Chapter 11—The Use of Budgets in Planning and Decision Making
Key
1. Budgets are:
2. Which of the following statements regarding budgeting is false?
3. A budget built from the ground up each year rather than by simply adding a percentage increase to last year’s
numbers is called:
4. Which of the following statements is true regarding budgeting?
5. Which of the following statements regarding budgets is true?
6. ____ activities involve developing objectives and goals for the organization as well as the actual preparation
of the budget.
7. Which type of activity includes ensuring that the objectives and goals developed by the organization are
being attained?
8. The comparison of actual outcomes with desired outcomes is an example of a(n):
9. Which of the following is not an advantage of the budgeting process?
10. Which of the following is an advantage of the budgeting process?
11. Which of the following is not increased by the budgeting process?
12. The alignment of the personal goals of an organization’s managers with the goals of the overall organization
is called:
13. The usual starting point when developing a sales forecast is:
14. In the budgeting process, which budget is typically prepared first?
15. Which of the following is not a consideration in the preparation of a sales budget or sales forecast?
16. Which of the following statements is false regarding the process of preparing a sales forecast?
17. Which of the following statements is false regarding sales forecasting?
18. In order to prepare a sales budget, a ____ is required.
19. Milton Inc. has prepared the following first quarter sales forecast:
January
250,000 units
February
375,000 units
March
315,000 units
Each unit sells for $1.50.
The sales budget for the first quarter is:
20. In 2008, Wingen Inc. sold 650,000 units at $3 each. Sales volume is expected to increase by 20 percent in
2009 while the price of each unit is expected to decrease by 20 percent. The expected sales revenue for 2009 is:
21. In 2008, Truman Products sold 900,000 units at $9 each. Sales volume is expected to increase by 10 percent
in 2009 while the price of each unit is expected to decrease by 15 percent. The expected sales revenue for 2009
is:
22. Last year, Garrison Manufacturing sold 500,000 units at $4 each. Both sales volume and sales price are
expected to increase by 10 percent in the upcoming year. The expected sales revenue for the upcoming year is:
23. Brady Inc. produced and sold 200,000 units for $50 each last year. For the upcoming year, management
believes that if they decrease the price of each unit by 5%, volume will increase 5%. What are Brady’s expected
sales revenues for the upcoming year?
24. Broughton Corp. has prepared a production budget for February. Management has determined that the total
required production for February is 360,000 units when an ending inventory of 40,000 units is desired and the
beginning inventory is 10,000 units.
Based on the above information, what were February’s budgeted sales?
25. Enloe Manufacturing has prepared a production budget for June. Management has determined that the total
required production for June is 680,000 units when an ending inventory of 50,000 units is desired and the
beginning inventory is 30,000 units.
Based on the above information, what were June’s budgeted sales?
26. Ligon Enterprises has prepared a production budget for October. Management has determined that the total
required production for October is 425,000 units when an ending inventory of 20,000 units is desired and the
beginning inventory is 8,000 units.
Based on the above information, what were October’s budgeted sales?
27. The budget that forecasts how many units a manufacturing company should produce in order to meet sales
projections is called a:
28. Which of the following budgets would probably not be prepared using information provided by the
production budget?
29. Which of the following equations best depicts a basic production budget?
30. Newman Products is preparing their first quarter production budget. The desired ending inventory of
finished goods for the month of January becomes:
31. Porcelain Interiors sells a variety of porcelain products including porcelain sinks. At December 31, the
company had 200 sinks in inventory. The company’s policy is to maintain a sink inventory equal to 5% of next
month’s sales. The company expects the following sales activity for the first quarter of the year:
January
1,500 sinks
February
2,000 sinks
March
2,300 sinks
What is the projected production for February?
32. Homestyle Interiors sells a variety of home furnishings including sleeper sofas. At March 31, the company
had 400 sofas in inventory. The company’s policy is to maintain a sleeper sofa inventory equal to 2% of next
month’s sales. The company expects the following sales activity for the second quarter of the year:
April
1,000 sofas
May
1,400 sofas
June
2,000 sofas
What is the projected production for May?
33. Homestyle Interiors sells a variety of home furnishings including entertainment centers. At March 31, the
company had 150 centers in inventory. The company’s policy is to maintain a entertainment center inventory
equal to 3% of next month’s sales. The company expects the following sales activity for the second quarter of
the year:
April
800 centers
May
1,200 centers
June
1,000 centers
What is the projected production for May?
34. Select Manufacturing sells a variety of office products including two-drawer file cabinets. On June 30, the
company had 300 cabinets in inventory. The company’s policy is to maintain a cabinet inventory equal to 10%
of next month’s sales. The company expects the following sales activity for the third quarter of the year:
July
3,000 cabinets
August
4,000 cabinets
September
4,800 cabinets
In addition, October’s sales are projected to be 5,000 cabinets. What is the total required production for the third quarter?
35. Keep-it-Cool Products Inc. manufactures a medium-sized drink cooler. At June 30, the company had 5,000
coolers in inventory. The company’s policy is to maintain a cooler inventory equal to 15% of next month’s sales.
The company expects the following sales activity for the third quarter of the year:
July
50,000 coolers
August
40,000 coolers
September
25,000 coolers
How many coolers should be produced in August?
36. Tunstall Manufacturing sells medical supplies, including stethoscopes. At September 30, the company had
1,000 stethoscopes in inventory. The company’s policy is to maintain an inventory equal to 8% of next month’s
sales. The company expects the following sales activity for the fourth quarter of the year:
October
11,000 stethoscopes
November
15,000 stethoscopes
December
14,000 stethoscopes
In addition, January sales for the following year are projected to be 16,000 stethoscopes. What is the total required production for the fourth quarter?
37. Donnelly Manufacturing
Donnelly Manufacturing sells cedar birdhouses. The company has prepared the following forecast for the third
quarter of 2009:
July
5,000 units
August
6,000 units
September
10,000 units
Inventory at June 30, 2009 was budgeted at 1,000 units. Management would like the desired quantity of finished goods inventory at the end of each
month to be equal to 20% of next month’s budgeted unit sales. October’s sales are projected to be 12,000 units.
Each completed unit of finished product requires 3 square feet of cedar at a cost of $1.50 per square foot.
Refer to the Donnelly Manufacturing information above. The company has determined that it needs 20 percent of next month’s raw material needs
on hand at the end of each month.
The total required production of birdhouses for the third quarter of 2009 is:
38. Donnelly Manufacturing
Donnelly Manufacturing sells cedar birdhouses. The company has prepared the following forecast for the third
quarter of 2009:
July
5,000 units
August
6,000 units
September
10,000 units
Inventory at June 30, 2009 was budgeted at 1,000 units. Management would like the desired quantity of finished goods inventory at the end of each
month to be equal to 20% of next month’s budgeted unit sales. October’s sales are projected to be 12,000 units.
Each completed unit of finished product requires 3 square feet of cedar at a cost of $1.50 per square foot.
Refer to the Donnelly Manufacturing information above. The company has determined that it needs 10 percent of next month’s raw material needs
on hand at the end of each month.
The cost of the direct material that should be purchased in August is:
39. Jones Manufacturing
Jones Manufacturing sells unique decorative water fountains. The company has prepared the following forecast
for the first quarter of 2010:
January
1,000 units
February
1,400 units
March
2,000 units
Ending inventory at December 31, 2009 was budgeted at 80 units. Management would like the desired quantity of finished goods inventory at the end
of each month to be equal to 10 percent of next month’s budgeted unit sales. April’s sales are projected to be 1,600 units.
Each completed unit of finished product requires 3 pounds of compounding material at a cost of $2.00 per pound. The company has determined that
it needs 15 percent of next month’s raw material needs on hand at the end of each month.
Refer to the Jones Manufacturing information above. The total required production of water fountains for the first quarter of 2009 is:
40. Jones Manufacturing
Jones Manufacturing sells unique decorative water fountains. The company has prepared the following forecast
for the first quarter of 2010:
January
1,000 units
February
1,400 units
March
2,000 units
Ending inventory at December 31, 2009 was budgeted at 80 units. Management would like the desired quantity of finished goods inventory at the end
of each month to be equal to 10 percent of next month’s budgeted unit sales. April’s sales are projected to be 1,600 units.
Each completed unit of finished product requires 3 pounds of compounding material at a cost of $2.00 per pound. The company has determined that
it needs 15 percent of next month’s raw material needs on hand at the end of each month.
Refer to the Jones Manufacturing information above. The cost of the direct material that should be purchased in February is:
41. Thurston Products
Thurston Products sells a popular style of running shoe. The company has prepared the following sales forecast
for the second quarter of 2010:
April
80,000 pairs
May
100,000 pairs
June
130,000 pairs
Ending inventory at March 31, 2010 was budgeted at 5,000 pairs. Management would like the desired quantity of finished goods inventory at the end
of each month to be equal to 6 percent of next month’s budgeted unit sales. July’s sales are projected to be 120,000 pairs.
Each completed unit of finished product requires 1.5 pounds of rubber material at a cost of $.75 per pound. The company has determined that it needs
10 percent of next month’s raw material needs on hand at the end of each month.
Refer to the Thurston Products information above. The total required production of running shoes for the second quarter of 2010 is:
42. Thurston Products
Thurston Products sells a popular style of running shoe. The company has prepared the following sales forecast
for the second quarter of 2010:
April
80,000 pairs
May
100,000 pairs
June
130,000 pairs
Ending inventory at March 31, 2010 was budgeted at 5,000 pairs. Management would like the desired quantity of finished goods inventory at the end
of each month to be equal to 6 percent of next month’s budgeted unit sales. July’s sales are projected to be 120,000 pairs.
Each completed unit of finished product requires 1.5 pounds of rubber material at a cost of $.75 per pound. The company has determined that it needs
10 percent of next month’s raw material needs on hand at the end of each month.
Refer to the Thurston Products information above. The cost of the direct material that should be purchased in May is:
43. Robusto Coffee Traders Inc. sells prepackaged coffees to a variety of businesses throughout the East Coast.
Robusto purchases the coffee in bulk from a wholesale distributor and packages the coffee themselves to sell to
customers. The company expects to sell 500,000 and 600,000 one-pound packages of coffee during 2008 and
2009, respectively. The company had 18,000 one-pound packages on hand at the beginning of 2008, and the
company has a policy of maintaining an ending inventory equal to 10 percent of the packages needed for next
year’s expected sales.
How many packages of coffee should the company plan to purchase in 2008?
44. Woodsman Inc. produces a variety of wood finishing products including gallons of varnish that it
manufactures and packages under its own name. The company has computed the required production of gallons
of varnish it will need for the first three months of 2009 as follows:
January
300,000 gallons
February
340,000 gallons
March
400,000 gallons
Each gallon of varnish requires 10 ounces of a special chemical. This chemical costs $.25 per ounce. The company has determined that it needs 20
percent of next month’s raw material needs on hand at the end of each month.
The cost of the direct material that should be purchased in February is:
45. Crafty Cathy Products Inc. manufactures a product sold in most craft stores which requires non-soluble glue
as one of the key ingredients. The company has already estimated that it needs to produce the following number
of units of product for the second quarter of 2009:
April
75,000 units
May
90,000 units
June
84,000 units
Each unit requires .5 ounces of glue at a cost of $.30 an ounce. The company has determined that it needs 15 percent of next month’s raw material
needs on hand at the end of each month.
The cost of the glue that should be purchased in May is:
46. Carteret Inc.
Carteret Inc. manufactures hammocks under various brand names. The company sells most of its hammocks in
the second quarter of each year. Their production budget for the second quarter shows the following number of
hammocks needs to be produced:
April
6,000 units
May
10,000 units
June
15,000 units
Each unit requires 30 feet of cotton rope cord which costs $.50 per foot. The company has determined that it needs 20 percent of next month’s raw
material needs on hand at the end of each month.
In addition, each hammock requires 45 minutes of direct labor for assembly and inspection at a cost of $.25 per minute. The company currently
applies manufacturing overhead to production at the rate of $8 per direct labor hour.
Refer to the Carteret Inc. information above. The cost of the rope cord that should be purchased in May is:
47. Carteret Inc.
Carteret Inc. manufactures hammocks under various brand names. The company sells most of its hammocks in
the second quarter of each year. Their production budget for the second quarter shows the following number of
hammocks needs to be produced:
April
6,000 units
May
10,000 units
June
15,000 units
Each unit requires 30 feet of cotton rope cord which costs $.50 per foot. The company has determined that it needs 20 percent of next month’s raw
material needs on hand at the end of each month.
In addition, each hammock requires 45 minutes of direct labor for assembly and inspection at a cost of $.25 per minute. The company currently
applies manufacturing overhead to production at the rate of $8 per direct labor hour.
Refer to the Carteret Inc. information above. The total cost of direct labor and manufacturing overhead for the month of May is:
48. Sellars Inc. manufactures widgets. At June 30, the company had 2,000 widgets in inventory. The company’s
policy is to maintain a widget ending inventory equal to 10% of next month’s sales. In addition, each widget
manufactured requires 6 minutes of assembly and inspecting time at a cost of $.25 per minute.
The company expects the following sales activity for the third quarter of the year:
July
25,000 units
August
38,000 units
September
30,000 units
What is the projected direct labor cost for August?
49. Carson Products Inc. manufactures LEDs (light emitting diodes) for use in vehicles. At September 30, the
company had 5,000 LED units in inventory. The company’s policy is to maintain a LED ending inventory equal
to 25% of next month’s sales. In addition, each LED manufactured requires 2 minutes of assembly and
inspecting time at a cost of $.30 per minute.
The company expects the following sales activity for the fourth quarter of the year:
October
90,000 units
November
100,000 units
December
80,000 units
What is the projected direct labor cost for November?
50. Grisham Products Inc. manufactures engines for small scooters. At September 30, the company had 2,500
engines in inventory. The company’s policy is to maintain an ending inventory equal to 8% of next month’s
sales. Each engine manufactured requires 45 minutes of assembly and inspecting time at a cost of $.30 per
minute. Grisham applies overhead to engines at a rate of $.15 per direct labor minute.
The company expects the following sales activity for the fourth quarter of the year:
October
12,000 units
November
20,000 units
December
35,000 units
What is the projected applied manufacturing overhead cost for November?
51. Which of the following would not be included on a cash receipts budget?
52. Which of the following would most likely not be included on a cash disbursements budget?
53. Which of the following statements regarding cash flows is true?
54. The “Beginning Cash Balance” would most likely appear on which type of budget?
55. Which of the following is not one of the sections that appears on a summary cash budget?
56. Cash paid for the purchase of property, plant, and equipment will be shown:
57. Cash paid for the retirement of long-term debt will be shown:
58. Cash received from the borrowing of long-term debt will be shown:
59. Ingalls Mercantile Inc. sells bolts of fabric to retailers for $80 per bolt. The company’s accountant has
prepared the following sales forecast (in bolts) for the first quarter of 2009:
January
600 bolts
February
1,000 bolts
March
700 bolts
Historically, the cash collection of sales has been as follows: 60 percent in the month of sale, 30 percent in the month following sale, and 9 percent in
the second month following sale.
Cash receipts for March are expected to be:
60. Blooming Products Inc. sells flower bulbs to local nurseries. Each bag of bulbs sells for $2. The company’s
accountant has prepared the following sales forecast (in bags) for the fourth quarter of 2009:
October
5,000 bags
November
9,000 bags
December
8,000 bags
Historically, the cash collection of sales has been as follows: 50 percent in the month of sale, 40 percent in the month following sale, and 10 percent
in the second month following sale.
Cash receipts for December are expected to be:
61. Cicero Manufacturing Inc. sells gloves at local ski resorts during the winter months. Each pair of gloves
sells for $15. The following sales forecast (in units) has been prepared for October 2005 through March 2009:
October
500
November
800
December
1,000
January
1,200
February
900
March
600
Historically, the cash collection of sales has been as follows: 60 percent in the month of sale, 35 percent in the month following sale, and 4 percent in
the second month following sale. The remaining 1 percent is uncollectible.
Cash receipts for January are expected to be:
62. Taylor Inc. sells and installs residential water heaters. Its customers pay for their water heaters over four
months by paying in equal, monthly installments. The sales price of an installed water heater is $600. Taylor
sold and installed the following number of water heaters in the first six months of 2009:
January
80 units
February
100 units
March
70 units
April
84 units
May
90 units
June
75 units
Cash receipts for June are expected to be:
63. Browning Inc. has projected the following sales information for the fourth quarter of 2009:
October
November
December
Cash sales
$19,000
$26,000
$32,000
Credit sales
35,000
45,000
60,000
Total sales
$54,000
$71,000
$92,000
Credit sales are collected over a two-month period, with 60 percent collected in the month of sale and 40 percent collected in the month following
sale.
Total cash collections for December are:
64. Boylan Inc. has projected the following sales information for the first quarter of 2009:
January
February
March
Cash sales
$20,000
$35,000
$40,000
Credit sales
43,000
57,000
55,000
Total sales
$63,000
$92,000
$95,000
Credit sales are collected over a two-month period, with 55 percent collected in the month of sale and 45 percent collected in the month following
sale.
Total cash collections for March are:
65. Becham Inc. had the following purchases budgeted for the last quarter of 2009:
October
$75,000
November
90,000
December
84,000
Becham pays one-half of a month’s purchases in the month of purchase and the remainder in the following month. What are expected cash
disbursements for the month of December?
66. Holmes Manufacturing Inc. had the following purchases budgeted for the last six months of 2009:
July
$60,000
August
45,000
September
52,000
October
60,000
November
80,000
December
85,000
Holmes pays one-half of a month’s purchases in the month of purchase and the remainder in the following month. What are expected total cash
disbursements for the last quarter of 2009?
67. Merrell Enterprises had the following purchases budgeted for the last six months of 2009:
July
$100,000
August
80,000
September
90,000
October
70,000
November
90,000
December
100,000
Merrell pays one-half of a month’s purchases in the month of purchase and the remainder in the following month. What are expected total cash
disbursements for the last quarter of 2009?
68. In December of 2008, Jones Inc. was formed as a corporation. The company plans to start its operations in
early January of 2009. They have the following purchases budgeted for the first quarter of 2009:
January
$600,000
February
500,000
March
300,000
Jones has worked out agreements with its various suppliers to pay for one-fourth of a month’s purchases each month, beginning in the month of
purchase, until the purchases are paid in full. No purchases were made prior to January.
What are total cash disbursements expected for the first quarter of 2009?
69. In September of 2009, Mitford Products Inc. began doing business as a corporation. The company plans to
start making its first purchases in October of 2009. They have the following purchases budgeted for the last
quarter of 2009:
October
$850,000
November
600,000
December
720,000
Mitford has worked out agreements with its various suppliers to pay for one-third of a month’s purchases each month, beginning in the month of
purchase, until the purchases are paid in full. No purchases were made prior to October.
What are expected total cash disbursements for the last quarter of 2009?
70. Griswald Inc. would like to prepare a summary cash budget for the first quarter of 2009. The following
information from the cash receipts and cash disbursements budgets are available:
January
February
March
Cash receipts
$50,000
$72,000
$80,000
Cash disbursements
42,000
75,000
71,000
The company has a beginning cash balance on January 1, 2009 of $5,000. No other receipts and disbursements in the first quarter are expected. What
is the cash balance at the end of March expected to be?