions, and actual results of a responsibility center
is an arrangement of lines of responsibility within the organization
explicitly incorporates continuous improvement anticipated during the budget period
examines how a result will change if the original plan is not achieved

Answer: A

Diff: 2

Terms: responsibility accounting

Objective: 5

AACSB: Reflective thinking

Responsibility centers include all of the following EXCEPT: A) cost

B) revenue C) customers D) investment Answer: C Diff: 2

Terms: responsibility center

Objective: 5

AACSB: Reflective thinking

Variances between actual and budgeted amounts can be used to: A) alert managers to potential problems and available opportunities

B) inform managers about how well the company has implemented its strategies C) signal that company strategies are ineffective

D) All of these answers are correct. Answer: D

Diff: 2

Terms: responsibility accounting

Objective: 5

AACSB: Reflective thinking

A maintenance manager is most likely responsible for a(n):

revenue center
investment center
cost center

profit center Answer: C Diff: 1

Terms: cost center

Objective: 5

AACSB: Reflective thinking

The regional sales office manager of a national firm is most likely responsible for a(n): A) revenue center

B) investment center C) cost center

D) profit center Answer: A Diff: 1

Terms: revenue center

Objective: 5

AACSB: Multiculturalism and diversity

A regional manager of a restaurant chain in charge of finding additional locations for expansion is most likely responsible for a(n):

A) revenue center B) investment center C) cost center

D) profit center Answer: B Diff: 1

Terms: investment center

Objective: 5

AACSB: Analytical skills

The manager of a hobby store that is part of a chain of stores is most likely responsible for a(n): A) revenue center

B) investment center C) cost center

D) profit center Answer: D Diff: 1

Terms: profit center

Objective: 5

AACSB: Analytical skills

A manager of a revenue center is responsible for all of the following EXCEPT:

service quality and units sold
the acquisition cost of the product or service sold
price, product mix, and promotional activities
investments of excess cash

Answer: B

Diff: 2

Terms: revenue center

Objective: 5

AACSB: Reflective thinking

A manager of a profit center is responsible for all of the following EXCEPT: A) sales revenue

B) the cost of merchandise purchased for resale C) expanding into new geographic areas

D) selling and marketing costs Answer: C

Diff: 2

Terms: profit center

Objective: 5

AACSB: Reflective thinking

A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time.

A) controlled B) influenced C) segregated D) excluded Answer: B Diff: 2

Terms: controllable cost

Objective: 5

AACSB: Reflective thinking

A responsibility accounting system could:

exclude all uncontrollable costs
exclude controllable costs
segregate uncontrollable costs from controllable costs
Both A and C are correct.

Answer: D

Diff: 2

Terms: responsibility accounting

Objective: 5

AACSB: Analytical skills

12) Which statement about controllability is NOT true:

few costs are clearly under the sole influence of one manager
holds managers responsible for uncontrollable costs
with a long enough time span, all costs will come under somebody’s control

describes the degree of influence that managers have over a particular item Answer: B

Diff: 2

Terms: controllable cost

Objective: 5

AACSB: Reflective thinking

Controllability may be difficult to pinpoint because of all the following EXCEPT: A) some costs depend on market conditions

B) current managers may have inherited inefficiencies of a previous manager C) the current use of stretch or challenge targets

D) few costs are under the sole influence of one manager Answer: C

Diff: 2

Terms: controllable cost

Objective: 5

AACSB: Analytical skills

Responsibility accounting:

emphasizes controllability
focuses on whom should be asked about the information
attempts to assign blame for problems to a specific manager
All of these answers are correct.

Answer: B

Diff: 3

Terms: responsibility accounting

Objective: 5

AACSB: Reflective thinking

A primary consideration in assigning a cost to a responsibility center is: 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 Answer: C

Diff: 3

Terms: responsibility center

Objective: 5

AACSB: Reflective thinking

A responsibility center is a part, segment, or subunit of an organization, whose manager is accountable for a specified set of activities.

Answer: TRUE

Diff: 1

Terms: responsibility center

Objective: 5

AACSB: Reflective thinking

Each manager, regardless of level, is in charge of a responsibility center.

Answer: TRUE

Diff: 2

Terms: responsibility center

Objective: 5

AACSB: Reflective thinking

In a cost center, a manager is responsible for investments, revenues, and costs. Answer: FALSE

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

Diff: 1

Terms: cost center

Objective: 5

AACSB: Reflective thinking

A packaging department is most likely a profit center.

Answer: FALSE

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

Diff: 2

Terms: profit center

Objective: 5

AACSB: Analytical skills

Variances between actual and budgeted amounts inform management about performance relative to the budget.

Answer: TRUE

Diff: 1

Terms: responsibility accounting

Objective: 5

AACSB: Communication

An organization structure is an arrangement of lines of responsibility within the entity.

Answer: TRUE

Diff: 1

Terms: organization structure

Objective: 5

AACSB: Communication

A responsibility center can be structured to promote better alignment of individual and company goals.

Answer: TRUE

Diff: 2

Terms: responsibility center

Objective: 5

AACSB: Communication

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.

Answer: 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.

Diff: 2

Terms: revenue center, profit center

Objective: 5

AACSB: Reflective thinking

Responsibility accounting focuses on control, NOT on information and knowledge. Answer: FALSE

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

Diff: 2

Terms: responsibility accounting

Objective: 5

AACSB: Communication

The fundamental purpose of responsibility accounting is to fix blame when budgets are NOT achieved.

Answer: FALSE

Explanation: The fundamental purpose of responsibility accounting is to gather information when budgets are not achieved.

Diff: 2

Terms: responsibility accounting

Objective: 5

AACSB: Communication

Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?

Answer: 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.

Diff: 2

Terms: controllable cost

Objective: 5

AACSB: Reflective thinking

Objective 6.6

The Japanese use the term kaizen when referring to: A) scarce resources

B) pro forma financial statements C) continuous improvement

D) the sales forecast Answer: C

Diff: 1

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Kaizen refers to incorporating cost reductions:

in each successive budgeting period
in each successive sales forecast
in all customer service centers

All of these answers are correct. Answer: A

Diff: 2

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

All of the following are encouraged with kaizen budgeting EXCEPT: A) better interactions with suppliers

B) large discontinuous improvements C) cost reductions during manufacturing D) systematic monthly cost reductions Answer: B

Diff: 3

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Kaizen budgeting involves:

large cost reductions
management directed improvements
continual small cost reductions

continual small revenue increases Answer: C

Diff: 3

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Kaizen budgeting is driven by: A) management

B) employees C) stockholders D) creditors Answer: B Diff: 3

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Answer the following questions using the information below:

Sherry and John Enterprises are using the kaizen approach to budgeting for 2011. The budgeted income statement for January 2011 is as follows:

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

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

What is budgeted cost of goods sold for March 2011? A) $588,060

B) $592,000 C) $600,000 D) $594,000 Answer: A

Explanation: A) $600,000 × 0.99 × 0.99 = $588.060

Diff: 3

Terms: kaizen budgeting

Objective: 6

AACSB: Analytical skills

What is budgeted gross margin for March 2011?

$392,040
$396,000
$408,040

$411,940 Answer: D

Explanation: D) $1,000,000 – ($600,000 × .99 × .99) = $411,940

Diff: 3

Terms: kaizen budgeting

Objective: 6

AACSB: Analytical skills

Building in budgetary slack includes: A) overestimating budgeted revenues B) underestimating budgeted costs

C) making budgeted targets more easily achievable D) All of these answers are correct.

Answer: C

Diff: 2

Terms: budgetary slack

Objective: 6

AACSB: Reflective thinking

To reduce budgetary slack management may: 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 Answer: B

Diff: 3

Terms: budgetary slack

Objective: 6

AACSB: Analytical skills

A stretch budget is a budget that:

crosses more than one responsibility center
represents a challenging, but achievable level of performance
is impossible to implement in a cost center

is designed to include the effects of exchange rate fluctuations Answer: B

Diff: 2

Terms: responsibility accounting

Objective: 6

AACSB: Reflective thinking

Activity-based budgeting and kaizen budgeting are really equivalent in meaning. Answer: FALSE

Explanation: Activity-based budgeting and kaizen budgeting are not equivalent in meaning.

Diff: 2

Terms: activity-based budgeting, kaizen budgeting

Objective: 6

AACSB: Reflective thinking

Kaizen budgeting incorporates continuous improvement into budgeted amounts. Answer: TRUE

Diff: 1

Terms: sensitivity analysis, kaizen budgeting

Objective: 6

AACSB: Reflective thinking

Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better.

Answer: TRUE

Diff: 1

Terms: kaizen budgeting

Objective: 6

AACSB: Reflective thinking

The Japanese use kaizen to mean financing alternatives.

Answer: FALSE

Explanation: The Japanese use kaizen to mean continuous improvement.

Diff: 1

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Kaizen budgeting does NOT make sense for cost centers. Answer: FALSE

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

Diff: 2

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

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

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

Diff: 1

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation.

Answer: FALSE

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

Diff: 2

Terms: kaizen budgeting

Objective: 6

AACSB: Multiculturalism and diversity

Human factors are crucial parts of budgeting.

Answer: TRUE

Diff: 2

Terms: responsibility accounting

Objective: 6

AACSB: Reflective thinking

Budgetary slack provides management with a hedge against planned adverse circumstances. Answer: FALSE

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

Diff: 2

Terms: responsibility accounting

Objective: 6

AACSB: Communication

Most costs can be easily controlled because they are under the sole influence of one manager. Answer: FALSE

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

Diff: 3

Terms: controllable cost

Objective: 6

AACSB: Reflective thinking

Performance reports of responsibility centers may include uncontrollable items to influence behavior that is in alignment with corporate strategy.

Answer: TRUE

Diff: 2

Terms: controllable cost

Objective: 6

AACSB: Reflective thinking

When the operating budget is used as a control device, managers are less likely to be motivated to budget higher sales than actually anticipated.

Answer: TRUE

Diff: 3

Terms: operating budget, budgetary slack

Objective: 6

AACSB: Ethical reasoning

Budgeting slack is most likely to occur when a firm uses the budget only as a planning device and NOT for control.

Answer: FALSE

Explanation: Budgeting slack is most likely to occur when a firm uses the budget for control.

Diff: 3

Terms: controllable cost, budgetary slack

Objective: 6

AACSB: Reflective thinking

If a cost is considered controllable, it indicates that all aspects of the cost are under the control of the manager of the responsibility center to which that cost is assigned.

Answer: FALSE

Explanation: A controllable cost is any cost that is primarily subject to the influence of a given responsibility manager.

Diff: 2

Terms: controllable cost

Objective: 6

AACSB: Reflective thinking

To create greater commitment to the budget, lower-level managers should participate in creating the budget.

Answer: TRUE

Diff: 3

Terms: responsibility accounting

Objective: 6

AACSB: Ethical reasoning

Allscott Company is developing its budgets for 2012 and, for the first time, will use the kaizen approach. The initial 2012 income statement, based on static data from 2011, is as follows:

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 2012 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 20X5.

Answer: 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
Diff: 2
Diff: 2
Terms: kaizen budgeting, sensitivity analysis
Objective: 4, 6
AACSB: Analytical skills

Steve Corporation is using the kaizen approach to budgeting for 2011. The budgeted income statement for January 2011 is as follows:

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 2011.

Answer: 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
Diff: 2

Terms: kaizen budgeting

Objective: 6

AACSB: Analytical skills

28) Describe the concept of kaizen budgeting.

Answer: 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.

Diff: 2

Terms: kaizen budgeting

Objective: 6

AACSB: Reflective thinking

29) Describe some of the drawbacks of using the operating budget as a control device.

Answer: 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. Diff: 2

Terms: operating budget

Objective: 6

AACSB: Reflective thinking

What is budget 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?

Answer: Budget 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.

Diff: 2

Terms: budgetary slack

Objective: 6

AACSB: Reflective thinking

How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic?

Answer: 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.

Diff: 2

Terms: responsibility accounting

Objective: 6

AACSB: Reflective thinking

Objective 6.6

Multinational budgeting is more complex than budgeting in a domestic environment due to the possibility of:

A) exchange rate fluctuations

B) sophisticated techniques used by multinationals such as forward, future, and options contracts C) different political, legal, and economic environments faced by multinationals

D) All of these answers are correct. Answer: D

Diff: 2

Terms: responsibility accounting

Objective: 7

AACSB: Multiculturalism and diversity

Multinational budgeting is useful for everything EXCEPT:

comparing actual to budget in volatile conditions
helping managers learn and adapt to changing conditions
determining the impact of currency fluctuations

determining how well managers adapt to uncertain environments Answer: A

Diff: 2

Terms: responsibility accounting

Objective: 7

AACSB: Multiculturalism and diversity

Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations.

Answer: TRUE

Diff: 2

Terms: responsibility accounting

Objective: 7

AACSB: Multiculturalism and diversity

The possibility of exchange rate fluctuations does NOT influence the budgeting procedures in a multinational corporation.

Answer: FALSE

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

Diff: 2

Terms: responsibility accounting

Objective: 7

AACSB: Multiculturalism and diversity

Because of the possibility of exchange rate fluctuations, managers of multinational corporations should ignore subjective factors in their performance evaluations.

Answer: FALSE

Explanation: The possibility of exchange rate fluctuations increases the importance of subjective factors in performance evaluations of multinational corporations.

Diff: 2

Terms: responsibility accounting

Objective: 7

AACSB: Multiculturalism and diversity

Objective 6.A

To prepare the cash budget, all of the following budgets are required EXCEPT: A) capital expenditures budget

B) cost of goods sold budget C) budgeted balance sheet D) revenue budget Answer: C

Diff: 2

Terms: cash budget

Objective: A

AACSB: Reflective thinking

Financial analysts use the projected cash flow statement to do all of the following EXCEPT: A) plan for when excess cash is generated

B) plan for short-term cash investments

C) project cash shortages and plan a strategy to deal with the shortages D) project depreciation expense

Answer: D

Diff: 2

Terms: cash budget

Objective: A

AACSB: Reflective thinking

The cash flow statement does NOT include: A) cash inflows from the collection of receivables

B) cash outflows paid toward raw material purchases C) all sales revenues

D) interest paid and received Answer: C

Diff: 2

Terms: cash budget

Objective: A

AACSB: Reflective thinking

The cash budget is a schedule of expected cash receipts and disbursements that: 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 Answer: D

Diff: 1

Terms: cash budget

Objective: A

AACSB: Reflective thinking

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.

How much cash will be collected from customers in March?

$94,000
$86,000
$100,000

None of these answers are correct. Answer: B

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

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

How much cash will be paid to suppliers in March? A) $46,400

B) $56,000 C) $88,000

D) None of these answers are correct. Answer: A

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

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

How much cash will be disbursed in total in March? A) $42,000

B) $50,000 C) $88,400 D) $96,400 Answer: C

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

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

What is the ending cash balance for March?

($50,000)
$6,000
$5,600

$6,600 Answer: D

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

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

Answer the following questions using the information below:

Monetary Company has the following sales budget for the last six months of 2011:

July	$200,000	October	$ 180,000
August	160,000	November	200,000
September	220,000	December	188,000

Historically, the cash collection of sales 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.

Cash collections for September are: A) $143,000

B) $173,400 C) $199,000 D) $204,000 Answer: C

Explanation: C) ($220,000 × 0.65) + ($160,000 × 0.25) + ($200,000 × 0.08) = $199,000

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

What is the ending balance of accounts receivable for September, assuming uncollectible balances are written off during the second month following the sale?

A) $199,000 B) $97,000 C) $89,800 D) $93,000 Answer: D

Explanation: D) ($220,000 × 0.35) + ($160,000 × 0.10) = $93,000

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

Cash collections for October are:

$117,000
$184,800
$199,000

$176,400 Answer: B

Explanation: B) ($180,000 × 0.65) + ($220,000 × 0.25) + ($160,000 × 0.08) = $184,800

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

Answer the following questions using the information below:

Bear Company has the following information:

Month		Budgeted Purchases
January		$26,800
February		29,000
March		30,520
April		29,480
May		27,680

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 month after purchase

What is the expected balance in Accounts Payable as of March 31? A) $39,068

B) $18,312 C) $2,900 D) $30,520 Answer: A

Explanation: A) ($30,520 × 0.9) + ($29,000 × 0.4) = $39,068

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

What is the expected balance in Accounts Payable as of April 30? A) $26,532

B) $38,740 C) $12,208 D) $17,688 Answer: B

Explanation: B) ($29,480 × 0.9) + ($30,520 × 0.4) = $38,740

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

What is the expected Accounts Payable balance as of May 31? A) $11,792

B) $24,912 C) $36,704 D) $2,948 Answer: C

Explanation: C) ($27,680 × 0.9) + ($29,480 × 0.4) = $36,704

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

Answer the following questions using the information below:

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

Budgeted sales for January $100,000 and February $200,000.
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 $60,000. (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).

For January, budgeted cash collections are:

$20,000
$60,000
$80,000

None of these answers are correct. Answer: C

Explanation: C) $20,000 + ($100,000 × 60%) = $80,000

Diff: 3

Terms: cash budget

Objective: A

AACSB: Analytical skills

At the end of January, budgeted accounts receivable is: A) $20,000

B) $40,000 C) $60,000

D) None of these answers are correct. Answer: B

Explanation: B) $100,000 × 40% = $40,000

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

For January, budgeted cost of goods sold is: A) $20,000

B) $30,000 C) $40,000

D) None of these answers are correct. Answer: D

Explanation: D) $100,000 × 70% = $70,000

Diff: 3

Terms: cash budget

Objective: A

AACSB: Analytical skills

For January, budgeted net income is:

$20,000
$30,000
$40,000

None of these answers are correct. Answer: A

Explanation: A) $100,000 – $70,000 – $10,000 = $20,000

Diff: 3

Terms: cash budget

Objective: A

AACSB: Analytical skills

For January, budgeted cash payments for purchases are: A) $14,000

B) $70,000 C) $60,000

D) None of these answers are correct. Answer: C

Explanation: C) Accounts payable, $60,000 as stated

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

At the end of January, budgeted ending inventory is: A) $20,000

B) $28,000 C) $40,000

D) None of these answers are correct. Answer: B

Explanation: B) $200,000 × 70% × 20% = $28,000

Diff: 3

Terms: cash budget

Objective: A

AACSB: Analytical skills

A key use of sensitivity analysis is for cash-flow budgeting. Answer: TRUE

Diff: 1

Terms: sensitivity analysis, cash budget

Objective: A

AACSB: Analytical skills

The self-liquidating cycle is the movement from cash to inventories to receivables and back to cash. Answer: TRUE

Diff: 1

Terms: cash budget

Objective: A

AACSB: Reflective thinking

Russell Company has the following projected account balances for June 30, 2011:

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 & 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:

Prepare a budgeted income statement for June 2011
Prepare a budgeted balance sheet as of June 30, 2011.

Answer:
a.	Russell Company
	Budgeted Income Statement
	For the Month of June 2011
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, 2011
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 Diff: 2

Terms: operating budget

Objective: 3, A

AACSB: Analytical skills

24) Duffy Corporation has prepared the following sales budget:

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.

Answer:			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
Diff: 2
Diff: 2
Terms: cash budget
Objective: A
AACSB: Analytical skills

25) The following information pertains to Amigo Corporation:

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:

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

Answer:

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

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

Diff: 2

Terms: cash budget

Objective: A

AACSB: Analytical skills

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