Chapter 22
MASTER BUDGETS AND PLANNING
1. Consulting the persons affected by a budget when it is prepared can provide an effective
means of motivation and cooperation.
2. A budget can be an effective means of communicating management’s plans to the
employees of a business.
3. Budgets are normally more effective when all levels of management are involved in the
budgeting process.
4. One of the major benefits of formal budgeting is the positive effect it can have on employee
attitudes if applied correctly.
5. Budgeting is an informal plan for future business activities.
6. A budget is a formal statement of future plans, usually expressed in monetary terms.
7. Past performance is the best overall basis for evaluating current performance and assessing
the need for corrective action.
8. The process of evaluating performance can be improved by using budgets.
9. Continuous budgeting is the practice of preparing a new budget for a selected number of
future periods and replacing budgets for periods that have lapsed.
10. Budget preparation is best determined in a top-down managerial approach.
11. The task of preparing a budget should be the sole task of the most important department in
an organization.
12. The responsibility for coordinating the preparation of a master budget should be assigned
to the Chief Executive Officer.
13. Larger, more complex organizations usually require a longer time to prepare their budgets
than smaller organizations because of the considerable effort to coordinate the different units
within the business.
14. A rolling budget is a specific budget application relevant only to a merchandising
company.
15. The budgets within the master budget must be prepared in a definite sequence as dictated
by GAAP.
16. The merchandise purchases budget depends on information provided by the sales budget.
17. The master budget is a small component of the comprehensive budget.
18. The merchandise purchases budget is the starting point for preparing the master budget.
19. The master budget consists of three major groups of budget components: the operating
budgets, the capital expenditures budgets, and the financial budgets.
20. The financial budgets of a business include the cash budget, the budgeted income
statement, and the budgeted balance sheet.
21. The budget process is a continuous activity of planning, revising, and evaluating business
activities.
22. A master budget refers to a company’s sales budget that includes all of its segments or
departments.
23. Activity-based budgeting is a budget system based on expected activities and their activity
levels, which helps management plan for the resources required.
24. Traditional budgeting is generally better than activity-based budgeting when attempting to
reduce costs by eliminating non-value-added activities.
25. The sales budget is derived from the production budget.
26. A capital expenditures budget is prepared before the operating budgets.
27. The selling expenses budget is normally prepared before the sales budget because selling
expenses affect the amount of sales.
28. A manufacturing budget should include a list of equipment to be scrapped and additional
equipment to be purchased if the proposed production budget is carried out.
29. If budgeted beginning inventory is $8,300, budgeted ending inventory is $9,400, and cost
of goods sold is expected to be $10,260, then budgeted purchases should be $9,160.
30. Part of the cash budget is based on information taken from the capital expenditures
budget.
31. A cash budget is a plan that includes the expected cash receipts and cash expenditures
during each of the periods that it covers.
32. The budgeted balance sheet is prepared from data contained in the previously prepared
components of the master budget.
33. Financial budgets are normally completed after preparation of operating and capital
expenditure budgets.
34. The financial budgets include the cash budget and the capital expenditures budget.
35. A company’s history indicates that 20% of its sales are for cash and the rest are on credit.
Collections on credit sales are 20% in the month of the sale, 50% in the next month, and 30%
the following month. Projected sales for January, February, and March are $75,000, $92,000
and $60,000, respectively. The March expected cash receipts from all current and prior credit
sales are $80,500.
36. Production budgets should always show both budgeted units of product and costs.
37. The manufacturing budget shows only the direct materials needed for production.
38. A formal statement of future plans, usually expressed in monetary terms, is a:
A. Variance report.
B. Position statement.
C. Budget.
D. Prospectus.
E. Variance analysis.
39. The process of planning future business actions and expressing them as a formal plan is
called:
A. Budgeting.
B. Cost accounting.
C. Managerial accounting.
D. Variance analysis.
E. Standard cost analysis.
40. For budgets to be effective:
A. Goals should be attainable.
B. Employees affected by a budget should be consulted when it is prepared.
C. Evaluations should be made carefully with opportunities to explain any failures.
D. They should be properly applied to avoid negative effects.
E. All of the options are correct.
41. Which of the following is not a result of following a well-designed budgeting process?
A. Improved decision-making processes.
B. Improved performance evaluations.
C. Improved coordination of business activities.
D. Assurance of future profits.
E. All of these are benefits of effective budgeting.
42. Which of the following is a benefit derived from budgeting?
A. Budgeting focuses management’s attention on the future.
B. Budgeting provides coordination of departments.
C. Budgeting provides a basis for evaluating performance.
D. Budgeting provides motivation for managers and employees.
E. All of the choices are benefits derived from budgeting.
43. Which of the following statements about budgeting is false?
A. Budgeting is an aid to planning and control.
B. Budgets create standards for performance evaluation.
C. Budgets help coordinate the activities of the entire organization.
D. Budgeting forces managers to think ahead and formalize long-range objectives.
E. The master budget should only be prepared by top management.
44. A budget is best described as:
A. A formal statement of a company’s future plans usually expressed in monetary terms.
B. A master control device.
C. An informal statement of company’s future plans usually expressed in monetary terms.
D. The most crucial component of a company’s evaluation process.
E. The minimum acceptable performance level.
45. The overall coordinating activity of the budget process is the responsibility of the:
A. Chief Accounting Officer.
B. Chief Executive Officer (CEO).
C. Chief Financial Officer (CFO).
D. Budget Committee.
E. Board of Directors.
46. The set of periodic budgets that are prepared and periodically revised in the practice of
continuous budgeting are called:
A. Production budgets.
B. Sales budgets.
C. Cash budgets.
D. Rolling budgets.
E. Capital expenditures budgets.
47. Guidance for preparing a master budget is usually the responsibility of:
A. The company CEO.
B. The marketing department.
C. A budget committee.
D. The chief financial officer.
E. Lower level management.
48. The most useful budget figures are developed:
A. From the “top-down”.
B. From the “bottom-up” following a participatory process.
C. Solely by the budget committee.
D. By the CEO.
E. After the accounting period has begun.
49. The practice of preparing budgets for each of several future periods and revising those
budgets as each period is completed, adding a new budget each period so that the budgets
always cover the same number of future periods, is called:
A. Participatory budgeting.
B. Capital budgeting.
C. Balanced budgeting.
D. Continuous budgeting.
E. Primary budgeting.
22–16
50. The usual budget period is:
A. An annual period of 250 working days.
B. A monthly period separated into daily budgets.
C. A quarterly period separated into weekly budgets.
D. An annual period separated into weekly budgets.
E. An annual period separated into quarterly and monthly budgets.
51. Assuming a bottom-up process of budget development, which of the following should be
initially responsible for developing sales estimates?
A. The budget committee.
B. The accounting department.
C. The sales department.
D. Top management.
E. The marketing department.
52. A comprehensive or overall formal plan for a business that includes specific plans for
expected sales, the units of product to be produced, the merchandise or materials to be
purchased, the expenses to be incurred, the long-term assets to be purchased, and the amounts
of cash to be borrowed or loans to be repaid, as well as a budgeted income statement and
balance sheet, is called a:
A. Master budget.
B. Cash budget.
C. Capital expenditures budget.
D. Rolling budget.
E. Production budget.
53. Operating budgets include all the following budgets except the:
A. Sales budget.
B. Selling expense budget.
C. Cash budget.
D. Merchandise purchases budget.
E. General and administrative expense budget.
54. Financial budgets include all the following except the:
A. Sales budget.
B. Budgeted balance sheet.
C. Budgeted income statement.
D. Cash budget.
E. All of these are financial budgets.
55. The master budget includes:
A. Operating budgets.
B. A capital expenditures budget.
C. A budgeted income statement.
D. A cash budget.
E. All of the budgets are included in the master budget.
56. The usual starting point for preparing a master budget is forecasting or estimating:
A. Expenditures.
B. Sales.
C. Production.
D. Income.
E. Cash payments.
57. The master budget process usually ends with:
A. The production budget.
B. The sales budget.
C. The selling expense budget.
D. The budgeted balance sheet.
E. The overhead budget.
58. Which of the following budgets is not an operating budget?
A. Sales budget.
B. Cash budget.
C. General and administrative expense budget.
D. Selling expenses budget.
E. Merchandise purchases.
59. A budget system based on expected activities and their levels that enables management to
plan for resources required to perform the activities is:
A. Traditional budgeting.
B. Management budgeting.
C. Master budgeting.
D. Activity-based budgeting.
E. Cash budgeting.
60. A plan that lists the types and amounts of operating expenses expected that are not
included in the selling expenses budget is a:
A. General and administrative expense budget.
B. Sales budget.
C. Cash payments budget.
D. Overhead budget.
E. Selling expense budget.
61. A June sales forecast projects that 6,000 units are going to be sold at a price of $10.50 per
unit. The desired ending inventory of units is 15% higher than the beginning inventory of
1,000 units. Total June sales are anticipated to be:
A. $63,000.
B. $67,500.
C. $61,250.
D. $74,250.
E. $60,000.
62. Bentels Co. desires a December 31 ending inventory of 2,840 units. Budgeted sales for
December are 4,000 units. The November 30 inventory was 1,800 units. Budgeted purchases
are:
A. 5,040 units.
B. 1,240 units.
C. 6,840 units.
D. 4,000 units.
E. 5,800 units.