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CHAPTER 21
BUDGETARY PLANNING
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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Brief Exercises
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
21 - 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
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5,6
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Completion Statements
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Matching
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
4.
TF
31.
TF
39.
MC
42.
MC
196.
C
209.
SA
2.
TF
5.
TF
37.
MC
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147.
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197.
C
3.
TF
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TF
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MC
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148.
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Learning Objective 2
7.
TF
13.
TF
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MC
51.
MC
57.
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150.
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TF
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198.
C
9.
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TF
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149.
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Learning Objective 3
16.
TF
63.
MC
75.
MC
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MC
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MC
170.
Ex
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17.
TF
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18.
TF
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TF
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Ex
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20.
TF
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174.
Ex
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SA
21.
TF
68.
MC
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92.
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151.
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Ex
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22.
TF
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152.
MC
176.
Ex
23.
TF
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MC
82.
MC
94.
MC
159.
BE
177.
Ex
24.
TF
71.
MC
83.
MC
95.
MC
160.
BE
178.
Ex
33.
TF
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MC
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MC
96.
MC
161.
BE
179.
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34.
TF
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MC
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97.
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162.
BE
180.
Ex
62.
MC
74.
MC
86.
MC
98.
MC
169.
Ex
181.
Ex
Budgetary Planning
FOR INSTRUCTOR USE ONLY
21 - 3
Learning Objective 4
25.
TF
108.
MC
153.
MC
182.
Ex
107.
MC
109.
MC
181.
Ex
183.
Ex
Learning Objective 5
26.
TF
113.
MC
121.
MC
129.
MC
154.
MC
168.
BE
189.
Ex
27.
TF
114.
MC
122.
MC
130.
MC
155.
MC
182.
Ex
190.
Ex
35.
TF
115.
MC
123.
MC
131.
MC
156.
MC
183.
Ex
191.
Ex
104.
MC
116.
MC
124.
MC
132.
MC
163.
BE
184.
Ex
192.
Ex
106.
MC
117.
MC
125.
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133.
MC
164.
BE
185.
Ex
193.
Ex
110.
MC
118.
MC
126.
MC
134.
MC
165.
BE
186.
Ex
206.
C
111.
MC
119.
MC
127.
MC
135.
MC
166.
BE
187.
Ex
112.
MC
120.
MC
128.
MC
136.
MC
167.
BE
188.
Ex
Learning Objective 6
28.
TF
36.
TF
139.
MC
142.
MC
145.
MC
158.
MC
195.
Ex
29.
TF
137.
MC
140.
MC
143.
MC
146.
MC
193.
Ex
207.
C
30.
TF
138.
MC
141.
MC
144.
MC
157.
MC
194.
Ex
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise Ma = Matching
SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Identify the benefits of budgeting. The primary advantages of budgeting are that it (a)
requires management to plan ahead, (b) provides definite objectives for evaluating
performance, (c) creates an early warning system for potential problems, (d) facilitates
coordination of activities, (e) results in greater management awareness, and (f) motivates
personnel to meet planned objectives.
2. State the essentials of effective budgeting. The essentials of effective budgeting are (a)
sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of
management.
3. Identify the budgets that comprise the master budget. The master budget consists of the
following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manu-
facturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h)
capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet.
4. Describe the sources for preparing the budgeted income statement. The budgeted
income statement is prepared from (a) the sales budget, (b) the budgets for direct materials,
direct labor, and manufacturing overhead, and (c) the selling and administrative expense
budget.
5. Explain the principal sections of a cash budget. The cash budget has three sections
(receipts, disbursements, and financing) and the beginning and ending cash balances.
6. Indicate the applicability of budgeting in nonmanufacturing companies. Budgeting may
be used by merchandisers for development of a merchandise purchases budget. In service
companies budgeting is a critical factor in coordinating staff needs with anticipated services. In
not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 4
TRUE-FALSE STATEMENTS
1. Budgets are statements of management's plans stated in financial terms.
2. A benefit of budgeting is that it provides definite objectives for evaluating performance.
3. A budget can be a means of communicating a company's objectives to external parties.
4. A budget can be used as a basis for evaluating performance.
5. A well-developed budget can operate and enforce itself.
6. The budget itself and the administration of the budget are the responsibility of the
accounting department.
7. Effective budgeting requires clearly defined lines of authority and responsibility.
8. The flow of input data for budgeting should be from the highest levels of responsibility to
the lowest.
9. Budgets can have a positive or negative effect on human behavior depending on the
manner in which the budget is developed and administered.
10. A budget can facilitate the coordination of activities among the segments of a large
company.
11. The longer the budget period, the more reliable the estimates of future outcomes.
12. The budget committee has the responsibility for coordinating the preparation of the
budget.
13. The budget is developed within the framework of a sales forecast.
Budgetary Planning
21 - 5
14. Budgeting and long-range planning are two terms that describe the same process.
15. Long-range plans are used more as a review of progress toward long-term goals rather
than an evaluation of specific results to be achieved.
16. The master budget reflects management's long-term plans encompassing five years or
more.
17. The master budget consists of operating and financial budgets.
18. Financial budgets must be completed before the operating budgets can be prepared.
19. The direct materials budget must be completed before the production budget because the
quantity of materials available for production must be known.
20. The number of direct labor hours needed for production is obtained from the production
budget.
21. A manufacturing overhead budget is not needed if the company develops a predeter-
mined overhead rate to apply overhead.
22. The manufacturing overhead budget generally has separate sections for variable, mixed,
and fixed costs.
23. A production budget should be prepared before the sales budget.
24. The direct materials budget contains both quantity and cost data.
25. The budgeted income statement indicates the expected profitability of operations for the
next year.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 6
26. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the
end of any month.
27. The budgeted balance sheet is prepared entirely from the budgets for the current year.
28. The starting point when budgeting for a not-for-profit organization is generally to budget
expenditures first.
29. A merchandiser has a merchandise purchases budget rather than a production budget.
30. A critical factor in budgeting for a service firm is to determine the amount of products to
purchase.
31. The budget itself and the administration of the budget are entirely accounting
responsibilities.
32. Financial planning models and statistical and mathematical techniques may be used in
forecasting sales.
33. The direct materials budget is derived from the direct materials units required for
production plus desired ending direct materials units less beginning direct materials units.
34. The manufacturing overhead budget shows the expected manufacturing overhead costs.
35. In order to develop a budgeted balance sheet, the previous year's balance sheet is
needed.
36. In service enterprises, the critical factor in budgeting is coordinating materials and
equipment with anticipated services.
Budgetary Planning
21 - 7
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE QUESTIONS
37. Why are budgets useful in the planning process?
a. They provide management with information about the company's past performance.
b. They help communicate goals and provide a basis for evaluation.
c. They guarantee the company will be profitable if it meets its objectives.
d. They enable the budget committee to earn their paycheck.
38. A budget
a. is a substitute for management.
b. is an aid to management.
c. can operate or enforce itself.
d. is the responsibility of the accounting department.
39. Accounting generally has the responsibility for
a. setting company goals.
b. expressing the budget in financial terms.
c. enforcing the budget.
d. administration of the budget.
40. Which one of the following is not a benefit of budgeting?
a. It facilitates the coordination of activities.
b. It provides definite objectives for evaluating performance.
c. It provides assurance that the company will achieve its objectives.
d. It requires all levels of management to plan ahead on a recurring basis.
41. Budgeting is usually most closely associated with which management function?
a. Planning
b. Directing
c. Motivating
d. Controlling
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 8
42. Which of the following items does not follow from the adoption of a budget?
a. Promote efficiency
b. Deterrent to waste
c. Basis for performance evaluation
d. Guarantee of accomplishing the profit objective
43. Which is true of budgets?
a. They are voted on and approved by stockholders.
b. They are used in the planning, but not in the control, process.
c. There is a standard form and structure for budgets.
d. They are used in performance evaluation.
44. A common starting point in the budgeting process is
a. expected future net income.
b. past performance.
c. to motivate the sales force.
d. a clean slate, with no expectations.
45. If budgets are to be effective, all of the following must be present except
a. acceptance at all levels of management.
b. research and analysis in setting realistic goals.
c. stockholders' approval of the budget.
d. sound organizational structure.
46. If budgets are to be effective, there must be
a. a history of successful operations.
b. independent verification of budget goals.
c. an organizational structure with clearly defined lines of authority and responsibility.
d. excess plant capacity.
47. It is important that budgets be accepted by
a. division managers.
b. department heads.
c. supervisors.
d. All of these.
Budgetary Planning
21 - 9
48. Which of the following statements about budget acceptance in an organization is true?
a. The most widely accepted budget by the organization is the one prepared by top
management.
b. The most widely accepted budget by the organization is the one prepared by the
department heads.
c. Budgets are hardly ever accepted by anyone except top management.
d. Budgets have a greater chance of acceptance if all levels of management have
provided input into the budgeting process.
49. Top management notices a variation from budget and an investigation of the difference
reveals that the department manager could not be expected to have controlled the
variation. Which of the following statements is applicable?
a. Department managers should be held accountable for all variances from budgets for
their departments.
b. Department managers should only be held accountable for controllable variances for
their departments.
c. Department managers should be credited for favorable variances even if they are
beyond their control.
d. Department managers' performances should not be evaluated based on actual results
to budgeted results.
50. An unrealistic budget is more likely to result when it
a. has been developed in a top down fashion.
b. has been developed in a bottom up fashion.
c. has been developed by all levels of management.
d. is developed with performance appraisal usages in mind.
51. A budget is most likely to be effective if
a. it is used to assess blame when things do not occur according to plans.
b. it is not used to evaluate a manager's performance.
c. employees and managers at the lower levels do not get involved in the budgeting
process.
d. it has top management support.
52. In many companies, responsibility for coordinating the preparation of the budget is
assigned to
a. the company's independent certified public accountants.
b. the company's internal auditors.
c. the company's board of directors.
d. a budget committee.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 10
53. A budget period should be
a. monthly.
b. for a year or more.
c. long-term.
d. long enough to provide an obtainable goal under normal business conditions.
54. If a company has adopted continuous budgeting, the budget will show plans for
a. every day.
b. a full year ahead.
c. the current year and the next year.
d. at least five years.
55. The most common budget period is
a. one month.
b. three months.
c. six months.
d. one year.
56. Budget development for the coming year usually starts
a. a year in advance.
b. the first month of the year to be budgeted.
c. several months before the end of the current year.
d. the last month of the previous year.
57. The budget committee would not normally include the
a. research director.
b. treasurer.
c. sales manager.
d. external auditor.
58. The budget committee in a company is often headed by the
a. president.
b. controller.
c. treasurer.
d. budget director.
59. Long-range planning
a. generally presents more detailed information than an annual budget.
b. generally encompasses a longer period of time than an annual budget.
c. is usually more accurate than an annual budget.
d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.
Budgetary Planning
21 - 11
60. Long-range planning usually encompasses a period of at least
a. six months.
b. 1 year.
c. 5 years.
d. 10 years.
61. Which of the following is not a proper match-up?
a. Long range planning → Strategies
b. Budgeting → Short-term goals
c. Long-range planning → 5 years
d. Budgeting → Long-term goals
62. Which is the last step in developing the master budget?
a. Preparing the budgeted balance sheet
b. Preparing the cost of goods manufactured budget
c. Preparing the budgeted income statement
d. Preparing the cash budget
63. If there were 60,000 pounds of raw materials on hand on January 1, 120,000 pounds are
desired for inventory at January 31, and 410,000 pounds are required for January
production, how many pounds of raw materials should be purchased in January?
a. 350,000 pounds
b. 530,000 pounds
c. 290,000 pounds
d. 470,000 pounds
64. The total direct labor hours required in preparing a direct labor budget are calculated
using the
a. sales forecast.
b. production budget.
c. direct materials budget.
d. sales budget.
65. The direct materials and direct labor budgets provide information for preparing the
a. sales budget.
b. production budget.
c. manufacturing overhead budget.
d. cash budget.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 12
66. A sales forecast
a. shows a forecast for the firm only.
b. shows a forecast for the industry only.
c. shows forecasts for the industry and for the firm.
d. plays a minor role in the development of the master budget.
67. Which of the following is not an operating budget?
a. Direct labor budget
b. Sales budget
c. Production budget
d. Cash budget
68. Which of the following is not a financial budget?
a. Capital expenditure budget
b. Cash budget
c. Manufacturing overhead budget
d. Budgeted balance sheet
69. Which of the following is done to improve the reliability of the sales forecast?
a. Employ financial planning models
b. Lengthen the planning horizon to more than a year
c. Rely solely on outside consultants
d. Use the sales forecasts from the previous year
70. The financial budgets include the
a. cash budget and the selling and administrative expense budget.
b. cash budget and the budgeted balance sheet.
c. budgeted balance sheet and the budgeted income statement.
d. cash budget and the production budget.
71. The culmination of preparing operating budgets is the
a. budgeted balance sheet.
b. production budget.
c. cash budget.
d. budgeted income statement.
Budgetary Planning
21 - 13
72. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 1,200
Sales budgeted for the quarter 426,000
Capacity in units of production facility 472,000
How many finished goods units should be produced during the quarter if the company
desires 3,200 units available to start the next quarter?
a. 428,000
b. 424,000
c. 474,000
d. 429,200
73. An overly optimistic sales budget may result in
a. increases in selling prices late in the year.
b. insufficient inventories.
c. increased sales during the year.
d. excessive inventories.
74. In a production budget, total required production units are the budgeted sales units plus
a. beginning finished goods units.
b. desired ending finished goods units.
c. desired ending finished goods units plus beginning finished goods units.
d. desired ending finished goods units minus beginning finished goods units.
75. The direct materials budget details
1. the quantity of direct materials to be purchased.
2. the cost of direct materials to be purchased.
a. 1
b. 2
c. both 1 and 2
d. neither 1 nor 2
76. The production budget shows expected unit sales of 32,000. Beginning finished goods
units are 3,600. Required production units are 33,600. What are the desired ending
finished goods units?
a. 2,000
b. 3,600
c. 6,400
d. 5,200
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
21 - 14
77. The production budget shows expected unit sales are 100,000. The required production
units are 104,000. What are the beginning and desired ending finished goods units,
respectively?
Beginning Units Ending Units
a. 10,000 6,000
b. 6,000 10,000
c. 4,000 10,000
d. 10,000 4,000
78. The production budget shows that expected unit sales are 48,000. The total required units
are 54,000. What are the required production units?
a. 6,000
b. 9,000
c. 12,000
d. Cannot be determined from the data provided.
79. The direct materials budget shows:
Units to be produced 3,000
Total pounds needed for production 9,000
Total materials required 9,900
What are the direct materials per unit?
a. .33 pounds
b. 3.0 pounds
c. 3.3 pounds
d. Cannot be determined from the data provided.
80. The direct materials budget shows:
Desired ending direct materials 48,000 pounds
Total materials required 69,000 pounds
Direct materials purchases 63,200 pounds
The total direct materials needed for production is
a. 21,000 pounds.
b. 5,800 pounds.
c. 15,200 pounds.
d. 132,200 pounds.
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81. If the required direct materials purchases are 24,000 pounds, the direct materials required
for production is three times the direct materials purchases, and the beginning direct
materials are three and a half times the direct materials purchases, what are the desired
ending direct materials in pounds?
a. 60,000
b. 12,000
c. 36,000
d. 24,000
82. Dart, Inc. makes and sells umbrellas. The company is in the process of preparing its
Selling and Administrative Expense Budget for the last half of the year. The following
budget data are available:
Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $0.60 $ 6,000
Shipping 1.20
Advertising 0.30
Executive salaries 40,000
Depreciation on office equipment 8,000
Other 0.35 28,000
Expenses are paid in the month incurred. If the company has budgeted to sell 8,000
umbrellas in October, how much is the total budgeted variable selling and administrative
expenses for October?
a. $16,800
b. $18,400
c. $101,600
d. $19,600
83. Which of the following expenses would not appear on a selling and administrative
expense budget?
a. Sales commissions
b. Depreciation
c. Property taxes
d. Indirect labor
84. Which of the following would not appear as a fixed expense on a selling and
administrative expense budget?
a. Freight-out
b. Office salaries
c. Property taxes
d. Depreciation
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85. A master budget consists of
a. an interrelated long-term plan and operating budgets.
b. financial budgets and a long-term plan.
c. interrelated financial budgets and operating budgets.
d. all the accounting journals and ledgers used by a company.
86. The starting point in preparing a master budget is the preparation of the
a. production budget.
b. sales budget.
c. purchasing budget.
d. personnel budget.
87. Which one of the following is not needed in preparing a production budget?
a. Budgeted unit sales
b. Budgeted raw materials
c. Beginning finished goods units
d. Ending finished goods units
88. A company budgeted unit sales of 204,000 units for January, 2013 and 240,000 units for
February 2013. The company has a policy of having an inventory of units on hand at the
end of each month equal to 30% of next month's budgeted unit sales. If there were 61,200
units of inventory on hand on December 31, 2012, how many units should be produced in
January, 2013 in order for the company to meet its goals?
a. 214,800 units
b. 204,000 units
c. 193,200 units
d. 276,000 units
89. At January 1, 2013, Deer Corp. has beginning inventory of 2,000 surfboards. Deer
estimates it will sell 10,000 units during the first quarter of 2013 with a 12% increase in
sales each quarter. Deer’s policy is to maintain an ending inventory equal to 25% of the
next quarter’s sales. Each surfboard costs $100 and is sold for $150. How much is
budgeted sales revenue for the third quarter of 2013?
a. $450,000
b. $1,950,000
c. $1,881,600
d. $12,544
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90. Doe Manufacturing plans to sell 6,000 purple lawn chairs during May, 5,700 in June, and
6,000 during July. The company keeps 15% of the next month’s sales as ending
inventory. How many units should Doe produce during June?
a. 5,745
b. 6,600
c. 5,655
d. Not enough information to determine.
91. Strand Company is planning to sell 400 buckets and produce 380 buckets during March.
Each bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs
$10 per 500 grams and employees of the company are paid $15.00 per hour.
Manufacturing overhead is applied at a rate of 110% of direct labor costs. Strand has 300
kilos of plastic in beginning inventory and wants to have 200 kilos in ending inventory.
How much is the total amount of budgeted direct labor for March?
a. $3,000
b. $6,000
c. $2,850
d. $5,700
92. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870
boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of
direct labor. Clay mix costs $0.40 per pound and employees of the company are paid
$12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor
costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500
pounds in ending inventory.
What is the total amount to be budgeted for manufacturing overhead for the month?
a. $2,871
b. $2,970
c. $11,484
d. $11,880
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93. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870
boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of
direct labor. Clay mix costs $0.40 per pound and employees of the company are paid
$12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor
costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500
pounds in ending inventory.
What is the total amount to be budgeted for direct labor for the month?
a. $2,610
b. $10,440
c. $2,700
d. $41,760
94. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870
boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of
direct labor. Clay mix costs $0.40 per pound and employees of the company are paid
$12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor
costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500
pounds in ending inventory.
What is the total amount to be budgeted in pounds for direct materials to be purchased for
the month?
a. 38,280
b. 37,680
c. 38,880
d. 40,200
95. Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie
Nursery keeps 15% of the next month’s sales as ending inventory. How many units should
Lorie Nursery produce during April?
a. 308
b. 332
c. 320
d. 356
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96. Comma Co. makes and sells widgets. The company is in the process of preparing its
selling and administrative expense budget for the month. The following budget data are
available:
Item Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $1 $10,000
Shipping $3
Advertising $4
Executive salaries $120,000
Depreciation on office equipment $4,000
Other $2 $6,000
Expenses are paid in the month incurred. If the company has budgeted to sell 80,000
widgets in October, how much is the total budgeted selling and administrative expenses
for October?
a. $940,000
b. $140,000
c. $930,000
d. $800,000
97. Comma Manufacturing budgets on an annual basis for its fiscal year. The following
beginning and ending inventory levels are planned for the fiscal year of July 1, 2012 to
June 30, 2013:
June 30, 2013 June 30, 2012
Raw Materials 3,000 kilos 2,000 kilos
Three kilos of raw materials are needed to produce each unit of finished product. If
Comma Manufacturing plans to produce 560,000 units during the 2012-2013 fiscal year,
how many kilos of materials will the company need to purchase for its production during
the year?
a. 1,681,000
b. 1,686,000
c. 1,680,000
d. 1,678,000
98. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 1,200
Sales budgeted for the quarter 456,000
Production capacity in units 472,000
How many finished goods units should be produced during the quarter if the company
desires 3,200 units available to start the next quarter?
a. 458,000
b. 454,000
c. 474,000
d. 459,200
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99. Off-Line Co. has 9,000 units in beginning finished goods. The sales budget shows
expected sales to be 36,000 units. If the production budget shows that 42,000 units are
required for production, what was the desired ending finished goods?
a. 3,000.
b. 9,000.
c. 15,000.
d. 27,000.
100. Lion Industries required production for June is 132,000 units. To make one unit of finished
product, three pounds of direct material Z are required. Actual beginning and desired
ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively.
How many pounds of direct material Z must be purchased?
a. 378,000.
b. 396,000.
c. 408,000.
d. 426,000.
101. Haft Construction Company determines that 54,000 pounds of direct materials are needed
for production in July. There are 3,200 pounds of direct materials on hand at July 1 and
the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3,
what is the budgeted total cost of direct materials purchases?
a. $158,400.
b. $160,800.
c. $163,200.
d. $165,600.
102. Pell Manufacturing is preparing its direct labor budget for May. Projections for the month
are that 33,400 units are to be produced and that direct labor time is three hours per unit.
If the labor cost per hour is $12, what is the total budgeted direct labor cost for May?
a. $1,159,200.
b. $1,180,800.
c. $1,202,400.
d. $1,296,000.
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103. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will
increase by 18,000 units each quarter over the year. They have, and desire, a 25%
ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash.
70% of the credit customers pay within the quarter. The remainder is received in the
quarter following sale.
Production in units for the third quarter should be budgeted at
a. 220,500.
b. 207,000.
c. 274,500.
d. 216,000.
104. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will
increase by 18,000 units each quarter over the year. They have, and desire, a 25%
ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash.
70% of the credit customers pay within the quarter. The remainder is received in the
quarter following sale.
Cash collections for the third quarter are budgeted at
a. $3,051,000.
b. $4,428,000.
c. $5,319,000.
d. $6,156,000.
105. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will
increase by 20,000 units each quarter over the year. They have, and desire, a 25%
ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash.
70% of the credit customers pay within the quarter. The remainder is received in the
quarter following sale.
Production in units for the third quarter should be budgeted at
a. 245,000.
b. 230,000.
c. 305,000.
d. 240,000.
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106. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will
increase by 20,000 units each quarter over the year. They have, and desire, a 25%
ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash.
70% of the credit customers pay within the quarter. The remainder is received in the
quarter following sale.
Cash collections for the third quarter are budgeted at
a. $4,746,000.
b. $6,888,000.
c. $8,274,000.
d. $9,576,000.
107. A company determined that the budgeted cost of producing a product is $30 per unit. On
June 1, there were 80,000 units on hand, the sales department budgeted sales of 300,000
units in June, and the company desires to have 120,000 units on hand on June 30. The
budgeted cost of goods manufactured for June would be
a. $7,800,000.
b. $11,400,000.
c. $9,000,000.
d. $10,200,000.
108. Of the following items, which one is not obtained from an individual operating budget?
a. Selling and administrative expenses
b. Accounts receivable
c. Cost of goods sold
d. Sales
109. Which of the following statements about a budgeted income statement is not true?
a. The budgeted income statement is prepared after the financial budgets are prepared.
b. The budgeted income statement is prepared on the accrual basis of accounting.
c. The budgeted income statement can be prepared in a multiple-step format.
d. The budgeted income statement is prepared using the individual operating budgets.
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110. A company has budgeted direct materials purchases of $300,000 in July and $480,000 in
August. Past experience indicates that the company pays for 70% of its purchases in the
month of purchase and the remaining 30% in the next month. During August, the following
items were budgeted:
Wages Expense $150,000
Purchase of office equipment 72,000
Selling and Administrative Expenses 48,000
Depreciation Expense 36,000
The budgeted cash disbursements for August are
a. $648,000.
b. $426,000.
c. $696,000.
d. $732,000.
111. Astor Manufacturing has the following budgeted sales: January $120,000, February
$180,000, and March $150,000. 40% of the sales are for cash and 60% are on credit. For
the credit sales, 50% are collected in the month of sale, and 50% the next month. The
total expected cash receipts during March are:
a. $168,000.
b. $159,000.
c. $157,500.
d. $150,000.
112. Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials
in August. Three-fourths of all purchases are paid for in the month of purchase, and the
other one-fourth are paid for in the month following the month of purchase. How much will
August's cash disbursements for materials purchases be?
a. $135,000
b. $157,500
c. $202,500
d. $210,000
113. The single most important output in preparing financial budgets is the
a. sales forecast.
b. determination of the unit cost of the product.
c. cash budget.
d. budgeted income statement.
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114. Which of the following does not appear as a separate section on the cash budget?
a. Cash receipts
b. Cash disbursements
c. Capital expenditures
d. Financing
115. The financing section of a cash budget is needed if there is a cash deficiency or if the
ending cash balance is less than
a. the prior years.
b. management's minimum required balance.
c. the amount needed to avoid a service charge at the bank.
d. the industry average.
116. Beginning cash balance plus total receipts
a. equals ending cash balance.
b. must equal total disbursements.
c. equals total available cash.
d. is the excess of available cash over disbursements.
117. The projection of financial position at the end of the budget period is found on the
a. budgeted income statement.
b. cash budget.
c. budgeted balance sheet.
d. sales budget.
118. What is the proper preparation sequencing of the following budgets?
1. Budgeted Balance Sheet
2. Sales Budget
3. Selling and Administrative Budget
4. Budgeted Income Statement
a. 1, 2, 3, 4
b. 2, 3, 1, 4
c. 2, 3, 4, 1
d. 2, 4, 1, 3
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119. Kam Department Store reported the following information for 2013:
October November December
Budgeted sales $1,240,000 $1,160,000 $1,440,000
• All sales are on credit.
• Customer amounts on account are collected 50% in the month of sale and 50% in the
following month.
How much cash will Kam receive in November?
a. $580,000
b. $1,300,000
c. $1,200,000
d. $1,160,000
120. The following information was taken from Southgate Industry’s cash budget for the month
of July:
Beginning cash balance $480,000
Cash receipts 304,000
Cash disbursements 544,000
If the company has a policy of maintaining a minimum end of the month cash balance of
$400,000, the amount the company would have to borrow is
a. $160,000.
b. $80,000.
c. $240,000.
d. $96,000.
121. The cash budget reflects
a. all revenues and all expenses for a period.
b. expected cash receipts and cash disbursements from all sources.
c. all the items that appear on a budgeted income statement.
d. all the items that appear on a budgeted balance sheet.
122. The following credit sales are budgeted by Terra Co.:
January $204,000
February 300,000
March 420,000
April 360,000
The company's past experience indicates that 70% of the accounts receivable are
collected in the month of sale, 20% in the month following the sale, and 8% in the second
month following the sale. The anticipated cash inflow for the month of April is
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MC. 122 (cont.)
a. $370,320.
b. $336,000.
c. $360,000.
d. $352,800.
123. Hyde Corp.'s cash budget showed total available cash less cash disbursements. What
does this amount equal?
a. Ending cash balance
b. Total cash receipts
c. The excess of available cash over cash disbursements
d. The amount of financing required
124. Which one of the following sections would not appear on a cash budget?
a. Cash receipts
b. Financing
c. Investing
d. Cash disbursements
125. A company's past experience indicates that 60% of its credit sales are collected in the
month of sale, 30% in the next month, and 5% in the second month after the sale; the
remainder is never collected. Budgeted credit sales were:
January $360,000
February 216,000
March 540,000
The cash inflow in the month of March is expected to be
a. $406,800.
b. $307,800.
c. $324,000.
d. $388,800.
126. Which one of the following items would never appear on a cash budget?
a. Office salaries expense
b. Interest expense
c. Depreciation expense
d. Travel expense
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127. Correy Inc. reported the following information for 2013:
October November December
Budgeted sales $460,000 $440,000 $540,000
Budgeted purchases $240,000 $256,000 $288,000
• All sales are on credit.
• Customer amounts on account are collected 50% in the month of sale and 50% in the
following month.
• Cost of goods sold is 35% of sales.
• Correy purchases and pays for merchandise 60% in the month of acquisition and 40%
in the following month.
• Accounts payable is used only for inventory acquisitions.
How much cash will Correy receive during November?
a. $220,000
b. $490,000
c. $450,000
d. $440,000
128. Correy Company reported the following information for 2013:
October November December
Budgeted sales $460,000 $440,000 $540,000
Budgeted purchases $240,000 $256,000 $288,000
• Cost of goods sold is 35% of sales.
• Correy purchases and pays for merchandise 60% in the month of acquisition and 40%
in the following month.
• Accounts payable is used only for inventory acquisitions.
How much is the budgeted balance for Accounts Payable at October 31, 2013?
a. $96,000
b. $144,000
c. $204,000
d. $102,400
129. Petal Co. reported the following information for 2013:
October November December
Budgeted sales $930,000 $870,000 $1,080,000
• All sales are on credit.
• Customer amounts on account are collected 50% in the month of sale and 50% in the
following month.
How much is the November 30, 2013 budgeted Accounts Receivable?
a. $900,000
b. $540,000
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MC. 129 (cont.)
c. $465,000
d. $435,000
130. Bean Manufacturing reported the following information for 2013:
October November December
Budgeted purchases $240,000 $256,000 $288,000
• Operating expenses are: Salaries, $100,000; Depreciation, $40,000; Rent, $20,000;
Utilities, $28,000
• Operating expenses are paid during the month incurred.
• Accounts payable is used only for inventory acquisitions.
How much is the budgeted amount of cash to be paid for operating expenses in
November?
a. $404,000
b. $148,000
c. $188,000
d. $444,000
131. During September, the capital expenditure budget indicates a $420,000 purchase of
equipment. The ending September cash balance from operations is budgeted to be
$60,000. The company wants to maintain a minimum cash balance of $30,000. What is
the minimum cash loan that must be planned to be borrowed from the bank during
September?
a. $330,000
b. $360,000
c. $450,000
d. $390,000
132. Young Co. has budgeted its activity for December according to the following information:
1. Sales at $600,000, all for cash.
2. Budgeted depreciation for December is $15,000.
4. The cash balance at December 1 was $15,000.
5. Selling and administrative expenses are budgeted at $60,000 for December and
are paid for in cash.
6. The planned merchandise inventory on December 31 and December 1 is $18,000.
7. The invoice cost for merchandise purchases represents 75% of the sales price. All
purchases are paid in cash.
How much are the budgeted cash disbursements for December?
a. $345,000
b. $510,000
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MC. 132 (cont.)
c. $525,000
d. $492,000
133. Dex Industries expects to purchase $120,000 of materials in March and $140,000 of
materials in April. Three-fourths of all purchases are paid for in the month of purchase, and
the other one-fourth are paid for in the month following the month of purchase. In addition, a
2% discount is received for payments made in the month of purchase. How much will
April's cash disbursements for materials purchases be?
a. $88,200
b. $108,200
c. $132,900
d. $120,000
134. On January 1, Witt Company has a beginning cash balance of $126,000. During the year,
the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If
Witt requires an ending cash balance of $120,000, Witt Company must borrow
a. $96,000.
b. $120,000.
c. $144,000.
d. $276,000.
135. Mapleview, Inc. has the following budgeted sales: July $200,000, August $300,000, and
September $250,000. 40% of the sales are for cash and 60% are on credit. For the credit
sales, 50% are collected in the month of sale, and 50% the next month. The total
expected cash receipts during September are
a. $280,000.
b. $265,000.
c. $262,500.
d. $250,000.
136. Burr, Inc.'s direct materials budget shows total cost of direct materials purchases for April
$400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of
purchase and 40% in the following month. The budgeted cash payments for June are
a. $528,000.
b. $512,000.
c. $480,000.
d. $416,000.
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137. Which one of the following budgets would be prepared for a manufacturer but not for a
merchandiser?
a. Direct labor budget
b. Cash budget
c. Sales budget
d. Budgeted income statement
138. The formula for determining budgeted merchandise purchases is budgeted
a. production + desired ending inventory – beginning inventory.
b. sales + beginning inventory – desired ending inventory.
c. cost of goods sold + desired ending inventory – beginning inventory.
d. cost of goods sold + beginning inventory – desired ending inventory.
139. Which one of the following is a problem resulting from a service company being
overstaffed?
a. Labor costs will be disproportionately low.
b. Profits will be higher because of the additional salaries.
c. Staff turnover may increase.
d. Revenue may be lost.
140. The master budget for a service enterprise
a. will have the same types of budgets as a merchandiser.
b. may include a sales budget for sales revenue.
c. will not include a budgeted income statement.
d. includes a service revenue budget based on expected client billings.
141. Budgeting in not-for-profit organizations
a. is not important because they are not profit-oriented.
b. usually starts with budgeting expenditures, rather than receipts.
c. is necessary only if some product is produced and sold.
d. consists entirely of budgeted contributions.
142. For a merchandiser, the starting point in the development of the master budget is the
a. cash budget.
b. sales budget.
c. selling and administrative expenses budget.
d. budgeted income statement.
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143. Instead of a production budget, a merchandiser will prepare a
a. pseudo-production budget.
b. merchandise purchases budget.
c. master time sheet.
d. sales forecast.
144. Orange Co. is a manufacturer and Pineapple Company is a merchandiser. What is the
difference in the budgets the two entities will prepare?
a. Orange Co. will prepare a production budget, and Pineapple Company will prepare a
merchandise purchases budget.
b. Orange Co. will prepare a sales forecast, and Pineapple Company will prepare a sales
budget.
c. Pineapple Company will prepare a production budget, and Orange Co. will prepare a
merchandise purchases budget.
d. Both companies will prepare the same types of budgets.
145. An appropriate activity index for a college or university for budgeting faculty positions
would be the
a. faculty hours worked.
b. number of administrators.
c. credit hours taught by a department.
d. number of days in the school term.
146. A critical factor in budgeting for a service firm is to
a. hire professional staff to perform the budgeting work.
b. coordinate professional staff needs with anticipated services.
c. classify all personnel as either variable or fixed.
d. budget expenditures before anticipated receipts.
147. The primary benefits of budgeting include all of the following except it
a. requires only top management to plan ahead and formalize their future goals.
b. provides definite objectives for evaluating performance.
c. creates an early warning system for potential problems.
d. motivates personnel throughout the organization.
148. The responsibility for expressing management's budgeting goals in financial terms is
performed by the
a. accounting department.
b. top management.
c. lower level of management.
d. budget committee.
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149. Coordinating the preparation of the budget is the responsibility of the
a. treasurer.
b. president.
c. chief accountant.
d. budget committee.
150. For better management acceptance, the flow of input data for budgeting should begin with the
a. accounting department.
b. top management.
c. lower levels of management.
d. budget committee.
151. In the direct materials budget, the quantity of direct materials to be purchased is computed
by adding direct materials required for production to
a. desired ending direct materials.
b. beginning direct materials.
c. desired ending direct materials less beginning direct materials.
d. beginning direct materials less desired ending direct materials.
152. Grey Company has 24,000 units in beginning finished goods. If sales are expected to be
120,000 units for the year and Grey desires ending finished goods of 30,000 units, how
many units must the company produce?
a. 114,000
b. 120,000
c. 126,000
d. 150,000
153. The important end-product of the operating budgets is the
a. budgeted income statement.
b. cash budget.
c. production budget.
d. budgeted balance sheet.
154. On January 1, Kale Company has a beginning cash balance of $42,000. During the year,
the company expects cash disbursements of $340,000 and cash receipts of $290,000. If
Kale requires an ending cash balance of $40,000, the company must borrow
a. $32,000.
b. $40,000.
c. $48,000.
d. $92,000.
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155. The budget that is often considered to be the most important financial budget is the
a. cash budget.
b. capital expenditure budget.
c. budgeted income statement.
d. budgeted balance sheet.
156. Lark Corp.'s direct materials budget shows total cost of direct materials purchases for
January $250,000, February $300,000 and March $350,000. Cash payments are 60% in
the month of purchase and 40% in the following month. The budgeted cash payments for
March are
a. $330,000.
b. $320,000.
c. $300,000.
d. $260,000.
157. A purchases budget is used instead of a production budget by
a. merchandising companies.
b. service enterprises.
c. not-for-profit organizations.
d. manufacturing companies.
158. Which of the following statements is incorrect?
a. A continuous twelve-month budget results from dropping the month just ended and
adding a future month.
b. The production budget is derived from the direct materials and direct labor budgets.
c. The cash budget shows anticipated cash flows.
d. In the budget process for not-for-profit organizations, the emphasis is on cash flow
rather than on revenue and expenses.
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Answers to Multiple Choice Questions
BRIEF EXERCISES
BE 159
Wynn, Inc. manufactures beanies. The budgeted units to be produced and sold are below:
Expected Production Expected Sales
August 3,500 2,900
September 2,800 3,900
It takes 18 yards of yarn to produce a beanie. The company's policy is to maintain yarn at the end
of each month equal to 5% of next month's production needs and to maintain a finished goods
inventory at the end of each month equal to 20% of next month's anticipated production needs.
The cost of yarn is $0.20 a yard. At August 1, 3,150 yards of yarn were on hand.
Instructions
Compute the budgeted cost of purchases.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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BE 160
The budget components for Birk Company for the quarter ended June 30 appear below. Birk sells
trash cans for $12 each. Budgeted production for the next three months is:
April 26,000 units
May 46,000 units
June 29,000 units
Birk desires to have trash cans on hand at the end of each month equal to 20 percent of the
following month’s budgeted sales in units. On March 31, Birk had 4,000 completed units on hand.
Five pounds of plastic are required for each trash can. At the end of each month, Birk desires to
have 10 percent of the following month’s production material needs on hand. At March 31, Birk
had 13,000 pounds of plastic on hand. The materials used in production costs $0.60 per pound.
Each trash can produced requires 0.10 hours of direct labor.
Instructions
Compute the cost of the plastic inventory at the end of May.
BE 161
Smoke, Inc. makes and sells buckets. Each bucket uses 1/2 pound of plastic. Budgeted
production of buckets in units for the next three months is as follows:
April May June
Budgeted production 21,000 22,000 24,000
The company wants to maintain monthly ending inventories of plastic equal to 25% of the
following month's budgeted production needs. The cost of plastic is $2.20 per pound.
Instructions
Prepare a direct materials purchases budget for the month of May.
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BE 162
The budget components for Park Company for the quarter ended June 30 appear below. Park
sells trash cans for $12 each. Budgeted sales and production for the next three months are:
Sales Production
April 20,000 units 26,000 units
May 50,000 units 46,000 units
June 30,000 units 29,000 units
Park desires to have trash cans on hand at the end of each month equal to 20 percent of the
following month’s budgeted sales in units. On March 31, Park had 4,000 completed units on
hand. Five pounds of plastic are required for each trash can. At the end of each month, Park
desires to have 10 percent of the following month’s production material needs on hand. At March
31, Park had 13,000 pounds of plastic on hand. The materials used in production cost $0.60 per
pound. Each trash can produced requires 0.10 hours of direct labor.
Instructions
Determine how much the materials purchases budget will be for the month ending April 30.
BE 163
Jent Company reported the following information for 2013:
October November December
Budgeted sales $320,000 $340,000 $360,000
Budgeted purchases $120,000 $128,000 $144,000
• All sales are on credit.
• Customer amounts on account are collected 40% in the month of sale and 60% in the
following month.
Instructions
Compute the amount of cash Jent will receive during November.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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BE 164
Plack Company budgeted the following information for 2013:
May June July
Budgeted purchases $104,000 $110,000 $102,000
• Cost of goods sold is 40% of sales. Accounts payable is used only for inventory acquisitions.
• Plack purchases and pays for merchandise 60% in the month of acquisition and 40% in the
following month.
• Selling and administrative expenses are budgeted at $30,000 for May and are expected to
increase 5% per month. They are paid during the month of acquisition. In addition, budgeted
depreciation is $10,000 per month.
• Income taxes are $38,400 for July and are paid in the month incurred.
Instructions
Compute the amount of budgeted cash disbursements for July.
BE 165
Sable, Inc. has budgeted direct materials purchases of $400,000 in March and $500,000 in April.
Past experience indicates that the company pays for 60% of its purchases in the month of
purchase and the remaining 40% in the next month. Other costs are all paid during the month
incurred. During April, the following items were budgeted:
Wages expense $120,000
Purchase of office equipment 200,000
Selling and administrative expenses 126,000
Depreciation expense 18,000
Instructions
Compute the amount of budgeted cash disbursements for April.
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BE 166
Chain Inc. provided the following information:
April May June
Projected merchandise purchases $92,000 $80,000 $66,000
• Chain pays 40% of merchandise purchases in the month purchased and 60% in the following
month.
• General operating expenses are budgeted to be $31,000 per month of which depreciation is
$3,000 of this amount. Chain pays operating expenses in the month incurred.
• Chain makes loan payments of $4,000 per month of which $450 is interest and the remainder
is principal.
Instructions
Calculate budgeted cash disbursements for May.
BE 167
Beal, Inc. provided the following information:
March April May
Projected merchandise purchases $65,000 $75,000 $80,000
• Beal pays 40% of merchandise purchases in the month purchased and 60% in the following
month.
• General operating expenses are budgeted to be $20,000 per month of which depreciation is
$2,000 of this amount. Beal pays operating expenses in the month incurred.
Instructions
Calculate Beal’s budgeted cash disbursements for May.
Budgetary Planning
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BE 168
The beginning cash balance is $15,000. Sales are forecasted at $800,000 of which 80% will be
on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures
for the year are forecasted at $475,000. Accounts Receivable from previous accounting periods
totaling $9,000 will be collected in the current year. The company is required to make a $15,000
loan payment and an annual interest payment on the last day of every year. The loan balance as
of the beginning of the year is $90,000, and the annual interest rate is 10%.
Instructions
Compute the excess of cash receipts over cash disbursements.
EXERCISES
Ex. 169
Delta Manufacturing has budgeted the following unit sales:
2012 Units
April 25,000
May 40,000
June 60,000
July 45,000
Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit
and the remainder are sold by the Central Division at an average price of $12 per unit.
Instructions
Prepare separate sales budgets for each division and for the company in total for the second
quarter of 2013.
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Ex. 170
Pitt Corp. makes and sells a single product, widgets. Two pounds of sand are needed to make
one widget. Budgeted production of widgets for the next few months follows:
September 25,000 units
October 31,000 units
The company wants to maintain monthly ending inventories of sand equal to 20% of the following
month's production needs. On August 31, 10,000 pounds of sand were on hand.
Instructions
How much sand should be purchased in September?
Budgetary Planning
21 - 41
Ex. 171
Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units
to be produced are as follows:
Units of Product
2013 Regular Deluxe Total
July 10,000 15,000 25,000
August 6,000 10,000 16,000
September 9,000 14,000 23,000
October 8,000 12,000 20,000
It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials
to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials
on hand at the end of each month equal to 30% of the next month's production needs for the
Regular product and 20% of the next month's production needs for the Deluxe product. Direct
materials inventory on hand at June 30 were 6,000 pounds for the Regular product and 15,000
pounds for the Deluxe product. The cost per pound of materials is $5 Regular and $8 Deluxe.
Instructions
Prepare separate direct materials budgets for each product for the third quarter of 2013.
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Ex. 172
Garver Industries has budgeted the following unit sales:
2013 Units
January 10,000
February 8,000
March 9,000
April 11,000
May 15,000
The finished goods units on hand on December 31, 2012, was 2,000 units. Each unit requires 3
pounds of raw materials that are estimated to cost an average of $4 per pound. It is the
company's policy to maintain a finished goods inventory at the end of each month equal to 20%
of next month's anticipated sales. They also have a policy of maintaining a raw materials
inventory at the end of each month equal to 30% of the pounds needed for the following month's
production. There were 8,640 pounds of raw materials on hand at December 31, 2012.
Instructions
For the first quarter of 2013, prepare (1) a production budget and (2) a direct materials budget.
Budgetary Planning
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Ex. 173
Benet Company has budgeted the following unit sales:
2013 2013
Quarter Units Quarter Units
1 105,000 1 90,000
2 60,000
3 75,000
4 120,000
The finished goods inventory on hand on December 31, 2012 was 21,000 units. It is the
company's policy to maintain a finished goods inventory at the end of each quarter equal to 20%
of the next quarter's anticipated sales.
Instructions
Prepare a production budget for 2013.
Ex. 174
The following facts are known:
• The total pounds needed for production are 2 times the units to be produced.
• The desired ending direct materials inventory is 20% of the total pounds needed for
production.
• The beginning direct materials inventory is equal in number to 10% of the units to be produced.
• Cost per pound is $5.
• Total cost of the direct materials purchases is $1,035,000.
Instructions
Prepare a direct materials budget for the period.
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Ex. 175
Tall Oak, Inc. produces rulers from plastic resin. Tall Oak has estimated production and sales of
rulers in units for the next 2 months as:
May June
Estimated production 42,000 48,000
Estimated sales 50,000 36,000
Each ruler requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Tall Oak wants to
have 20% of the next month's materials requirements on hand at the end of each month.
Instructions
Prepare a direct materials purchases budget for the month of May.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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Ex. 176
Pulham Company is preparing its direct labor budget for 2013 from the following production
budget based on a calendar year:
Quarter Units
1 60,000
2 30,000
3 45,000
4 75,000
Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in
wage rate to $11 per hour on October 1.
Instructions
Prepare a direct labor budget for 2013.
Ex. 177
For each item given, identify the budget in which it will appear. If an item will appear on more than
one budget, then indicate as many budgets as are relevant.
Budget Code:
DM Direct Materials Budget
DL Direct Labor Budget
P Production Budget
S Sales Budget
C Cash Budget
BBS Budgeted Balance Sheet
BIS Budgeted Income Statement
SA Selling and Administrative Expense Budget
MOH Manufacturing Overhead Budget
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Ex. 177 (Cont.)
___________ 1. Ending cash balance
___________ 2. Total selling and administrative expenses
___________ 3. Total sales (in dollars)
___________ 4. Interest expense
___________ 5. Ending raw materials inventory (in dollars)
___________ 6. Ending finished goods inventory (in dollars)
Ex. 178
Leaf Industries is preparing its master budget for 2013. Relevant data pertaining to its sales
budget are as follows:
Sales for the year are expected to total 8,000,000 units. Quarterly sales are 25%, 30%, 15%, and
30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then
be increased to $2.20 per unit in the second quarter.
Instructions
Prepare a sales budget for 2013 for Leaf Industries.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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Ex. 179
Shep Company combines its operating expenses for budget purposes in a selling and
administrative expense budget. For the first quarter of 2013, the following data are developed:
1. Sales: 20,000 units; unit selling price: $30
2. Variable costs per dollar of sales:
Sales commissions 6%
Delivery expense 2%
Advertising 4%
3. Fixed costs per quarter:
Sales salaries $24,000
Office salaries 19,000
Depreciation 6,000
Insurance 2,000
Utilities 1,000
Instructions
Prepare a selling and administrative expense budget for the first quarter of 2013.
Ex. 180
Thread Company is preparing its manufacturing overhead budget for 2013. Relevant data consist
of the following.
Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000.
Direct labor: Time is 1 hour per unit.
Variable overhead costs per direct labor hour: Indirect materials $0.80; indirect labor $1.20; and
maintenance $0.50.
Fixed overhead costs per quarter: Supervisory salaries $42,000; depreciation $16,000; and
maintenance $12,000.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
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Ex. 180 (Cont.)
Instructions
Prepare the manufacturing overhead budget for the year, showing quarterly data.
Ex. 181
Walt Bach Company has accumulated the following budget data for the year 2013.
1. Sales: 40,000 units, unit selling price $50.
2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5
hours at $12 per hour, and manufacturing overhead $6 per direct labor hour.
3. Inventories (raw materials only): Beginning, 10,000 pounds; ending, 15,000 pounds.
4. Raw materials cost: $5 per pound.
5. Selling and administrative expenses: $200,000.
6. Income taxes: 30% of income before income taxes.
Instructions
(a) Prepare a schedule showing the computation of cost of goods sold for 2013.
(b) Prepare a budgeted income statement for 2013.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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Ex. 182
The Northeast Regional Division of Union Corp. has been requested to prepare a quarterly
budgeted income statement for 2013. The regional manager expects that sales in the first quarter
of 2013 will increase by 10% over the same quarter of the preceding year and will then increase
by 5% for each succeeding quarter in 2013.
The corporate head office has requested that the regional manager maintain an inventory in
dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly
sales. Budgeted ending inventory on December 31, 2012 is $176,000. Quarterly salaries are
$20,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses
are estimated to be as follows:
Rent expense $24,000
Depreciation on office equipment $12,000
Utilities expense $3,600
Miscellaneous expenses 2% of sales
The income statement for the first quarter of 2012 was as follows:
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Instructions
Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2013.
(Show computations.)
Budgetary Planning
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Ex. 183
In September 2013, the budget committee of Jason Company assembles the following data:
1. Expected Sales
October $1,800,000
November 1,700,000
December 1,600,000
2. Cost of goods sold is expected to be 60% of sales.
3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold.
4. The beginning inventory at October 1 will be the desired amount.
Instructions
Prepare the budgeted income statement for October through gross profit on sales, including a
cost of goods sold schedule.
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Ex. 184
Burr, Inc. provided the following information:
July August
Projected sales $220,000 $260,000
Projected merchandise purchases $150,000 $180,000
• Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after
the sale, and 22% in the second month following the sale. Three percent of all sales are
estimated to be bad debts.
• Burr pays 30% of merchandise purchases in the month purchased and 70% in the following
month.
• General operating expenses are budgeted to be $20,000 per month of which depreciation is
$2,000 of this amount. Burr pays operating expenses in the month incurred.
• Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is
principal.
Instructions
Calculate Burr's budgeted cash disbursements for August.
Ex. 185
Casa Development, Inc. has budgeted sales revenues as follows:
Budgeted Sales Revenues
January $55,000
February 75,000
March 90,000
April 80,000
May 60,000
June 35,000
Past experience has indicated that 80% of sales each month are on credit and that collection of
credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale,
and 5% in the second month following the sale. The other 5% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the months of April, May,
and June.
Budgetary Planning
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Ex. 186
Cruises, Inc. has budgeted sales revenues as follows:
June July August
Credit sales $135,000 $125,000 $ 90,000
Cash sales 90,000 255,000 195,000
Total sales $225,000 $380,000 $285,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and
the remaining 40% will be collected in the following month. Purchases of inventory are all on
credit and 50% is paid in the month of purchase and 50% in the month following purchase.
Budgeted inventory purchases are:
June $300,000
July 240,000
August 105,000
Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each
month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for
$30,000 cash.
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Ex. 186 (Cont.)
The company wishes to maintain a minimum cash balance of $50,000 at the end of each month.
The company borrows money from the bank at 6% interest if necessary to maintain the minimum
cash balance. Borrowed money is repaid in months when there is an excess cash balance. The
beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for
one month.
Instructions
Prepare a cash budget for the months of July and August. Prepare separate schedules for
expected collections from customers and expected payments for purchases of inventory.
Budgetary Planning
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Ex. 187
Clay Co.’s projected sales are as follows:
August $400,000
September $450,000
October $550,000
Clay estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and
18% in the second month following the sale. Two percent of all sales are estimated to be bad
debts.
Instructions
How much are Clay Co.'s budgeted cash receipts for October?
Ex. 188
The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended
December 31, 2013. The following information is available:
1. The cash budget shows an expected cash balance of $75,000 at December 31, 2013.
2. The 2013 sales budget shows total annual sales of $800,000. All sales are made on account
and accounts receivable at December 31, 2013 are expected to be 10% of annual sales.
3. The merchandise purchases budget shows budgeted cost of goods sold for 2013 of $600,000
and ending merchandise inventory of $95,000. 20% of the ending inventory is expected to
have not yet been paid at December 31, 2013.
4. The December 31, 2012 balance sheet includes the following balances: Equipment $294,000,
Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings
$48,000.
5. The budgeted income statement for 2013 includes the following: depreciation on equipment
$15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not
be paid until 2013.
6. In 2013, management does not expect to purchase additional equipment or to declare any
dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
Instructions
Prepare an unclassified budgeted balance sheet at December 31, 2013.
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Ex. 189
The management of Ocean Industries estimates that credit sales for August, September,
October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively.
Experience has shown that collections are made as follows:
In month of sale 25%
In first month after sale 60%
In second month after sale 10%
Instructions
Determine the collections from customers in October and November. Show all computations.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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Ex. 190
The beginning cash balance is $20,000. Sales are forecasted at $700,000 of which 80% will be
on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures
for the year are forecasted at $500,000. Accounts receivable from previous accounting periods
totaling $12,000 will be collected in the current year. The company is required to make a $20,000
loan payment and an annual interest payment on the last day of the year. The loan balance as of
the beginning of the year is $120,000, and the annual interest rate is 10%.
Instructions
How much will be reported as 'cash' on the budgeted balance sheet?
Ex. 191
Rudd Company has budgeted sales revenue as follows for the next 4 months:
February $300,000
March 240,000
April 210,000
May 330,000
Past experience indicates that 80% of sales each month are on credit and that collection of credit
sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in
the second month following the sale. The other 2% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the month of May.
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Ex. 192
Hagen Company's budgeted sales and direct materials purchases are as follows.
Budgeted Sales Budgeted D.M. Purchases
January $300,000 $60,000
February 330,000 70,000
March 350,000 80,000
Hagen's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale,
50% in the month following sale, and 36% in the second month following sale; 4% are
uncollectible. Hagen's purchases are 50% cash and 50% on account. Purchases on account are
paid 40% in the month of purchase, and 60% in the month following purchase.
Instructions
(a) Prepare a schedule of expected collections from customers for March.
(b) Prepare a schedule of expected payments for direct materials for March.
Budgetary Planning
FOR INSTRUCTOR USE ONLY
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Ex. 193
Minor Landscaping Company is preparing its budget for the first quarter of 2013. The next step in
the budgeting process is to prepare a cash receipts schedule and a cash payments schedule. To
that end the following information has been collected.
Clients usually pay 60% of their fee in the month that service is provided, 30% the month after,
and 10% the second month after receiving service.
Actual service revenue for 2012 and expected service revenues for 2013 are: November 2012,
$120,000; December 2012, $110,000; January 2013, $140,000; February 2013, $160,000; March
2013, $170,000.
Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase and
60% the following month. Actual purchases for 2012 and expected purchases for 2013 are:
December 2012, $21,000; January 2013, $20,000; February 2013, $22,000; March 2013,
$27,000.
Instructions
(a) Prepare the following schedules for each month in the first quarter of 2013 and for the quarter
in total:
(1) Expected collections from clients.
(2) Expected payments for landscaping supplies.
(b) Determine the following balances at March 31, 2013:
(1) Accounts receivable.
(2) Accounts payable.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
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Ex. 194
In May 2013, the budget committee of Crater, Inc. assembles the following data in preparation of
budgeted merchandise purchases for the month of June.
1. Expected sales: June $750,000, July $900,000.
2. Cost of goods sold is expected to be 80% of sales.
3. Desired ending merchandise inventory is 40% of the following (next) month's cost of goods
sold.
4. The beginning inventory at June 1 will be the desired amount.
Instructions
(a) Compute the budgeted merchandise purchases for June.
(b) Prepare the budgeted income statement for June through gross profit.
Budgetary Planning
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Ex. 195
In September 2013, the management of Rye Company assembles the following data in
preparation of budgeted merchandise purchases for the months of October and November.
1. Expected Sales
October $1,500,000
November 2,100,000
December 2,700,000
2. Cost of goods sold is expected to be 70% of sales.
3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold.
4. The beginning inventory at October 1 will be the desired amount.
Instructions
Compute the budgeted merchandise purchases for October and November. Use a columnar
format with separate columns for each month.
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COMPLETION STATEMENTS
196. A _________________ is a formal written statement of management's plans expressed in
financial terms.
197. A budget is a primary means of ________________ agreed upon objectives throughout
the business organization.
198. Effective budgeting is dependent on an _________________________ in which authority
and responsibility are clearly defined.
199. The budget should have the support of _________________ and should be an important
basis for _________________________ by comparing actual results to expected results.
200. Many companies use ____________________________ budgets by dropping the month
just ending and adding a future month.
201. A __________________ is responsible for coordinating the preparation of the budget in
many companies.
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202. A major difference between the annual budget and long-range planning is the
____________________ over which the data pertain.
203. The ____________________ is the starting point in preparing the master budget.
204. The formula for developing a production budget is ___________________ plus
______________________ minus _______________________.
205. The ________________ is a set of interrelated budgets that constitutes a plan of action
for a specified period of time.
206. Three major sections of a cash budget are (1) ___________________, (2)
____________________, and (3) ______________________.
207. The two major differences between the master budgets of a merchandiser and a
manufacturer are that the merchandiser will have a ______________________ budget
and will not have __________________ budgets.
Answers to Completion Statements
196. budget 203. sales budget
197. communicating 204. budgeted sales units,
198. organizational structure desired ending finished goods units,
199. top management, evaluating beginning finished goods units
performance 205. master budget
200. continuous twelve-month 206. cash receipts, cash disbursements,
201. budget committee financing
202. time period 207. merchandise purchases, manufacturing
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MATCHING
208. Match the items below by entering the appropriate code letter in the space provided.
A. Budget F. Production budget
B. Financial budgets G. Cash budget
C. Budget committee H. Long-range planning
D. Master budget I. Direct materials budget
E. Sales forecast J. Sales budget
____ 1. A selection of strategies to achieve long-term goals.
____ 2. An estimate of expected sales for the budget period.
____ 3. Budgets that indicate the cash resources needed for expected operations and planned
capital expenditures.
____ 4. The projection of potential sales for the industry and the company's expected share of
such sales.
____ 5. Management's plans expressed in financial terms for a specified future time period.
____ 6. A projection of anticipated cash flows.
____ 7. A group responsible for coordinating the preparation of the budget.
____ 8. A projection of production requirements to meet expected sales.
____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period.
____ 10. An estimate of the quantity and cost of direct materials to be purchased.
Answers to Matching
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 209
(a) What is a budget?
(b) How does a budget contribute to good management?
S-A E 210
Budgeting can be an important management tool if implemented properly. Identify several
positive results when budgets are used properly. Since budgets affect people, identify several
negative aspects if budgets are not implemented properly.
S-A E 211
Budgeting and long-range planning are both important aids to management in achieving a
company's goals and objectives. Briefly distinguish between budgeting and long-range planning
and indicate how they help managers perform their functions.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 212
What is participative budgeting? What are its potential benefits? What are its potential
shortcomings?
S-A E 213 (Ethics)
Ashley Finn is a new production manager. After a great deal of effort, including considerable
market research, she completes her budget and submits it to her boss, Keith Payne. Without
even looking at it, he asks her what her "fudge factor" was, and which items contained the most
slack. Ashley, very surprised, responds that she doesn't use any "fudge factor," and that all her
figures are honest. Mr. Payne counters by asking her how she would respond if she had to cut
about 20% from her budget, as it is. He tells her that most budgets are trimmed in committee, and
she had better be ready. He returns the budget to her, and tells her to come back with something
reasonable.
Required:
1. Is it ethical to build slack into a budget? Explain.
2. Was it ethical for Mr. Payne to refuse to accept a budget without slack? Briefly explain.
Budgetary Planning
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S-A E 214 (Communication)
At Boulder Industries, budgets are the responsibility of everyone. Each department collaborates
in determining its expected needs, and sales personnel determine the likely sales volume. Bart
Gray, one of the production managers, believes in building plenty of slack into everything,
including his estimates of ending inventory of work in process.
Required:
You are the accounting manager. Write a memo to Mr. Gray. Explain why the ending inventory
figure should be extremely accurate, with as little slack as possible.
