CHAPTER 13: BUDGETING AND STANDARD COST SYSTEMS
1. A formal written statement of management’s plans for the future, expressed in financial terms,
is called a budget.
a. True
b. False
2. Budgets are normally used by both profit-making businesses and nonprofit organizations.
a. True
b. False
3. When budget goals are set too tight, the budget becomes less effective for planning and
controlling operations.
a. True
b. False
4. Employees view budgeting more positively when goals are established for them by senior
management.
a. True
b. False
5. A budget procedure that provides for the maintenance at all times of a twelve-month
projection into the future is called continuous budgeting.
a. True
b. False
6. The budget procedure that requires all levels of management to start from zero in estimating
sales, production, and other operating data is called zero-based budgeting.
a. True
b. False
7. Goal conflict can be avoided if budget goals are carefully designed for consistency across all
areas of the organization.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
8. Once a static budget has been determined, it is changed regularly as the underlying activity
changes.
a. True
b. False
9. Budgetary slack can be avoided if lower and mid-level managers are requested to support all
of their spending requirements with specific operational plans.
a. True
b. False
10. Flexible budgeting builds the effect of changes in level of activity into the budget system.
a. True
b. False
11. In preparing flexible budgets, the first step is to identify the fixed and variable components of
the various costs and expenses being budgeted.
a. True
b. False
12. The master budget of a small manufacturer would normally include all necessary component
budgets except the capital expenditures budget.
a. True
b. False
13. The master budget of a small manufacturer would normally include all component budgets
that impact the financial statements.
a. True
b. False
14. The first budget to be prepared is usually the production budget.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
15. The first budget to be prepared is usually the sales budget.
a. True
b. False
16. The budgeted volume of production is based on the sum of (1) the expected sales volume and
(2) the desired ending inventory, less (3) the estimated beginning inventory.
a. True
b. False
17. If Division Inc. expects to sell 200,000 units in 2015, desires ending inventory of 24,000 units,
and has 22,000 units on hand as of the beginning of the year, the budgeted volume of
production for 2015 is 198,000 units.
a. True
b. False
18. If Division Inc. expects to sell 300,000 units in 2015, desires ending inventory of 22,000 units,
and has 24,000 units on hand as of the beginning of the year, the budgeted volume of
production for 2015 is 298,000 units.
a. True
b. False
19. The budgeted volume of production is normally computed as the sum of (1) the expected sales
volume and (2) the desired ending inventory.
a. True
b. False
20. The budgeted direct materials purchases are based on the sum of (1) the materials needed for
production and (2) the desired ending materials inventory, less (3) the estimated beginning
materials inventory.
a. True
b. False
21. The budgeted direct materials purchases are normally computed as the sum of (1) the materials
for production and (2) the desired beginning inventory.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
22. The production budget is the starting point for preparation of the direct labor cost budget.
a. True
b. False
23. The sales budget is the starting point for preparation of the direct labor cost budget.
a. True
b. False
24. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the
factory overhead cost budget.
a. True
b. False
25. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the
selling and administrative expenses budget.
a. True
b. False
26. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost
budget.
a. True
b. False
27. The capital expenditure budget summarizes future plans for acquisition of fixed assets.
a. True
b. False
28. The cash budget summarizes future plans for acquisition of fixed assets.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
29. The cash budget presents the expected inflow and outflow of cash for a specified period of
time.
a. True
b. False
30. A variable cost system is an accounting system where standards are set for each manufacturing
cost element.
a. True
b. False
31. Standard costs serve as a device for measuring efficiency.
a. True
b. False
32. Normally standard costs should be revised when labor rates change to incorporate new union
contracts.
a. True
b. False
33. Standard costs should be revised when they differ from actual costs.
a. True
b. False
34. As a device for measuring efficiency, standard cost systems enables management to determine
the causes of differences between what a product should cost and how much it actually costs to
produce.
a. True
b. False
35. The standard cost is a detailed estimate of how much a product should cost.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
36. Financial reporting systems that are guided by the principle of exceptions concept focus
attention on variances from standard costs.
a. True
b. False
37. In most businesses, cost standards are established principally by accountants.
a. True
b. False
38. Ideal standards are developed under conditions that assume no idle time, no machine
breakdowns, and no materials spoilage.
a. True
b. False
39. Currently attainable standards allow for unreasonable production difficulties.
a. True
b. False
40. The fact that workers are unable to meet a properly determined direct labor standard is
sufficient cause to change the standard.
a. True
b. False
41. Changes in technology, machinery, or production methods may make past cost data irrelevant
for future operations.
a. True
b. False
42. The difference between the standard cost of a product and its actual cost is called a variance.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
43. A budget performance report compares actual results with the budgeted amounts and reports
differences for possible investigation.
a. True
b. False
44. A favorable cost variance occurs when actual cost is less than budgeted cost at actual volumes.
a. True
b. False
45. An unfavorable cost variance occurs when budgeted cost at actual volumes exceeds actual
cost.
a. True
b. False
46. Standards are designed to evaluate price and quantity variances separately.
a. True
b. False
47. If the standard to produce a given amount of product is 500 direct labor hours at $15 and the
actual was 600 hours at $17, the time variance was $1,500 favorable.
a. True
b. False
48. If the standard to produce a given amount of product is 500 direct labor hours at $15 and the
actual was 600 hours at $17, the rate variance was $1,200 favorable.
a. True
b. False
49. If the standard to produce a given amount of product is 2,000 units of direct materials at $12
and the actual was 1,600 units at $13, the direct materials quantity variance was $4,800
favorable.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
50. If the standard to produce a given amount of product is 900 units of direct materials at $11 and
the actual was 800 units at $12, the direct materials quantity variance was $1,100 unfavorable.
a. True
b. False
51. If the standard to produce a given amount of product is 1,000 units of direct materials at $11
and the actual was 800 units at $12, the direct materials price variance was $800 favorable.
a. True
b. False
52. If the standard to produce a given amount of product is 1,000 units of direct materials at $11
and the actual was 800 units at $12, the direct materials price variance was $1,000 favorable.
a. True
b. False
53. If the standard to produce a given amount of product is 1,000 units of direct materials at $11
and the actual was 800 units at $12, the direct materials quantity variance was $2,200
favorable.
a. True
b. False
54. If the standard to produce a given amount of product is 600 direct labor hours at $17 and the
actual was 500 hours at $15, the direct labor time variance was $1,700 favorable.
a. True
b. False
55. The direct labor time variance measures the efficiency of the direct labor force.
a. True
b. False
56. Using a standard costing system for nonmanufacturing expenses is easily administered
because the expenses generally relate to a repetitive, measurable output.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
57. Standards are more widely used for nonmanufacturing expenses than for manufacturing costs.
a. True
b. False
58. Nonmanufacturing activities are usually controlled using a static budget rather than a standard
costing system.
a. True
b. False
59. The difference between the budgeted fixed overhead at 100% of normal capacity and the
standard fixed cost for the actual units produced is termed volume variance.
a. True
b. False
60. The difference between the actual amount of variable factory overhead cost incurred and the
amount of variable factory overhead budgeted for the standard product is termed as variable
factory overhead controllable variance.
a. True
b. False
61. If the standard to produce certain quantity of product is 16,000 hours at a factory overhead rate
of $5 ($3 fixed, $2 variable), actual variable factory overhead is $26,400, actual fixed factory
overhead is $45,000, and 100% of productive capacity is 15,000 hours, the volume variance is
$3,000 favorable.
a. True
b. False
62. If the standard to produce a given amount of product is 12,000 hours at a factory overhead rate
of $5 ($3 fixed, $2 variable), actual variable factory overhead was $26,400, actual fixed
factory overhead was $45,000, and 100% of productive capacity is 15,000 hours, the volume
variance was $9,000 favorable.
a. True
b. False
Chapter 13: Budgeting and Standard Cost Systems
63. The most effective means of presenting standard factory overhead cost variance data is
through a selling overhead cost budget.
a. True
b. False
64. The most effective means of presenting standard factory overhead cost variance data is
through a factory overhead cost variance report.
a. True
b. False
65. Since the controllable variance measures the efficiency of using variable overhead resources, if
budgeted variable overhead exceeds actual results, the variance is favorable.
a. True
b. False
66. An unfavorable volume variance may be due to a failure of supervisors to maintain an even
flow of work.
a. True
b. False
67. Favorable volume variances are never harmful since achieving them encourages managers to
run the factory above normal capacity.
a. True
b. False
68. The budget process involves all of the following except:
a. establishing specific goals.
b. executing plans to achieve the goals.
c. periodically comparing actual results with the goals.
d. dismissing all managers who fail to achieve operational goals specified in the budget.
Chapter 13: Budgeting and Standard Cost Systems
69. Department managers plan lower goals than possible in order to build in a cushion for
unexpected events. This result in:
a. budgetary slack.
b. zero-based budgeting.
c. goal conflict.
d. flexible budgeting.
70. The process of developing budget estimates by requiring all levels of management to estimate
sales, production, and other operating data as though operations were being initiated for the
first time is referred to as:
a. flexible budgeting.
b. continuous budgeting.
c. zero-based budgeting.
d. master budgeting.
71. A variant of fiscal-year budgeting whereby a twelve-month projection into the future is
maintained at all times is termed:
a. flexible budgeting.
b. master budgeting.
c. zero-based budgeting.
d. continuous budgeting.
72. Microgen Company static budget for 12,000 units of production includes $48,000 for direct
materials, $36,000 for direct labor, utilities of $6,000, and supervisor salaries of $18,000. A
flexible budget for 14,000 units of production would show:
a. the same cost structure in total.
b. direct materials of $56,000, direct labor of $42,000, utilities of $7,000, and supervisor
salaries of $18,000.
c. total variable costs of $126,800.
d. direct materials of $50,000, direct labor of $37,500, utilities of $6,250, and supervisor
salaries of $21,000.
73. A disadvantage of static budgets is that they:
a. start with a clean slate.
b. cannot be used by service companies.
c. do not show possible changes in underlying activity levels.
d. show the expected results of a responsibility center for several levels of activity.
Chapter 13: Budgeting and Standard Cost Systems
74. A series of budgets for varying rates of activity is termed a(n):
a. flexible budget.
b. variable budget.
c. master budget.
d. activity budget.
75. For February, sales revenue is $300,000; sales commissions are 5% of sales; the sales
manager’s salary is $40,000; advertising expenses are $13,000; shipping expenses total 1% of
sales; and miscellaneous selling expenses are $1,100 plus 1/2 of 1% of sales. Total selling
expenses for the month of February are:
a. $71,000.
b. $55,000.
c. $58,600.
d. $73,600.
76. Which of the following budgets is prepared using the production budget?
a. Selling and administrative expenses
b. Direct materials purchases
c. Sales
d. Capital expenditures
77. Which of the following are the principal components of a master budget?
a. Production budget
b. Sales budget
c. Capital expenditures budget
d. All of these
78. The first budget customarily prepared as part of an entity’s master budget is the:
a. production budget.
b. cash budget.
c. sales budget.
d. direct materials purchases.
Chapter 13: Budgeting and Standard Cost Systems
Below is budgeted production and sales information for Octofic Cans, Inc. for the month of
March:
Aluminum
Tin
Estimated beginning inventory
12,000 units
6,000 units
Desired ending inventory
15,000 units
4,000 units
Region I, anticipated sales
380,000 units
85,000 units
Region II, anticipated sales
125,000 units
25,000 units
The unit selling price for aluminum cans is $0.15 and for tin cans is $0.20.
79. Refer to the information provided for Octofic Cans Inc. Budgeted sales for the month are:
a. $97,550.
b. $123,000.
c. $82,750.
d. $81,550.
80. Refer to the information provided for Octofic Cans Inc. Budgeted production for aluminum
cans during the month is:
a. 383,000 units.
b. 508,000 units.
c. 502,000 units.
d. 532,000 units.
81. Refer to the information provided for Octofic Cans Inc. Budgeted production for tin cans
during the month is:
a. 108,000 units.
b. 83,000 units.
c. 112,000 units.
d. 120,000 units.
Chapter 13: Budgeting and Standard Cost Systems
Cape Corporation sells a single product. Budgeted sales for the year are anticipated to be
640,000 units, estimated beginning inventory is 98,000 units, and desired ending inventory is
80,000 units. The quantities of direct materials expected to be used for each unit of finished
product are given below.
Material A
.50 lb. per unit
@ $0.60 per pound
Material B
1.00 lb. per unit
@ $1.70 per pound
Material C
1.20 lb. per unit
@ $1.00 per pound
82. Refer to the information provided for Cape Corporation. The amount of direct material A
purchased during the year is:
a. $216,000.
b. $186,600.
c. $192,000.
d. $245,400.
83. Refer to the information provided for Cape Corporation. The amount of direct material B
purchased during the year is:
a. $1,224,000.
b. $1,390,600.
c. $1,088,000.
d. $1,057,400.
84. Refer to the information provided for Cape Corporation. The amount of direct material C
purchased during the year is:
a. $789,600.
b. $768,000.
c. $746,400.
d. $650,400.
85. If the expected sales volume for the current period is 25,000 units, the desired ending
inventory is 700 units, and the beginning inventory is 450 units, the number of units set forth
in the production budget, representing total production for the current period, is:
a. 25,250 units.
b. 21,500 units.
c. 22,300 units.
d. 22,800 units.
Chapter 13: Budgeting and Standard Cost Systems
86. Production estimates for August are as follows:
Estimated inventory (units), August 1
3,000
Desired inventory (units), August 31
2,000
Expected sales volume (units), August
40,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($2 per lb.) 5 lbs.
Direct material B ($11 per lb.) 1 lb.
The number of pounds of materials A and B required for August production is:
a. 195,000 lbs. of A; 39,000 lbs. of B.
b. 200,000 lbs. of A; 40,000 lbs. of B.
c. 205,000 lbs. of A; 41,000 lbs. of B.
d. 210,000 lbs. of A; 42,000 lbs. of B.
87. Production estimates for August are as follows:
12,000
9,000
75,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($5 per lb.) 3 lbs.
Direct material B ($15 per lb.) 1/2 lb.
The total direct materials purchases of materials A and B required for August production is:
a. $1,260,000 for A; $630,000 for B.
b. $1,080,000 for A; $540,000 for B.
c. $1,125,000 for A; $562,500 for B.
d. $1,170,000 for A; $585,000 for B.
Chapter 13: Budgeting and Standard Cost Systems
88. Production estimates for July are as follows:
Estimated inventory (units), July 1
725
Desired inventory (units), July 31
1,200
Expected sales volume (units), July
7,500
For each unit produced 4 hours of direct labor is required. The labor rate per hour is $15. The
number of direct labor hours required for July production is:
a. 25,200.
b. 27,100.
c. 31,900.
d. 34,800.
89. Based on the following production and sales estimates for May, determine the number of units
expected to be manufactured in May.
Estimated inventory (units), May 1
20,000
Desired inventory (units), May 31
15,000
Expected sales volume (units):
South region
30,000
West region
40,000
North region
20,000
Unit sales price
a. 85,000 units
$10
b. 90,000 units
c. 95,000 units
d. 105,000 units
90. Which of the following budgets provides the starting point for the preparation of the direct
labor cost budget?
a. Direct materials purchases budget
b. Cash budget
c. Production budget
d. Factory overhead budget
Chapter 13: Budgeting and Standard Cost Systems
91. If the expected sales volume for the current period is 7,800 units, the desired ending inventory
is 500 units, and the beginning inventory is 400 units, the number of units set forth in the
production budget, representing total production for the current period, is:
a. 7,300.
b. 6,900.
c. 7,800.
d. 7,900.
92. The budget that summarizes future plans for the acquisition of fixed assets is the:
a. direct materials purchases budget.
b. production budget.
c. sales budget.
d. capital expenditures budget.
93. Estimated cash payments are planned reductions in cash from all of the following except:
a. manufacturing and selling and administrative expenses.
b. capital expenditures.
c. notes receivables and accounts receivable collections.
d. payments for interest or dividends.
94. For which of the following reasons, management accountants usually provide for a minimum
cash balance in their cash budgets?
a. Stockholders demand a minimum cash balance
b. It is an important way of effectively managing cash.
c. It provides a safety buffer for variations in estimates.
d. It makes funds available for major capital expenditures.
95. Refer to the information provided for Benjamin Corporation. The cash collections from
accounts receivable in September are:
a. $175,000.
b. $140,000.
c. $190,000.
d. $168,000.
Chapter 13: Budgeting and Standard Cost Systems
96. Refer to the information provided for Benjamin Corporation. The cash collections from
accounts receivable in October are:
a. $270,000.
b. $272,500.
c. $210,000.
d. $218,000.
97. Refer to the information provided for Benjamin Corporation. The cash collections from
accounts receivable in November are:
a. $305,200.
b. $294,000.
c. $235,200.
d. $381,500.
98. Refer to the information provided for Kohlman Company. The cash payments for
manufacturing in the month of April are:
a. $128,000.
b. $117,600.
c. $156,800.
d. $96,000.
99. Refer to the information provided for Kohlman Company. The cash payments for
manufacturing in the month of May are:
a. $185,600.
b. $156,800.
c. $124,800.
d. $146,400.
Chapter 13: Budgeting and Standard Cost Systems
100. Refer to the information provided for Kohlman Company. The cash payments for
manufacturing in the month of June are:
a. $294,000.
b. $235,200.
c. $183,200.
d. $381,500.
101. McCabe Manufacturing Co.’s static budget at 8,000 units of production includes $40,000 for
direct labor and $4,000 for electric power. Total fixed costs are $23,000. At 9,000 units of
production, a flexible budget would show:
a. variable costs of $49,500 and $25,875 of fixed costs.
b. variable costs of $44,000 and $23,000 of fixed costs.
c. variable costs of $49,500 and $23,000 of fixed costs.
d. variable costs of $44,000 and $25,875 of fixed costs.
102. Planning for capital expenditures is necessary for all of the following reasons except:
a. machinery and other fixed assets wear out.
b. expansion may be necessary to meet increased demand.
c. amounts spent for office equipment may be immaterial.
d. fixed assets may fall below minimum standards of efficiency.
103. Production and sales estimates for May for the Hudson Co. are as follows:
Estimated inventory (units), May 1
17,500
Desired inventory (unit), May 31
19,300
Expected sales volume (units):
Area W
4,200
Area X
7,000
Area Y
9,000
Unit sales price
$15
The number of units expected to be sold in May is:
a. 22,000.
b. 18,400.
c. 23,800.
d. 20,200.
Chapter 13: Budgeting and Standard Cost Systems
104. Production and sales estimates for June are as follows:
Estimated inventory (units), June 1
18,500
Desired inventory (units), June 30
19,000
Expected sales volume (units):
Area X
3,000
Area Y
4,000
Area Z
5,500
Unit sales price
$20
The number of units expected to be manufactured in June is:
a. 10,000.
b. 12,000.
c. 13,000.
d. 12,500.
105. Production and sales estimates for June are as follows:
Estimated inventory (units), June 1
8,000
Desired inventory (units), June 30
9,000
Expected sales volume (units):
Area X
3,000
Area Y
4,000
Area Z
5,500
Unit sales price
$25
The budgeted total sales for June is:
a. $300,000.
b. $337,500.
c. $312,500.
d. $287,500.
106. As of January 1 of the current year, the Butner Company had accounts receivables of $50,000.
Sales for January, February, and March were as follows: $120,000, $140,000, and $150,000.
20% of each month’s sales are for cash. Of the remaining 80% (the credit sales), 60% are
collected in the month of sale, with the remaining 40% collected in the following month. What
is the total cash collected (both from accounts receivable and for cash sales) in the month of
February?
a. $132,000
b. $105,600
c. $133,600
d. $95,200