Chapter 15 – The budgeting process
MULTIPLE CHOICE
1. Which of the following is NOT a criticism of the traditional master budget?
a.
results oriented
b.
Interdependencies are recognized.
c.
static
d.
department oriented
2. If a department plans forward from resources to outputs, this describes which criticism of traditional
budgeting?
a.
department orientation
b.
dynamic
c.
process oriented, not results oriented
d.
results oriented, not process oriented
3. Activity-based budgeting
a.
focuses on processes that result in output.
b.
focuses on eliminating nonvalue-added activities.
c.
focuses on the best use of capacity.
d.
All of the above are correct.
4. Activity-based budgeting provides better planning because
a.
it incorporates change by understanding processes and drivers.
b.
it incorporates change by assuming production relationships to be the same.
c.
it incorporates change by making inflationary adjustments.
d.
All of the above are correct.
Figure 15-1
Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities
and cost drivers have been developed:
Activity
Cost Formula
Maintenance
£15,000 + £4 per machine hour
Machining
£35,000 + £1 per machine hour
Inspection
£60,000 + £750 per batch
Setups
£1,000 per batch
Purchasing
£50,000 + £10 per purchase order
5. Refer to Figure 15-1. What is the budgeted maintenance cost if there was production of 50,000
reflectors that will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?
a.
£15,000
b.
£32,000
c.
£47,000
d.
£79,000
6. Refer to Figure 15-1. What is the budgeted inspection cost if there was production of 50,000 reflectors
that will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?
a.
£18,750
b.
£60,000
c.
£66,000
d.
£78,750
7. Refer to Figure 15-1. What is the budgeted setup costs if there was production of 50,000 reflectors that
will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?
a.
£1,000
b.
£25,000
c.
£8,000,000
d.
£15,000,000
8. Refer to Figure 15-1. What is the budgeted purchasing cost if there was production of 50,000 reflectors
that will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?
a.
£150,000
b.
£200,000
c.
£100,000
d.
none of the above
9. Refer to Figure 15-1. What is the machine cost for production of 50,000 reflectors that will require
8,000 machine hours, 25 batches, and 15,000 purchase orders?
a.
£47,000
b.
£43,000
c.
£38,410,000
d.
none of the above
10. Refer to Figure 15-1. What is the budget for maintenance if 20,000 reflectors were made that required
3,500 machine hours, 12 batches, and 5,000 purchase orders?
a.
£3,500
b.
£15,000
c.
£29,000
d.
£14,000
Figure 15-2
Harald, Inc., has done a cost analysis for its production of bumper stickers. The following activities
and cost drivers have been developed:
Activity
Cost Formula
Maintenance
£11,000 + £0.11 per machine hour
Machining
£25,000 + £0.50 per machine hour
Setups
£50 per batch
Purchasing
£200 + £45 per purchase order
Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20
purchase orders
Maintenance
£11,500
Machining
28,300
Setups
550
Purchasing
1,000
11. Refer to Figure 15-2. What is the budgeted cost per sticker? (Round to three decimal places.)
a.
£0.468
b.
£0.478
c.
£0.486
d.
£0.487
12. Refer to Figure 15-2. What is the actual cost per sticker? (Round to three decimal places.)
a.
£0.468
b.
£0.478
c.
£0.486
d.
£0.487
13. Activity-based budgeting is most useful when
a.
output is homogeneous.
b.
production processes are simple.
c.
diverse products are produced.
d.
volume levels are stable.
14. Activity-based budgets compare costs for items based on activities such as
a.
direct material.
b.
direct labour.
c.
setups.
d.
power.
15. Which is NOT one of the four steps needed to build an activity-based budget?
a.
Determine output level.
b.
Determine the activities and their drivers needed to produce output.
c.
Estimate the demand for each activity to produce the output.
d.
Estimate the committed capacity.
16. A budget based on additions and subtractions from last year’s budget is
a.
a zero-base budget.
b.
a continuous budget.
c.
an incremental budget.
d.
none of these.
17. A budget where managers must justify all costs based on need is a(n)
a.
zero-base budget.
b.
participatory budget.
c.
continuous budget.
d.
incremental budget.
18. Which of the following expenses is an example of a discretionary fixed expense?
a.
investment in production equipment
b.
investment in the factory
c.
electricity costs
d.
employment costs
19. Which of the following is an example of a discretionary fixed expense?
a.
direct labour
b.
depreciation on a factory building
c.
insurance on a building
d.
property taxes on a factory building
20. ____ are costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly
planning.
a.
Discretionary fixed expenses
b.
Committed fixed expenses
c.
Mixed costs
d.
Step-variable costs
21. The first step in planning and control is
a.
preparation of the budget.
b.
performance evaluation.
c.
strategic planning.
d.
setting long-term objectives.
22. A budget is
a.
a planning tool.
b.
a control tool.
c.
a means of communicating goals to the firm’s divisions.
d.
all of the above.
23. Which of the following is true about budgets?
a.
Budgets are financial plans for the future.
b.
Budgets identify objectives and the actions needed to achieve them.
c.
Budgets should be tightly linked to the strategic plan.
d.
all of the above
24. Which of the following is an advantage of the budgeting process?
a.
Budgeting provides resource information for decision making.
b.
Budgeting provides a standard for performance evaluation.
c.
Budgeting improves communication and coordination within the organization.
d.
all of the above
25. A moving twelve-month budget where a future month is added as the current month expires is called
a(n)
a.
zero-base budget.
b.
incremental budget.
c.
revolving budget.
d.
continuous budget.
26. Continuous budgeting requires managers to
a.
add a future month as the current month expires.
b.
constantly update the budget to include new information.
c.
continuously refer to the budget when making decisions.
d.
assign budgeting responsibilities to a defined group of employees.
27. The budget that is a comprehensive financial plan for the organization as a whole is called a
a.
capital budget.
b.
master budget.
c.
comprehensive budget.
d.
continuous budget.
28. The first step in the budgeting process is the preparation of the
a.
production budget.
b.
selling and administrative expenses budget.
c.
sales forecast.
d.
cash budget.
29. Which of the following is usually prepared before the production budget?
a.
direct materials purchases budget
b.
direct labour budget
c.
sales budget
d.
cash budget
30. The production budget
a.
summarizes the cost of producing units for the budget period.
b.
is calculated based on the sales budget and the desired ending inventory.
c.
specifies the required overhead.
d.
specifies the required direct labour hours.
31. Which budget is prepared without monetary amounts?
a.
direct materials purchases budget
b.
overhead budget
c.
production budget
d.
all of the above
32. Which of the following is usually prepared before the direct materials purchases budget?
a.
production budget
b.
cash budget
c.
pro forma income statement
d.
pro forma balance sheet
33. Which of the following appears in the cash budget?
a.
interest payments
b.
purchase of equipment on credit
c.
depreciation
d.
all of the above
34. A bank manager may review a company’s cash budget to
a.
determine whether the firm will earn net income.
b.
uncover possible employee theft.
c.
evaluate the company’s ability to repay a loan.
d.
do all of the above.
35. Activity-based budgeting
a.
is a more powerful planning and control tool than a functional-based budget system.
b.
starts with sales and production budgets similar to a functional-based budget system.
c.
is simpler to construct than a functional-based budget system.
d.
Both a and b above are correct.
36. Jiggy Company plans to sell 33,000 units during the month of May. The company plans to have 2,500
units on hand at the end of the month. If 1,200 units are on hand on May 1, how many units must be
produced during May?
a.
33,000
b.
35,500
c.
34,300
d.
31,800
37. Jiggy Company plans to sell 33,000 units during the month of May. Beginning inventory was 1,200
units. The company plans to have 2,500 units on hand at the end of the month. Each unit requires 3
pounds of raw materials. If raw material inventory on May 1 is 4,400 pounds and desired ending
inventory is 2,200 pounds, how many pounds of raw materials must be purchased during May?
a.
103,500
b.
102,900
c.
105,100
d.
100,700
38. Feedee Company has budgeted sales and production (in units) over the next three months as follows:
January
February
March
Sales
50,000
?
80,000
Production
52,000
64,000
78,000
There are 10,000 units on hand on January 1. A minimum of 20 per cent of the next month’s sales in
units must be on hand at the end of each month. April sales are expected to be 70,000. Budgeted sales
for February would be
a.
64,000.
b.
78,000.
c.
60,000.
d.
52,000.
Figure 15-3
Projected sales for Sommers, Inc., for next year and beginning and ending inventory data are as
follows:
Sales
50,000 units
Beginning inventory
4,000 units
Desired ending inventory
8,000 units
The selling price is £40 per unit. Each unit requires four pounds of material which costs £6 per pound.
The beginning inventory of raw materials is 12,000 pounds. The company wants to have 3,000 pounds
of material in inventory at the end of the year.
39. Refer to Figure 15-3. Sommers’ budgeted sales would be
a.
£2,160,000.
b.
£2,320,000.
c.
£2,480,000.
d.
£2,000,000.
Budgeted sales
+ Ending inventory (80,000 .20)
Total needs
– Beginning inventory (52,000 + 10,000 – 50,000)
Production
40. Refer to Figure 15-3. According to Sommers’ production budget, how many units should be produced?
a.
54,000
b.
46,000
c.
62,000
d.
38,000
41. Refer to Figure 15-3. How many pounds of material would Sommers need to purchase?
a.
216,000
b.
225,000
c.
207,000
d.
201,000
42. Refer to Figure 15-3. Sommers’ budgeted total purchase cost of direct materials would be
a.
£1,350,000.
b.
£1,242,000.
c.
£1,206,000.
d.
£1,296,000.
43. Bronco Company sells a product for £10. Budgeted sales for the first quarter of the current year are as
follows:
Budgeted Sales
January
£600,000
February
800,000
March
900,000
The company wants to maintain an inventory of finished units equal to 30 per cent of the following
month’s sales, and 10,000 units are on hand at the beginning of the year.
Each unit requires two pounds of raw material costing £1 per pound. The company maintains a raw
materials inventory equal to 20 per cent of the following month’s production needs.
Budgeted production in units for February would be
a.
131,000.
b.
107,000.
c.
83,000.
d.
80,000.
44. Budgeted sales for the first quarter for Cullison Company, a retailer, are as follows:
Budgeted Sales (Units)
January
75,000
February
100,000
March
110,000
Cullison started the year with an inventory of 7,500 units. The company likes to maintain an inventory
equal to 10 per cent of next month’s budgeted sales.
Budgeted purchases in units for February would be
a.
111,000.
b.
110,000.
c.
101,000.
d.
100,000.
February sales
Ending inventory, February (10% 110,000)
Total needs
February sales (£800,000/£10)
Ending inventory, February [30% (£900,000/£10)]
Total needs
Less: Beginning inventory [30% (£800,000/£10)]
Budget production for February
45. Nichols Company sells a product for £20. Budgeted sales for the first quarter of the current year are as
follows:
Budgeted Sales
January
£80,000
February
50,000
March
90,000
The company wants to maintain an inventory of finished units equal to 30 per cent of the following
month’s sales, and 1,000 units are on hand at the beginning of the year.
Each unit requires two pounds of raw material costing £1 per pound. The company maintains a raw
materials inventory equal to 10 per cent of the following month’s production needs.
Budgeted production in units for February would be
a.
2,500.
b.
3,100.
c.
3,850.
d.
4,600.
February sales (£50,000/£20)
Desired ending inventory [30% ((£90,000/£20)]
Total Needs
Less: Beginning inventory [30% (£50,000/£20)]
Units to be produced
46. Budgeted sales for the second quarter for Maxwell Company, a retailer, are as follows:
Budgeted Sales (Units)
April
60,000
May
120,000
June
140,000
Maxwell started the quarter with an inventory of 30,000 units. The company likes to maintain an
inventory equal to 10 per cent of next month’s budgeted sales.
Budgeted purchases in units for May would be
a.
146,000.
b.
120,000.
Units to be purchased
Sales
Beginning inventory
Desired ending inventory
c.
134,000.
d.
122,000.
47. Arlo Company uses an annual cost formula for overhead of £72,000 + £1.60 for each direct labour
hour worked. For the upcoming month, Arlo plans to manufacture 96,000 units. Each unit requires five
minutes of direct labour. Arlo’s budgeted overhead for the month is
a.
£12,800.
b.
£18,800.
c.
£84,800.
d.
£225,600.
48. Cal Company uses the following formula for annual overhead: £360,000 + £1.20 for each machine
hour used. For the upcoming month, Cal plans to manufacture 6,000 units. Each unit requires 2
machine hours. Cal’s budgeted overhead for the month is
a.
£367,200.
b.
£37,200.
c.
£374,400.
d.
£44,400.
49. Brown, Inc., has budgeted £60,000 for annual fixed overhead costs for the coming year. Budgeted
variable overhead is £0.10 per unit. For the next quarter, Brown plans to manufacture 500,000 units.
Brown’s budgeted overhead for the quarter is
a.
£50,000.
b.
£65,000.
c.
£110,000.
d.
£150,000.
Figure 15-4
Budgeted sales for the second quarter of the current year are as follows:
Budgeted Sales
April
£150,000
May
200,000
June
180,000
The company collects 20 per cent in the month of sale, 70 per cent in the first month following the
sale, and 10 per cent in the second month following the sale.
50. Refer to Figure 15-4. April sales to be collected in May are
a.
£30,000.
b.
£105,000.
c.
£104,000.
d.
£-0-.
51. Refer to Figure 15-4 above. Total cash collected in June will be
a.
£180,000.
b.
£191,000.
c.
£90,000.
d.
£140,000.
£150,000 10% =
£200,000 70% =
52. Refer to Figure 15-4. Wemberly’s budgeted cash receipts for February are
a.
£220,000.
b.
£209,000.
c.
£194,000.
d.
£143,000.
53. Refer to Figure 15-4 above. Wemberly’s budgeted cash receipts for March are
a.
£300,000.
b.
£335,000.
c.
£195,000.
d.
£261,000.
£300,000 65% =
£220,000 30% =
54. Diely Company has the following sales budget:
July
August
September
Budgeted Sales
£105,000
£211,000
£134,000
Credit sales represent 80 per cent of budgeted sales. Of the credit sales, 20 per cent is collected in the
month of the sale, 60 per cent in the month after the sale, and the remaining 15 per cent is collected
two months after the sale. Five per cent of all sales are uncollectible and written-off. Cash receipts
from sales in September amounted to
a.
£169,150.
b.
£135,320.
c.
£107,200.
d.
£162,120.
September:
Cash sales (£134,000 .20)
Credit sales:
July (£105,000 .80 .15)
August (£211,000 .80 .60)
September (£134,000 .80 .20)
Total cash receipts
£220,000 65% =
£170,000 30% =
55. At the beginning of the current month, Melrose had £10,000. Cash disbursements were £260,000 and
cash collections were £235,000. Melrose invests all excess cash in a money market fund and has a line
of credit to cover cash deficiencies.
If Melrose wishes to start the next month with £15,000, Melrose must
a.
borrow £15,000.
b.
borrow £30,000.
c.
borrow £45,000.
d.
do nothing.
56. Which of the following is an example of a discretionary fixed cost?
a.
the cost of a donation to the United Way
b.
the cost of the manufacturing facilities
c.
the cost of the manufacturing equipment
d.
taxes on the property used for manufacturing
57. The budget committee
a.
has the responsibility to review the budget.
b.
resolves differences that may arise as the budget is prepared.
c.
prepares financial statements for the auditor.
d.
both a and b
58. General Ltd. manufactures boxes. The estimated number of boxes sold for the first three months of
2012 are:
Month
Sales
January
3,000
February
4,200
March
3,900
Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is
equal to 20 per cent of the next month’s sales. General Ltd. expects to sell the boxes for £5 each. April
2012 sales is projected at 4,500 boxes.
What is the expected sales amount for March?
a.
£15,000
b.
£21,000
Beginning cash balance
Add: Cash receipts
Cash available
Less: Cash disbursements
Cash surplus (deficiency)
Add: Cash from loans
Ending cash balance
c.
£19,500
d.
£4,500
Figure 15-5
Canceco Company produces and sells pillows. It expects to sell 10,000 pillows in the year 2008 and
had 1,000 pillows in finished goods inventory at the end of 2011. Canceco would like to complete
operations in the year 2008 with at least 1,250 completed pillows in inventory. There is no ending
work-in-process inventory. The pillows sell for £5 each.
59. Refer to Figure 15-5. How many pillows would be produced in the year 2008?
a.
10,000 pillows
b.
11,000 pillows
c.
11,250 pillows
d.
10,250 pillows
60. Refer to Figure 15-5. What would be the total sales for the year 2008?
a.
£50,000
b.
£55,000
c.
£56,250
d.
£51,250
61. Gerald Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2.
Scheduled production of books for the next two months is 1,000 and 1,200 units, respectively.
Beginning inventory is 4,000 units of A1 and 30 units of A2. The ending inventory of A1 is planned to
decrease 500 units in each of the next two months, and the A2 inventory is expected to increase 5 units
in each of the next two months.
How many units of A1 does expect to use in production during the second month?
a.
12,000 units
b.
12,500 units
c.
10,000 units
d.
10,750 units
62. The following forecasted sales pertain to Norah Company:
Month
Sales
April
£200,000
May
250,000
June
150,000
July
100,000
Collection pattern:
60 per cent in month of sale
40 per cent in month following the sale
Accounts receivable as of March 31
£35,000
Finished goods inventory as of March 31
4,000 units
The company has a selling price of £10 per unit and expects to maintain ending inventories equal to 20
per cent of the next month’s sales.
How many units are expected to be produced in April?
a.
21,000 units
b.
19,000 units
c.
25,000 units
d.
20,000 units
63. The following forecasted sales pertain to Reject City:
Month
Sales
June
£160,000
July
200,000
August
120,000
September
80,000
Collection pattern:
65 per cent in month of sale
35 per cent in month following sales
Accounts receivable as of May 31
£28,000
Finished goods inventory as of May 31
6,000 units
Reject City has a selling price of £5 per unit and expects to maintain ending inventories equal to 25 per
cent of next month’s sales.
How many units are expected to be produced in June?
a.
36,000 units
b.
50,000 units