Chapter 19—Profit Planning Key
1. A strategic plan identifies strategies for future activities and operations, generally covering at least five
years.
2. Budgets are financial plans for the future.
3. The master budget is composed of operating budgets and financial budgets.
4. Control is achieved by comparing actual results with budgeted results on a periodic basis.
5. Planning is looking ahead to see what actions should be taken to realize particular goals.
6. Budgets identify objectives and the actions needed to achieve them because they are foresighted financial
plans.
7. A firm should develop a strategic plan before preparing a budget.
8. A firm acquires information that can be used to improve decision making from a budgetary system.
9. Comparing actual results with budgeted results on a periodic basis provides control in a budgetary system.
10. A large difference between actual and planned results is feedback that the system is providing adequate
control.
11. Communication and coordination are served by budgets.
12. The master budget is typically a comprehensive financial plan for the organization for the past fiscal year.
13. A continuous budget is a moving 12-month budget.
14. The department manager reviews the budget, provides policy guidelines and budgetary goals, and resolves
differences that arise as the budget is prepared, approves the final budget, and monitors the actual performance
of the organization as the year unfolds.
15. The budget director is the person responsible for directing and coordinating the organization’s overall
budgeting process.
16. The first budget to be prepared is the sales budget.
17. The production budget is prepared in units and in dollars.
18. The direct materials purchases budget is based on the sales budget.
19. There are as many direct materials purchases budgets as there are products.
20. The direct labor budget includes: units to be produced, direct labor time needed per unit, and total direct
labor cost for the period.
21. The selling and administrative expenses budget is part of the operating budgets.
22. The sales budget is used directly in the development of the production budget.
23. In preparing the direct labor budget, the average wage rate is used to calculate total direct labor cost.
24. The cash budget includes the beginning balance of cash, cash receipts, cash disbursements, and the ending
balance of cash.
25. If the initial cash budget indicates a cash deficiency, the company must go out of business.
26. Cash receipts must be at least as much as sales.
27. Cash budgets are often prepared monthly or even weekly.
28. The output of the cost of goods sold budget is entered into the pro forma balance sheet.
29. Individual behavior that is in basic conflict with the goals of the organization is called goal congruence.
30. Pseudoparticipation is one of the potential problems with participative budgeting.
31. Budgets should be based on ideal standards to encourage everyone to reach for the highest level of
performance.
32. Ideally, managers are held accountable for controllable costs.
33. Myopic behavior is one of the advantages of participative budgeting.
34. Monetary incentives include salary increases, bonuses, and promotions.
35. __________________ is looking ahead to see what actions should be taken to realize particular goals.
36. The ________________ plots a direction for an organization’s future activities and operations; it generally
covers at least five years.
37. Budgets improve _________________.
38. The _________________ is the comprehensive financial plan for the organization as a whole.
39. A __________________ is a moving 12-month budget.
40. The controller of the company usually serves as the __________________.
41. The cash budget and budgeted balance sheet are part of the ________________.
42. The _______________ tells how many units must be produced to meet sales needs and to satisfy ending
inventory requirements.
43. The __________________ shows the expected cost of all production costs other than direct materials and
direct labor.
44. Salaries expense, advertising expense and depreciation expense would be included in the
______________________ budget.
45. The basic structure of a ______________ includes cash receipts, cash disbursements, any excess or
deficiency of cash, and financing.
46. _________________ consists of beginning cash balance and the expected cash receipts.
47. The alignment of managerial and organizational goals is often referred to as _______________.
48. ____________________ is individual behavior that is in basic conflict with the goals of the organization.
49. ______________ are the means an organization uses to influence a manager to exert effort to achieve an
organization’s goals.
50. Examples of ________________ include job enrichment, increased responsibility and autonomy, and
recognition programs.
51. _____________________ allows subordinate managers considerable say in how the budgets are
established.
52. ___________________ exists when a manager deliberately underestimates revenues or overestimates cost
in an effort to make the future period appear less attractive in the budget than they think it will be in reality.
53. When top management assumes total control of the budgeting process and only seeks superficial
participation from lower-level managers this is known as ________________.
54. _________________ are used to ensure that budgeted costs can be realistically compared with costs for
actual levels of activity.
55. Which of the following is an advantage of budgeting?
56. Which of the following is a use of budgets for control?
57. Which of the following budgets can be used for control?
58. In a (n) ____, as one month expires, an additional month in the future is added to the budget so that the
company always has a 12-month plan on hand.
59. The ____ is the person responsible for directing and coordinating the organization’s overall budget process.
60. Looking backward to determine what actually happened and comparing it with the previously planned
outcomes is
61. Budgets are
62. The master budget is
63. Which of the following is not true?
64. The first step in creating the master budget is the creation of the
65. The budget that describes how many units must be produced in order to meet sales needs and ending
inventory objectives is the
66. Direct materials needed for production is calculated by
67. In preparing the overhead budget, many companies use
68. Which of the following statements is true?
69. The ending finished goods inventory budget supplies information needed for the
70. Which of the following budgets are needed to calculate a budgeted unit cost?
71. The selling and administrative expenses budget includes
72. Budgeted operating income includes
73. Depreciation expense on sales equipment appears in a separate line on which of the following budgets?
74. Rodriquez Company budgeted the following sales in units:
January
30,000
February
20,000
March
40,000
Rodriquez’s policy is to have 20% of the following month’s sales in inventory. On January 1, inventory equaled 7,500 units. February production in
units is
75. A company has had stable sales and production for several years. Next year, sales are expected to increase
by at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished
product and direct materials purchases, what will be the likely effect on the desired ending inventory of finished
product?
76. A company expects the following sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
40,000
30,000
60,000
80,000
$5
$5
$5
$6
Budgeted sales revenue for the year is
77. A company provided the following information on sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
40,000
40,000
30,000
80,000
$5
$5
$5
$6
Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next quarter’s sales in ending inventory,
which quarter will have the lowest production?
78. Belant Company budgeted 200,000 units of production for June, 210,000 units for July and 300,000 units
for August. Each unit requires 0.25 direct labor hours. How many direct labor hours are budgeted for August?
79. In budgeting direct labor hours for the coming year, it is important to
80. Galvern Company provided the following data for July:
Direct materials
$50,000
Direct labor
$25,000
Overhead
$90,000
Beginning finished goods
$15,000
Ending finished goods
$34,000
Production in units
10,000
What is the cost of goods sold?
81. A production budget is most important for which of the following?
82. A company requires 200 pounds of plastic to meet the production needs of a product. It currently has 20
pounds of plastic inventory. The desired ending inventory of plastic is 60 pounds. How many pounds of plastic
should be budgeted for purchasing during the coming period?
83. A company plans on selling 400 units. The selling price per unit is $5. There are 40 units in beginning
inventory, and the company would like to have 75 units in ending inventory. How many units should be
produced for the coming period?
84. A company has provided a sales budget for the next four months. It bases its production budget on the sales
budget, and has a policy that each month’s ending inventory of finished product must be equal to 25% of the
following month’s sales needs. The direct materials purchases budget is based on the production budget. The
company’s policy for each month’s ending inventory of raw materials is that they must be equal to 10% of the
following month’s production needs for raw materials. Given this information, the company can prepare direct
materials purchases budgets for how many months?
85. Which of the following is the most common starting point in the information gathering process for
budgeting?
86. Which of the following is an operating budget?
87. What is the formula used to compute the units to be produced?
88. Candace Company produces and sells pillows. It expects to sell 10,000 pillows in the year 2012 and had
1,000 pillows in finished goods inventory at the end of 2011. Candace would like to complete operations in the
year 2012 with at least 1,250 completed pillows in inventory. There is no ending work–in-process inventory.
The pillows sell for $5 each. How many pillows would be produced in the year 2012?
89. Bright Lamp Company manufactures lamps. The estimated number of lamp sales for the last three months
of 2011 are as follows:
Month
Sales
October
10,000
November
14,000
December
13,000
Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is budgeted to equal 25 percent of the next
month’s sales. Bright Lamp expects to sell the lamps for $25 each. January 2012 sales are projected at 16,000 lamps. How many lamps should be
produced in November?
90. In going from the sales budget to the production budget, adjustments to the sales budget need to be made
for
91. Watson Corporation manufactures boxes. The estimated numbers of boxes sold for the first three months of
2011 are as follows:
Month
Sales
January
3,000
February
4,200
March
3,900
Finished goods inventory at the end of December was 600 units. Ending finished goods inventory is equal to 20 percent of the next month’s sales.
Watson Corporation expects to sell the boxes for $5 each. April 2011 sales are projected at 4,500 boxes. How many boxes should be produced in
February?
92. Figure 9-1.
Saphire Company budgeted the following production in units for the second quarter of the year:
April
45,000
May
38,000
June
42,000
Each unit requires four pounds of raw material. Saphire’s policy is to have 30 percentage of the following month’s production needs for materials in
inventory. This policy was met in March.
Refer to Figure 9-1. Raw materials purchases budgeted for May in pounds equal:
93. Figure 9-1.
Saphire Company budgeted the following production in units for the second quarter of the year:
April
45,000
May
38,000
June
42,000
Each unit requires four pounds of raw material. Saphire’s policy is to have 30 percentage of the following month’s production needs for materials in
inventory. This policy was met in March.
Refer to Figure 9-1. Desired ending inventory for April in pounds equals:
94. Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:
SR200
TX500
May
8,000
20,000
June
13,000
32,000
July
11,000
39,000
August
18,000
46,000
Kenner’s ending inventory policy is that SR200 should have 15 percent of next month’s sales in ending inventory and TX500 should have 40 percent
of next month’s sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in inventory on May 1.
Kenner wants to have 20 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 9-2. How many units of TX500 are budgeted for production in June?
95. Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:
SR200
TX500
May
8,000
20,000
June
13,000
32,000
July
11,000
39,000
August
18,000
46,000
Kenner’s ending inventory policy is that SR200 should have 15 percent of next month’s sales in ending inventory and TX500 should have 40 percent
of next month’s sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in inventory on May 1.
Kenner wants to have 20 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 9-2. What is the budgeted production of SR200 for May in units?
96. Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:
SR200
TX500
May
8,000
20,000
June
13,000
32,000
July
11,000
39,000
August
18,000
46,000
Kenner’s ending inventory policy is that SR200 should have 15 percent of next month’s sales in ending inventory and TX500 should have 40 percent
of next month’s sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in inventory on May 1.
Kenner wants to have 20 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May?
97. Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:
SR200
TX500
May
8,000
20,000
June
13,000
32,000
July
11,000
39,000
August
18,000
46,000
Kenner’s ending inventory policy is that SR200 should have 15 percent of next month’s sales in ending inventory and TX500 should have 40 percent
of next month’s sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in inventory on May 1.
Kenner wants to have 20 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 9-2. What is the desired ending inventory of component A for May?
98. Figure 9-3.
Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is
budgeted as follows:
August
26,000
September
48,000
October
31,000
Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour. Monthly overhead averages $8 per direct labor hour
plus fixed overhead of $4,300.
Refer to Figure 9-3. What is the direct labor cost budgeted for September?
99. Figure 9-3.
Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is
budgeted as follows:
August
26,000
September
48,000
October
31,000
Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour. Monthly overhead averages $8 per direct labor hour
plus fixed overhead of $4,300.
Refer to Figure 9-3. What is the total overhead budgeted for the month of September?
100. Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford’s policy is
that 10 percent of the following month’s sales must be in ending inventory. On November 1, there were 14,000
units in inventory.
It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable
overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month.
Refer to Figure 9-4. What is the direct labor cost budgeted for November?
101. Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford’s policy is
that 10 percent of the following month’s sales must be in ending inventory. On November 1, there were 14,000
units in inventory.
It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable
overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month.
Refer to Figure 9-4. What is the budgeted production in units for November?
102. Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford’s policy is
that 10 percent of the following month’s sales must be in ending inventory. On November 1, there were 14,000
units in inventory.
It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable
overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month.
Refer to Figure 9-4. What is the budgeted overhead for November?