Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 6 Master Budget and Responsibility Accounting
Objective 6.1
1) Which of the following is true of a budget?
A) Budgets are used to express only the operational plans and not the strategic plans of a company.
B) Budgets do not account for nonfinancial aspects of the upcoming period.
C) Budgets are most useful when they are planned independent of the company’s strategic plans.
D) Budgets help managers to revise their plans and strategies.
2) Which of the following is a financial budget?
A) budgeted balance sheet
B) cash receivables budget
C) production budget
D) cost of goods sold budget
3) Budgets are used to ________.
A) increase the book value of its assets
B) communicate with external stakeholders
C) calculate the income tax liability
D) formulate company strategies
4) Which of the following is true of master budgets?
A) They include only financial aspects of a plan and exclude nonfinancial aspects.
B) They aid in coordinating what needs to be done to implement a plan.
C) They aid in quantifying the expectations of all stakeholders.
D) They must be administered rigidly after they are committed to.
5) Operating decisions primarily deal with ________.
A) the best use of scarce resources
B) how to obtain funds to acquire resources
C) acquiring equipment and buildings
D) satisfying stockholders
6) 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
7) A master budget ________.
A) is the initial plan of what the company intends to accomplish in the period and evolves from
both the operating and financing decisions
B) is a substitute for the management functions of planning and coordination
C) improves companies’ market capitalization and evolves from both the investing and financing
decisions
D) provides an ethical framework for decision making
8) Which of the following is generally expressed through a short-run budget?
A) operational plans
B) expansion plans
C) strategic plans
D) startup plans
9) Which of the following statements is true of budgets?
A) Master budgets express management’s operating and financial plans.
B) Financial budgets are prepared before the master budget is prepared.
C) Operating budgets are prepared independently of the master budget.
D) Financial budgets are working documents at the core of the budgeting process.
10) A master budget forces managers to examine the business as they plan, so they can ________.
A) detect inaccurate historical records to avoid errors in budgets
B) set expectations against which actual results can be compared
C) complete the budgeting task on time
D) ensure that only financial risks and opportunities are incorporated
11) A budget is the quantitative expression of a proposed plan of action by management for a specified
period.
12) A budget generally includes both financial and nonfinancial aspects of the plan.
13) An organization’s strategy matches its capabilities with the opportunities in the marketplace to
accomplish its objectives.
14) Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as
the number of physical units manufactured.
15) Operating plans are generally expressed through long-run budgets.
16) A budget aids to coordinate what needs to be done to implement the proposed plan.
17) Long-run planning and short-run planning are best performed independently of each other.
18) Financing decisions deal with how to best use the limited resources of an organization.
19) The feedback from budgets can lead to changes in plans and strategies.
20) Budgeted financial statements are called pro forma statements.
21) Describe the benefits of preparing an operating budget to an organization.
22) 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 an
improper budgeting function. The company made a good product and market potential was great.
Required:
Describe the usual budgeting cycle that well-managed companies adopt?
Objective 6.2
1) Which of the following is true of budgets when they are administered thoughtfully?
A) They eliminate subjectivity in performance evaluation.
B) They can eliminate the uncertainty faced by a company.
C) They promote coordination within the subunits of a company.
D) They are a substitute the planning and coordination functions of management.
2) A budget is an end product of negotiations among senior and subordinate mangers because ________.
A) budgeting is their mutual responsibility
B) senior managers alone cannot spare the time required for the budgeting process
C) senior managers are responsible for providing information on competitors performance and
subordinate managers are responsible for information on external market conditions
D) senior managers want stiffer targets and subordinates want relatively easy targets
3) Which of the following is a limitation of using past performance as a basis for judging actual results?
A) It does not account for productivity increases over the periods.
B) It increases the incentive for managers to introduce budgetary slack.
C) It does consider inefficiencies of previous periods.
D) It increases the tendency of senior managers exaggerating changes in future conditions as opposed to
changes in current conditions.
4) Challenging budgets tend to ________.
A) discourage out-of-the-box and creative thinking as there is very little room for error
B) set unrealistic expectations and are perceived as overly ambitious and unachievable
C) increase anxiety without motivation not meeting them is viewed as a failure
D) motivate improved performance as employees work more intensely to avoid failure
5) A limitation of using past performance as a basis for judging actual results is that ________.
A) future conditions can be different from the past
B) any undervaluation of profits in the past period is likely to continue
C) any subsequent change in accounting treatment will distort performance evaluation
D) they tend to distort results when current and past conditions are similar
6) 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) to avoid any feedback from the budgets due to past miscues
C) inefficiencies of the past year can be included
D) a rolling budget can be implemented
7) Which of the following is a reason why top managers want lower-level managers to participate in the
budgeting process?
A) To benefit from their experience with the day-to-day aspects of running the business.
B) To reduce the time and cost expended in the budgeting process.
C) To ensure that they do not introduce any budgetary slack.
D) To ensure that the budgets are administered rigidly given the changing market conditions.
8) Demanding but achievable targets tend to ________.
A) be set by subordinate managers to create intrinsic reasons to achieve targets
B) create unnecessary anxiety that de-motivates employees
C) improve performance of employees when they are closer to the target
D) be perceived as ambitious with little chance of success in achieving targets
9) Which of the following is referred to as the bottom-up aspect of the budgeting process?
A) lower-level managers setting their individual targets that aggregate to be the company-wide target
B) senior managers consulting middle- and lower-level managers to investigate any deviations from the
budget
C) lower-level managers implementing the budgets with senior managers monitoring progress and
investigating deviations
D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge
10) Participation of employees in the budgeting process helps ________.
A) create greater commitment towards the budget
B) create demanding but achievable budget
C) decrease deviations from the budget
D) secure communication of sensitive information
11) 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) to face little interference in the day-to-day aspects of running the business
C) be inactive participants in the budgeting process
D) convert the budget to a shorter more reasonable time period
12) Which of the following is a benefit of budgeting?
A) It helps investors to value stocks.
B) It helps managers gather information for improving future performance.
C) It helps managers to take marketing decisions.
D) It helps in increasing market capitalization of the company.
13) 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
14) Budgets should ________.
A) be flexible
B) be administered rigidly
C) only be developed for short periods of time
D) include only variable costs
15) After a budget is agreed upon and finalized by the management team, the amounts should NOT be
changed for any reason.
16) Even in the face of changing conditions, attaining the original budget is critical.
17) Lower-level managers will not actively participate in the budget process if they perceive upper
management does not believe in the process.
18) Budgeting helps managers gather information for improving only the budgeted period’s performance.
19) Bottom-up budgets entrusts senior managers to prepare budgets and lower-level managers to
execute them.
20) It is best to compare this year’s performance with last year’s actual performance rather than this year’s
budget.
21) When administered wisely, budgets promote communication and coordination among the various
subunits of the organization.
Objective 6.3
1) Which of the following is a factor while choosing the period of a budget?
A) the frequency of interim financial statements
B) the estimated period required to achieve budget targets
C) the general economic trend
D) the motive for creating the budget
2) Which of the following is a component of operating budgets?
A) sales budget
B) budgeted statement of cash flows
C) capital expenditures budget
D) budgeted balance sheet
3) The operating budget process generally concludes with the preparation of the ________.
A) production budget
B) cash flow statement
C) research and development budget
D) budgeted income statement
4) Which of the following best describes a rolling budget?
A) It is a budget that outlines the amount required to roll over debt in a future period.
B) It is a budget that is always available for a specified future time period.
C) It is a budget that outlines budgeted expenses.
D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant.
5) The ________ is a component of financial budgets.
A) cost of goods sold budget
B) marketing costs budget
C) distribution costs budget
D) cash budget
6) ________ include a budgeted statement of cash flows and a budgeted balance sheet.
A) Revenue budgets
B) Financial budgets
C) Operating budgets
D) Production budgets
7) The order to follow when preparing the operating budget is ________.
A) revenues budget, production budget, and direct manufacturing labor costs budget
B) costs of goods sold budget, production budget, and cash budget
C) revenues budget, manufacturing overhead costs budget, and production budget
D) cash expenditures budget, revenues budget, and production budget
8) 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
A) ABDC
B) DABC
C) DCAB
D) CABD
9) 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
10) ________ is the usual starting point for budgeting.
A) The revenues budget
B) The estimated net income
C) The production budget
D) The cash budget
11) 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
12) Costs such as supervision, depreciation, maintenance, supplies, and power. are included in the
________.
A) capital expenditures budget
B) distribution costs budget
C) revenues budget
D) manufacturing overhead budget
13) High inventory levels increase the ________.
A) cost of carrying inventory, the costs of quality, and shrinkage costs
B) revenues and expected profits
C) cost of equity, cost of debt, and cost of short-term funds
D) cost of materials, the costs of overhead, and opportunity costs
14) The revenues budget identifies ________.
A) expected cash flows for each product
B) actual sales from last year for each product
C) the expected level of sales for the company
D) the variance of sales from actual for each product
15) 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
16) Which of the following is a benefit of keeping inventory levels low?
A) It reduces setup costs.
B) It reduces shrinkage costs.
C) It reduces the loss from lost sales.
D) It reduces inventory turnover.
17) Budgeted production equals ________.
A) beginning finished goods inventory + budgeted unit sales – targeted ending finished goods inventory
B) targeted ending finished goods inventory + beginning finished goods inventory – budgeted unit sales
C) budgeted unit sales + targeted ending finished goods inventory – beginning finished goods inventory
D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory
18) Best products, an Atlanta based company, is in the midst of its budgeting process. It has already
prepared its direct materials usage budget and is now in the process of preparing its direct material
purchase budget. In addition to the details gathered to prepare the direct materials usage budget, Best
also must know ________.
A) the level of direct material inventory to be maintained
B) the ratio of direct materials to cost of goods sold
C) the beginning direct materials inventory level
D) the quantity of direct materials to be purchased
19) Total finished units to be produced is based on the ________.
A) direct material purchase budget
B) budgeted sales units
C) direct material usage budget
D) budgeted manufacturing overhead
20) Which of the following is most likely to be a cost driver for the variable portion of marketing costs?
A) percentage of markup on cost
B) number of units produced
C) increase in revenues attributable to such marketing
D) number of units units sold
21) Which of the following is required to arrive at the budgeted units to be produced in a year?
A) estimated direct materials inventory required at the end of the year
B) estimated finished goods inventory required at the end of the year
C) amount of direct materials to be used during the year
D) amount of manufacturing overhead to be incurred
22) When direct material and direct labor is the limiting factor, revenue budgets are usually based on
________.
A) expected demand of the company’s products
B) the capital in the budget period
C) the supply of indirect material and labor in the market
D) maximum units that can be manufactured
23) Which of the following information is required by a company’s manager while preparing a
manufacturing overhead costs budget?
A) estimated incentives to be paid to marketing personnel
B) estimated expense for office supplies
C) estimated expense for maintenance of factory building
D) rent expense for lease of office building
24) Esther Baskets Company expects to manufacture and sell 20,000 baskets in 2016 for $5 each. There are
4,000 baskets in beginning finished goods inventory with target ending inventory of 5,000 baskets. The
company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2016
budgeted income statement?
A) $105,000
B) $100,000
C) $95,000
D) $55,000
25) Orange Corporation has budgeted sales of 16,000 units, targeted ending finished goods inventory of
4,000 units, and beginning finished goods inventory of 2,000 units. How many units should be produced
next year?
A) 22,000 units
B) 20,000 units
C) 18,000 units
D) 16,000 units
26) For next year, Roberto, Inc., has budgeted sales of 15,000 units, targeted ending finished goods
inventory of 750 units, and beginning finished goods inventory of 450 units. All other inventories are
zero. How many units should be produced next year?
A) 14,700 units
B) 15,000 units
C) 15,300 units
D) 16,200 units
27) Antique Brass Company has budgeted sales volume of 120,000 units and budgeted production of
108,000 units, while 20,000 units are in beginning finished goods inventory. How many units are targeted
for ending finished goods inventory?
A) 20,000 units
B) 32,000 units
C) 12,000 units
D) 8,000 units
Answer the following questions using the information below:
Kason, Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct
manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory
levels apply to 2016:
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
28) On the 2016 budgeted income statement, what amount will be reported for sales?
A) $246,000
B) $240,000
C) $312,000
D) $318,000
29) How many pool cues need to be produced in 2016?
A) 22,500 cues
B) 22,000 cues
C) 20,500 cues
D) 19,500 cues
30) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?
A) $139,800
B) $136,000
C) $132,600
D) $153,000
31) What are the 2016 budgeted costs for direct materials, direct manufacturing labor, and manufacturing
overhead, respectively?
A) $48,000; $96,000; $19,200
B) $44,000; $88,000; $17,600
C) $41,000; $82,000; $16,400
D) $40,000; $80,000; $16,000
Answer the following questions using the information below:
Elton, Inc., expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct
manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels
apply to 2016:
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
32) On the 2016 budgeted income statement, what amount will be reported for sales?
A) $122,000
B) $118,000
C) $140,000
D) $120,000
33) How many ceramic vases should be produced in 2016?
A) 5,900 vases
B) 6,100 vases
C) 7,000 vases
D) 6,000 vases
34) On the 2016 budgeted income statement, what amount will be reported for cost of goods sold?
A) $105,000
B) $91,500
C) $90,000
D) $88,500
35) What are the 2016 budgeted production costs for direct materials, direct manufacturing labor, and
manufacturing overhead, respectively?
A) $12,200; $61,000; $18,300
B) $12,000; $60,000; $18,000
C) $2,000; $10,000; $3,000
D) $2,000; $0; $4,500
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
36) For January, budgeted gross margin is ________.
A) $100,000
B) $140,000
C) $60,000
D) $50,000
37) For January, the amount budgeted for the nonmanufacturing costs budget is ________.
A) $78,000
B) $10,000
C) $168,000
D) $18,000