38) 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 the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50
per unit and direct labor costs of Sweatshirts increase to $13.00 per unit?
A) $293,000
B) $90,000
C) $203,000
D) $473,000
Answer the following questions using the information below:
Meridian Industries manufactures and sells two models of watches, Prime and Luxuria. It expects to sell
3,000 units of Prime and 1,000 units of Luxuria in 2016.The following estimates are given for 2016:
Prime Luxuria
Selling price $200 $500
Direct materials 20 50
Direct labor 40 150
Manufacturing overhead 40 100
Meridian had an inventory of 200 units of Prime and 75 units of Luxuria at the end of 2015. It has decided
that as a measure to counter stock outages it will maintain ending inventory of 350 units of Prime and 200
units of Luxuria.
Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were
100 units of Crimpson in stock at the end of 2015.The management does not want to have any stock of
Crimpson at the end of 2016.
39) How many units of Prime watches must be produced in 2016?
A) 3,350 units
B) 3,150 units
C) 3,000 units
D) 2,800 units
40) What is the amount budgeted for purchase of Crimpson in 2016?
A) $31,500
B) $10,250
C) $30,500
D) $10,000
41) What is the total budgeted cost of sold for Meridian Industries in 2016?
A) $500,000
B) $600,000
C) $700,000
D) $800,000
42) What is the total budgeted cost of goods manufactured in 2016?
A) $600,000
B) $625,500
C) $652,500
D) $667,500
Answer the following questions using the information below:
Furniture, Inc., estimates the following number of mattress sales for the first four months of 2016:
Month Sales
January 22,000
February 30,800
March 28,600
April 35,200
Finished goods inventory at the end of December is 6,600 units. Target ending finished goods inventory is
20% of the next month’s sales.
43) How many mattresses need to be produced in January 2016?
A) 15,400 mattresses
B) 21,560 mattresses
C) 28,460 mattresses
D) 34,160 mattresses
44) How many mattresses should be produced in the first quarter of 2016?
A) 88,880 mattresses
B) 81,840 mattresses
C) 60,280 mattresses
D) 51,920 mattresses
Answer the following questions using the information below:
Wallace Company provides the following data for next year:
Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000
The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending
inventory levels are 20% of next month’s sales, stated at cost.
45) What is the amount of purchases budgeted for January?
A) $63,960
B) $70,440
C) $78,000
D) $92,040
46) What is the amount of purchases budgeted for February?
A) $32,214
B) $70,200
C) $73,320
D) $95,160
Answer the following questions using the information below:
Shamokin Manufacturing produces a Tourbillon watch movement called OM362. Shamokin expects to
sell 10,000 units of OM362 and to have an ending finished inventory of 2,000 units. Currently, it has a
beginning finished inventory of 800 units. Each unit of OM362 requires two labor operations, one labor
hour of assembling and two labor hours of polishing. The direct labor rate for assembling is $10 per
assembling hour and the direct labor rate for polishing is $12.50 per polishing hour.
47) The expected number of hours of direct labor for OM362 Bigger is ________.
A) 8,800 hours of assembling; 17,600 hours of polishing
B) 11,200 hours of assembling; 22,400 hours of polishing
C) 17,600 hours of assembling; 8,800 hours of polishing
D) 22,400 hours of assembling; 11,200 hours of polishing
48) The expected cost of direct labor for OM362 is ________.
A) $350,000
B) $378,000
C) $392,000
D) $420,000
49) Juan Sugita Manufacturing expects to produce and sell 12,000 units of Big, its only product, for $20
each. Direct material cost is $3 per unit, direct labor cost is $10 per unit, and variable manufacturing
overhead is $6 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and
administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total.
According to generally accepted accounting principles, inventoriable cost per unit of Big would be
________.
A) $13.00 per unit
B) $14.00 per unit
C) $21.00 per unit
D) $18.50 per unit
50) The use of activity-based budgeting is growing because of ________.
A) the increased use of activity-based costing
B) the increased use of kaizen costing
C) increases in work-in-process inventory
D) increases in direct materials inventory
51) 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.
52) 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
53) 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
54) Which of the following statements is true about activity-based budgeting?
A) activity-based budgeting estimates total costs more accurately than cost-based budgeting
B) activity-based budgeting provides more detailed information than cost-based budgeting
C) activity-based budgeting is cheaper than cost-based budgeting
D) activity-based budgeting is simpler to implement than cost-based budgeting
55) Activity-based budgeting ________.
A) uses one cost driver such as direct labor-hours
B) uses only output-based cost drivers such as units sold
C) focuses on activities necessary to produce and sell products and services
D) classifies costs by functional area within the value chain
56) Which one of the following is a benefit of activity-based budgeting?
A) It uses a single cost driver for batch-level activities or higher.
B) It is the most convenient method of budgeting as it requires minimal effort.
C) It provides detailed information that improves decision making.
D) It is the most efficient method to budget direct costs and trace them to individual cost objects.
57) A rolling budget is the same as a continuous budget.
58) Cost of goods sold budget takes inputs from both, ending inventories budget and nonmanufacturing
costs budget.
59) Preparation of the budgeted statement of cash flows is the final step in preparing the operating
budget.
60) A company usually prepares a budget for nonmanufacturing costs after preparing all operating
budgets.
61) The use of activity-based cost drivers gives rise to zero-based budgeting.
62) The revenues budget should be based on the cost of goods sold budget.
63) Cost-based budgeting is a budgeting method that focuses on the budgeted cost of the activities
necessary to produce and sell products and services.
64) The production cost budget identifies how each product is manufactured.
65) The manufacturing labor budget depends on wage rates, production methods, and hiring plans.
66) The revenues budget is prepared after all other operating budgets are prepared.
67) Activity-based budgeting provides better decision-making information than budgeting based solely
on output-based cost drivers (units produced, units sold, or revenues).
68) Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable
costs.
69) As budgeting is not a cross-functional activity, it tends to be accurate and reliable with regard to
forecasts.
70) Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the
budgeting process.
71) Listed below are elements of the master budget. Determine whether each budget is an operating
budget or a financial budget. Place an O for operating budget or F for a financial budget.
1. Capital expenditures budget
2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement
72) Prescher Company sells three products with the following seasonal sales pattern:
Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 30%
3 20% 20% 50%
4 10% 30% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per
unit to be as follows:
Product Units Selling Price
A 50,000 $ 16
B 125,000 40
C 62,500 24
Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.
33
73) Lubriderm Corporation has the following budgeted unit 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:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in
both pounds and dollars for each month.
74) Perry Company has provided the following information:
Month Budgeted Sales
March $200,000
April 212,000
May 204,000
June 218,000
July 210,000
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month’s cost of
sales.
Required:
Prepare a purchases budget for April through June.
75) 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.
76) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of
various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and
two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass,
and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass,
and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory.
Purchases are paid for in the month acquired.
Required:
a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.
77) Christy Enterprises reports the year-end information from 2015 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 2016 budget. In 2016 the company would like to increase selling prices by 10%,
and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is
expected to increase to 62%. Other than depreciation, all operating costs are variable.
Required:
Prepare a budgeted income statement for 2016.
78) Describe operating and financial budgets and give at least two examples of each discussed in the
textbook.
79) Discuss the importance of the sales forecast and items that influence its accuracy.
Objective 6.4
1) Financial planning models ________.
A) are not used in the budgeting process
B) are not useful for sensitivity analysis
C) are mathematical representations of the relationships affecting the budget process
D) are used for nonfinancial aspects of budgeting
2) 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
3) ERP systems store vast quantities of information about the materials, machines and equipment, labor,
power, maintenance, and setups needed to manufacture different products. This helps simplify the
budgeting process as ERP systems ________.
A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity
B) automatically identify and record changes in processes involved in producing products
C) identify which underlying assumptions are likely to change
D) always use a rolling budget ensuring that a budget is always available for a specified future period
4) When performing a sensitivity analysis, if the selling price per unit is increased, then the ________.
A) per unit fixed administrative costs will increase
B) per unit direct materials purchase price will increase
C) total volume of sales will increase
D) total costs for sales commissions and other nonmanufacturing variable costs will increase
5) Sensitivity analysis helps managers evaluate risks ________.
A) by showing the effects of changes to the original data or an underlying assumption
B) by identifying inconsistencies in underlying assumptions and actual conditions
C) by removing the effects of foreign currency exposure and other uncontrollable factors
D) by identifying gaps in the production process using information on setups needed to manufacture
products
Answer the following questions using the information below:
Kramer Enterprises reports year-end information from 2015 as follows:
Sales (160,000 units) $960,000
Cost of goods sold 640,000
Gross margin 320,000
Operating expenses 260,000
Operating income $60,000
Kramer is developing the 2016 budget. In 2016 the company would like to increase selling prices by
12.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected
to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a
fixed cost.
6) What is budgeted sales for 2016?
A) $1,080,000
B) $1,000,000
C) $982,800
D) $873,600