Chapter 21 – The Budgeting Process
TRUE/FALSE
1. Budgeting is the process of identifying, gathering, summarizing, and communicating financial and
nonfinancial information about an organization’s future activities.
2. A budget need not contain both revenue and expense components.
3. As part of the budgeting process, managers evaluate operational, tactical, value chain, and capacity
issues.
4. A budget can contain nonfinancial information.
5. Budgets are synonymous with managing an organization.
6. Participative budgeting seeks to motivate employees.
7. Participative budgeting involves only personnel at top levels of the organization.
8. The Budget Committee oversees each stage in the preparation of a master budget.
9. Successful budget implementation depends on two factors—clear communication and the support of
top management.
10. The short-term plan or budget involves every part of the enterprise and is much more detailed than the
long-term plan.
11. Only the lowest levels of management can be evaluated by the use of a budget.
12. Budgets assign resources and the responsibility to use them wisely to managers who are held
accountable for their results.
13. Budgets do not take into account potential constraints.
14. Budgets facilitate congruence between organizational and personal goals.
15. Responsibility accounting authorizes managers to take control of and be held accountable for the
revenues and expenses in their budgets.
16. Static budgets are prepared on quarterly basis and require frequent change during the annual budget
period.
17. A continuous budget is a 12-month forward rolling budget that summarizes budgets for the next 12
months.
18. Zero-based budgeting requires the preparation of budget from scratch.
19. Projected financial statements are the final product of the budgeting process.
20. A master budget consists of a set of operating budgets and a set of financial budgets for a specific
accounting period.
21. Only manufacturing organizations need a set of operating budgets.
22. The main difference in the master budget process for manufacturing, retail, and service organizations
is found in the preparation of the operating budgets.
23. Operating budgets are plans used in daily operations.
24. Managers do not need to know why a budget is being prepared.
25. The budgeting function begins with the preparation of the direct materials purchases budget.
26. The key factor to remember is that the sales unit forecast provides the catalyst for all the period
budgets.
27. A sales forecast is expressed in units and dollars.
28. Preparation of a production budget requires knowledge of the sales target in sales dollars.
29. The direct materials purchases budget reflects both the quantity and cost of direct materials purchases.
30. The direct labor budget is needed to prepare the production budget.
31. The selling and administrative expense budget is typically separated into variable and fixed cost
components.
32. The cost of goods manufactured budget is based on the results of the direct materials purchases, direct
labor, and selling and administrative expense budgets.
33. A company seeks to have as much cash as possible on hand. Cash budgeting helps to accomplish this.
34. The cash budget is derived exclusively from the sales and production budgets.
35. In estimating cash receipts and cash payments for the cash budget, many organizations prepare
supporting schedules.
36. Once cash receipts and cash payments have been established, the cash increase or decrease is added to
the period’s beginning balance to arrive at a projected cash balance at period end.
37. Depreciation is included in the cash budget.
38. Each period’s ending cash balance becomes the beginning cash balance for the next period.
MULTIPLE CHOICE
1. Budgets
a.
should contain both revenues and expenses.
b.
contain as much information as possible.
c.
are presented in dollars only; nondollar data should be excluded.
d.
are synonymous with managing an organization.
2. Budgets identify, gather, summarize, and communicate
a.
financial data only.
b.
financial and nonfinancial data.
c.
nonfinancial data only.
d.
none of these.
3. After management has set short-term goals, the budgeting process typically starts with
a.
a clearly defined timetable of events.
b.
input only from the accounting personnel.
c.
the naming of an efficient coordinator or director.
d.
a set of procedures or instructions.
4. Which type of budgeting utilizes employees at all levels of the company?
a.
Group budgeting
b.
Selective budgeting
c.
Target budgeting
d.
Participative budgeting
5. A continuous budget is prepared
a.
annually
b.
semi-annually
c.
monthly
d.
quarterly
6. A master budget is a compilation of forecasts for the coming year or operating cycle made by various
departments or functions within an organization. What is the most basic forecast made in a master
budget?
a.
Sales forecast
b.
Production forecast
c.
Labor forecast
d.
Materials forecast
7. A combined set of operational budgets and a set of financial budgets for the entire organization is
known as a
a.
master budget.
b.
flexible budget.
c.
month-to-month budget.
d.
continuous budget.
8. Financial budgets include
a.
pro forma statements, a sales budget, and a cost of goods manufactured budget.
b.
a budgeted income statement and budgeted balance sheet only.
c.
a budgeted income statement, budgeted balance sheet, and cash budget.
d.
pro forma statements, a capital expenditures budget, and a cash budget.
9. The first budget to be prepared when making a master budget is the
a.
sales budget.
b.
production budget.
c.
cash budget.
d.
direct labor budget.
10. The main difference in the master budget process for the three types of organizations involves the
preparation of the
a.
cash budget.
b.
capital expenditures budget.
c.
financial budgets.
d.
operating budgets.
11. Which of the following is not a guideline for budget preparation?
a.
Include financial data only.
b.
Know the sources of budget information.
c.
Know the purpose of the budget.
d.
Identify the format of the budget.
12. Which of the following would most likely be considered a short-term goal?
a.
Modernization and expansion of the plant
b.
A product line change
c.
A unit sales forecast
d.
A marketing plan to gain a higher percentage of control of the market in five years
13. Which budgets must managers prepare before they can prepare a direct materials purchases budget?
a.
Labor budget
b.
Overhead budget
c.
Production budget
d.
Cost of goods manufactured budget
14. Which of the following is a true statement?
a.
The direct materials purchases budget is determined from the direct labor budget.
b.
The only budget providing input into the revenue budget is the sales budget.
c.
The direct materials purchases budget and the capital expenditures budget are both
determined from the production budget.
d.
The selling and administrative expense budget is input into the forecasted cost of goods
sold.
15. Which of the following is not true about the direct materials purchases budget?
a.
It is determined by the anticipated change in the direct materials inventory level and the
production budget.
b.
The direct materials purchases budget does not affect the forecasted balance sheet.
c.
The direct materials purchases budget is expressed in units and dollars.
d.
It is used in preparing the budgeted income statement.
16. Which of the following budgets probably would be prepared immediately after the preparation of the
production budget?
a.
Cash budget
b.
Capital expenditures budget
c.
Selling and administrative expense budget
d.
Direct materials purchases budget
17. Purchases of buildings and equipment are formally planned in the
a.
depreciation budget.
b.
budgeted balance sheet.
c.
selling and administrative expense budget.
d.
capital expenditures budget.
18. Which of the following provides the catalyst for all operating budgets?
a.
Firm’s ten-year plan
b.
Production budget (units)
c.
Capital expenditures budget
d.
Unit sales forecast
19. Which of the following budgets should be prepared before the others listed?
a.
Cost of goods manufactured budget
b.
Cash budget
c.
Production budget
d.
Overhead budget
20. Ceiling Fans by Ike’s overhead budget for 2009 was as follows:
Factory supervision
$300,000
Utilities costs
150,000
Insurance
28,000
Property taxes
22,000
Depreciation
100,000
Total
$600,000
600,000 units were produced in 2009.
Direct labor cost is $18,000,000.
For both 2009 and 2010, each unit required 3 direct labor hours at $10 per hour.
In 2010, property taxes, insurance, and depreciation are expected to stay at 2009 levels.
Utilities costs vary proportionally with units produced.
Factory supervision increases by increments of $30,000 for every 200,000 increase in direct labor
hours.
The 2010 expected production is 1,200,000 units.
What will be the value for factory supervision in the 2010 overhead budget?
a.
$570,000
b.
$270,000
c.
$450,000
d.
$400,000
21. Ceiling Fans by Ike’s overhead budget for 2009 was as follows:
Factory supervision
$300,000
Utilities costs
150,000
Insurance
28,000
Property taxes
22,000
Depreciation
100,000
Total
$600,000
600,000 units were produced in 2009.
Direct labor cost is $18,000,000.
For both 2009 and 2010, each unit required 3 direct labor hours at $10 per hour.
In 2010, property taxes, insurance, and depreciation are expected to stay at 2009 levels.
Utilities costs vary proportionally with units produced.
Factory supervision increases by increments of $30,000 for every 200,000 increase in direct labor
hours.
The 2010 expected production is 1,200,000 units.
What will be the value for utilities costs in the 2010 overhead budget?
a.
$420,000
b.
$150,000
c.
$300,000
d.
$450,000
22. Ceiling Fans by Ike’s overhead budget for 2009 was as follows:
Factory supervision
$300,000
Utilities costs
150,000
Insurance
28,000
Property taxes
22,000
Depreciation
100,000
Total
$600,000
600,000 units were produced in 2009.
Direct labor cost is $18,000,000.
For both 2009 and 2010, each unit required 3 direct labor hours at $10 per hour.
In 2010, property taxes, insurance, and depreciation are expected to stay at 2009 levels.
Utilities costs vary proportionally with units produced.
Factory supervision increases by increments of $30,000 for every 200,000 increase in direct labor
hours.
The 2010 expected production is 1,200,000 units.
If the expected 2010 expense for factory supervision and for utilities costs is $500,000 and $250,000,
respectively, then the total for the 2010 overhead budget is
a.
$900,000.
b.
$800,000.
c.
$650,000.
d.
$750,000.
23. J. J. Johnson has decided to supplement his income by selling beehives. He expects to sell 25,000
hives in 2010. He ended 2009 with 2,500 completed hives in inventory and would like to complete
operations in 2010 with at least 2,800 completed hives in inventory. There is no ending work in
process inventory. One beehive holds about 250 bees. The bees are purchased for $4.00 per 1,000
bees. The hives sell for $15.00 each.
How many beehives would the 2010 production budget identify as needing to be produced?
a.
25,300
b.
25,000
c.
30,300
d.
24,700
24. J. J. Johnson has decided to supplement his income by selling beehives. He expects to sell 25,000
hives in 2010. He ended 2009 with 2,500 completed hives in inventory and would like to complete
operations in 2010 with at least 2,800 completed hives in inventory. There is no ending work in
process inventory. One beehive holds about 250 bees. The bees are purchased for $4.00 per 1,000
bees. The hives sell for $15.00 each.
What would be the total of the 2010 period sales budget?
a.
$378,000
b.
$375,000
c.
$379,500
d.
$376,500
25. J. J. Johnson has decided to supplement his income by selling beehives. He expects to sell 25,000
hives in 2010. He ended 2009 with 2,500 completed hives in inventory and would like to complete
operations in 2010 with at least 2,800 completed hives in inventory. There is no ending work in
process inventory. One beehive holds about 250 bees. The bees are purchased for $4.00 per 1,000
bees. The hives sell for $15.00 each.
What would be the yearly total on the direct materials purchases budget for bee purchases? (Assume
for this question that 40,000 beehives will be produced.)
a.
$44,000
b.
$16,000
c.
$64,000
d.
$40,000
26. Fantastic Futons manufactures futons. The estimated number of futon sales for the first three months
of 2010 are as follows:
January
40,000
February
50,000
March
60,000
Finished goods inventory at the end of 2009 was 12,000 units. On average, 25 percent of the futons are
produced during the month before they are sold, which normally accounts for the ending balance in
finished goods inventory. The planned selling price is $150 per unit.
What would be the sales budget for March?
a.
$7,200,000
b.
$8,000,000
c.
$6,750,000
d.
$9,000,000
27. Fantastic Futons manufactures futons. The estimated number of futon sales for the first three months
of 2010 are as follows:
January
40,000
February
50,000
March
60,000
Finished goods inventory at the end of 2009 was 12,000 units. On average, 25 percent of the futons are
produced during the month before they are sold, which normally accounts for the ending balance in
finished goods inventory. The planned selling price is $150 per unit.
How many futons are budgeted to be produced in January?
a.
44,500
b.
28,000
c.
40,500
d.
52,500
28. Fantastic Futons manufactures futons. The estimated number of futon sales for the first three months
of 2010 are as follows:
January
40,000
February
50,000
March
60,000
Finished goods inventory at the end of 2009 was 12,000 units. On average, 25 percent of the futons are
produced during the month before they are sold, which normally accounts for the ending balance in
finished goods inventory. The planned selling price is $150 per unit.
How many futons are budgeted to be produced in February?
a.
37,500
b.
65,000
c.
52,500
d.
55,000
29. Fantastic Futons manufactures futons. The estimated number of futon sales for the first three months
of 2010 are as follows:
January
40,000
February
50,000
March
60,000
Finished goods inventory at the end of 2009 was 12,000 units. On average, 25 percent of the futons are
produced during the month before they are sold, which normally accounts for the ending balance in
finished goods inventory. The planned selling price is $150 per unit.
Fantastic Futons buys direct materials for the futons in cloth rolls priced at $80 each. Each roll
provides direct material for 40 futons. There was one roll in the direct materials inventory at the
beginning of January, and the company expects to have four rolls in inventory at the end of the month.
Assuming the production budget calls for 60,000 units to be produced in January, what would be the
amount of the cloth rolls direct materials purchases budget for that month?
a.
$119,760
b.
$114,000
c.
$120,000
d.
$120,240
30. Fantastic Futons goes through two departments in the production process. Each futon requires two
direct labor hours in Department A and one hour in Department B. Labor cost is $8 per hour in
Department A and $10 per hour in Department B.
Assuming the amount budgeted to be produced in January is 30,000 units, what is the budgeted direct
labor cost for January?
a.
$810,000
b.
$840,000
c.
$780,000
d.
$540,000
31. Fantastic Futons goes through two departments in the production process. Each futon requires two
direct labor hours in Department A and one hour in Department B. Labor cost is $8 per hour in
Department A and $10 per hour in Department B.
The labor capacity for a normal eight-hour shift for a month is 50,000 direct labor hours each for both
Departments A and B. Overtime is paid at time and a half. What would be the budgeted direct labor
cost for January, assuming a budgeted production of 30,000 units?
a.
$900,000
b.
$780,000
c.
$820,000
d.
$420,000
32. Fantastic Futons goes through two departments in the production process. Each futon requires two
direct labor hours in Department A and one hour in Department B. Labor cost is $8 per hour in
Department A and $10 per hour in Department B.
The budgeted overhead rate is $5 per direct labor hour. What is the budgeted overhead cost for January
given a budgeted production of 30,000 units?
a.
$450,000
b.
$150,000
c.
$330,000
d.
$300,000
33. Selling and administrative expenses are billed and paid the month after they occur. Selling and
administrative expenses have both a fixed and a variable component. The fixed component is a
constant $8,000 a month. The variable component equals 5 percent of revenues. Given revenues of
$300,000 for January, $350,000 for February, and $400,000 for March, what would be the budgeted
selling and administrative expenses that would be paid in March?
a.
$8,000
b.
$16,500
c.
$25,500
d.
$23,000
34. United Insurance Company specializes in term life insurance contracts. Cash collection experience
shows that 30 percent of billed premiums are collected in the month before they are due, 60 percent are
collected in the month they are due, and 6 percent are collected in the month following their due date.
Four percent of the billed premiums are collected late (in the second month following their due date).
Total billing notices in January were $50,000; in February, $60,000; in March, $66,000; in April,
$65,000; in May, $60,000; and in June, $70,000. How much cash does the company expect to collect
in May?
a.
$63,540
b.
$66,750
c.
$60,000
d.
$56,000
35. The projections of direct materials purchases that follow are for the Sombo Corporation.
Purchases on
Account
Cash Purchases
December
$40,000
$30,000
January
60,000
33,000
February
50,000
35,000
March
70,000
25,000
The company pays for 60 percent of purchases on account in the month of purchase and 40 percent in
the month following the purchase. What is the expected cash payment for direct materials for the
month of January?
a.
$33,000
b.
$85,000
c.
$102,000
d.
$108,000
36. The projections of direct materials purchases that follow are for the Sombo Corporation.
Purchases on
Account
Cash Purchases
December
$40,000
$30,000
January
60,000
20,000
February
50,000
35,000
March
70,000
25,000
The company pays for 60 percent of purchases on account in the month of purchase and 40 percent in
the month following the purchase. What is the expected cash payment for direct materials for the
month of February?
a.
$52,000
b.
$72,000
c.
$89,000
d.
$95,000
37. XYZ Company expects to sell 37,000 units of its product in the coming year. Each unit sells for $45.
Sales brochures and supplies for the year are expected to cost $7,000. Three sales representatives cover
the Southeast region. Each one’s base salary is $25,000, and each earns a sales commission of 5
percent of the selling price of the units he or she sells. The sales representatives supply their own
transportation; they are reimbursed for travel at a rate of $0.40 per mile. The company estimates that
the sales representatives will drive a total of 75,000 miles next year. From the information provided,
calculate XYZ Company’s budgeted selling expenses for the coming year.
a.
$195,250
b.
$145,250
c.
$120,250
d.
$83,250
38. Hang 12 manufactures surfboards. During the upcoming quarter, it expects to sell 3,800 surfboards,
after which it plans to have 500 surfboards remaining in inventory. If it currently has 200 surfboards
on hand, how many surfboards will Hang 12 have to produce for the upcoming quarter?
a.
4,100
b.
3,500
c.
3,800
d.
3,100
39. Fallgatter, Inc., expects to sell 17,500 units. Each unit requires 3 pounds of direct materials at $12 per
pound and 2 direct labor hours at $10 per direct labor hour. The overhead rate is $8 per direct labor
hour. The beginning inventories are as follows: direct materials, 2,000 pounds; finished goods, 2,500
units. The planned ending inventories are as follows: direct materials, 5,600 pounds; finished goods,
3,000 units.
What is the planned production?
a.
15,000
b.
18,000
c.
17,500
d.
17,000
40. Fallgatter, Inc., expects to sell 17,500 units. Each unit requires 3 pounds of direct materials at $12 per
pound and 2 direct labor hours at $10 per direct labor hour. The overhead rate is $8 per direct labor
hour. The beginning inventories are as follows: direct materials, 2,000 pounds; finished goods, 2,500
units. The planned ending inventories are as follows: direct materials, 5,600 pounds; finished goods,
3,000 units.
Given a planned production of 10,000 units, what are the planned direct materials purchases?
a.
$331,200
b.
$295,200
c.
$367,200
d.
$403,200
41. Wean Corporation’s budgeted balance sheet for the coming year shows total assets of $5,000,000 and
total liabilities of $2,000,000. Common stock and retained earnings make up the entire stockholders’
equity section of the balance sheet. Common stock remains at its beginning balance of $1,500,000.
The projected net income for the year is $366,000. The company pays no cash dividends. What is the
balance of retained earnings at the beginning of the budget period?
a.
$1,034,000
b.
$1,134,000
c.
$1,866,000
d.
$1,500,000
42. Operating budgets for the DiP Company reveal the following information: net sales, $400,000;
beginning materials inventory, $23,000; materials purchased, $185,000; beginning work in process
inventory, $64,700; beginning finished goods inventory, $21,600; direct labor costs, $34,000;
overhead applied, $67,000; ending work in process inventory, $61,200; ending materials inventory,
$18,700; and ending finished goods inventory, $16,300. Compute DiP Company’s budgeted gross
margin.
a.
$299,800
b.
$293,800
c.
$150,900
d.
$100,900
43. Given that the cost of goods manufactured is $504,000 and the dollar values of the beginning and
ending finished goods inventory are $130,000 and $90,000, respectively, what is the cost of goods
sold?
a.
$544,000
b.
$634,000
c.
$414,000
d.
$464,000
44. Assume that the forecasted cost of goods sold is $800,000, budgeted selling and administrative
expenses are $320,000, planned capital expenditures are $320,000, and the tax rate is 40 percent. What
is the forecasted net income if each unit will sell for $150 and the sales forecast is for 15,000 units to
be sold?
a.
$678,000
b.
$452,000
c.
$805,000
d.
$483,000
45. In the development of a cash budget, which of the following elements must be determined first?
a.
Ending balance of Accounts Receivable
b.
Direct materials purchases
c.
Estimated sales in units
d.
Cash for payroll
46. A cash budget
a.
is an optional feature of a master budget.
b.
requires input from all parts of the organization.
c.
takes the place of another budget.
d.
is prepared only at year end.
47. Information on cash receipts would not come from which of the following sources?
a.
Sales budgets
b.
Collection records
c.
Direct materials purchases budget
d.
Budgeted income statement
48. If the cash budget showed a cash shortage, the company most likely would
a.
arrange to take out a short-term loan.
b.
cut salaries of employees.
c.
sign up for fewer orders so that it could control costs.
d.
lay off employees for that period.
49. A company pays for 25 percent of its purchases by credit terms n/60, 40 percent of its purchases by
credit terms n/30, and the remaining 35 percent by a two-month advance payment. The sources for
June’s cash payments schedule for direct materials would not include which of the following?
a.
June’s direct materials purchases budget
b.
August’s direct materials purchases budget
c.
May’s direct materials purchases budget
d.
April’s direct materials purchases budget
50. Mi Casa Corporation wishes to prepare a cash budget for November 2010. Sales, purchases, and
expenses for October (actual) and November and December (estimated) are as follows:
Sales
Purchases
Expenses
October
$48,000
$35,000
$14,000
November
40,000
30,000
11,000
December
45,000
22,000
9,500
Sales: All sales are on credit, and the company’s experience shows that, on the average, 80 percent of
sales are collected in the month of sale and the balance in the following month. A 2 percent discount is
allowed on all collections in the month of sale.
Purchases: The company pays 60 percent of purchases in the month of purchase and the balance in the
following month. The company is allowed an average discount of 1 percent on payments made in the
month of purchase.
Expenses: The monthly expenses for November include charges for depreciation amounting to $1,000
and $100 of prepaid expenses, which will expire. All other expenses are paid as incurred.
Other: On September 1, 2010, a new machine was purchased for $5,000. A down payment of $500
was made, and it was agreed that the balance would be paid in equal installments in the following three
months.
The cash receipts in November for October sales are expected to be
a.
$8,000.
b.
$9,600.
c.
$9,408.
d.
$7,840.
51. Mi Casa Corporation wishes to prepare a cash budget for November 2010. Sales, purchases, and
expenses for October (actual) and November and December (estimated) are as follows:
Sales
Purchases
Expenses
October
$48,000
$35,000
$14,000
November
40,000
30,000
11,000
December
45,000
22,000
9,500
Sales: All sales are on credit, and the company’s experience shows that, on the average, 80 percent of
sales are collected in the month of sale and the balance in the following month. A 2 percent discount is
allowed on all collections in the month of sale.
Purchases: The company pays 60 percent of purchases in the month of purchase and the balance in the
following month. The company is allowed an average discount of 1 percent on payments made in the
month of purchase.
Expenses: The monthly expenses for November include charges for depreciation amounting to $1,000
and $100 of prepaid expenses, which will expire. All other expenses are paid as incurred.
Other: On September 1, 2010, a new machine was purchased for $5,000. A down payment of $500
was made, and it was agreed that the balance would be paid in equal installments in the following three
months.
The cash receipts in November for November sales are expected to be
a.
$31,360.
b.
$32,000.
c.
$41,600.
d.
$39,200.