Chapter 22—Budgeting Key
1. A formal written statement of management’s plans for the future, expressed in financial terms, is called a
budget.
2. Budgets are normally used only by profit-making businesses.
3. The objectives of budgeting are (1) establishing specific goals for future operations, (2) executing plans to
achieve the goals, and (3) periodically comparing actual results with these goals.
4. When budget goals are set too tight, the budget becomes less effective as a tool for planning and controlling
operations.
5. Employees view budgeting more positively when goals are established for them by senior management.
6. Budgetary slack can be avoided if lower and mid-level managers are requested to support all of their
spending requirements with specific operational plans.
7. Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the
organization.
8. The budgeting process is used to effectively communicate planned expectations regarding profits and
expenses to the entire organization.
9. The budget procedures used by a large manufacturer of automobiles would probably not differ from those
used by a small manufacturer of paper products.
10. A budget procedure that provides for the maintenance at all times of a twelve-month projection into the
future is called continuous budgeting.
11. A budget procedure that provides for the maintenance at all times of a twelve-month projection into the
future is called master budgeting.
12. The budget procedure that requires all levels of management to start from zero in estimating sales,
production, and other operating data is called zero-based budgeting.
13. The budget procedure that requires all levels of management to start from zero in estimating sales,
production, and other operating data is called continuous budgeting.
14. Budgets are prepared in the Accounting Department and monitored by various department managers.
15. Once a static budget has been determined, it is changed regularly as the underlying activity changes.
16. The flexible budget is, in effect, a series of static budgets for different levels of activity.
17. Flexible budgeting requires all levels of management to start from zero and estimate sales, production, and
other operating data as though operations were being started for the first time.
18. Flexible budgeting builds the effect of changes in level of activity into the budget system.
19. In preparing flexible budgets, the first step is to identify the fixed and variable components of the various
costs and expenses being budgeted.
20. A process whereby the effect of fluctuations in the level of activity is built into the budgeting system is
referred to as flexible budgeting.
21. The master budget of a small manufacturer would normally include all necessary component budgets except
the capital expenditures budget.
22. The master budget of a small manufacturer would normally include all necessary component budgets except
23. The master budget of a small manufacturer would normally include all component budgets that impact on
24. The first budget to be prepared is usually the sales budget.
25. The first budget to be prepared is usually the production budget.
26. The first budget to be prepared is usually the cash budget.
27. After the sales budget is prepared, the production budget is normally prepared next.
28. After the sales budget is prepared, the capital expenditures budget is normally prepared next.
29. The budgeted volume of production is based on the sum of (1) the expected sales volume and (2) the desired
ending inventory, less (3) the estimated beginning inventory.
30. The budgeted volume of production is normally computed as the sum of (1) the expected sales volume and
(2) the desired ending inventory.
31. If Division Inc. expects to sell 200,000 units in 2012, desires ending inventory of 24,000 units, and has
22,000 units on hand as of the beginning of the year, the budgeted volume of production for 2012 is 202,000
units.
32. If Division Inc. expects to sell 200,000 units in 2012, desires ending inventory of 24,000 units, and has
22,000 units on hand as of the beginning of the year, the budgeted volume of production for 2012 is 198,000
units.
33. The budgeted direct materials purchases is based on the sum of (1) the materials needed for production and
(2) the desired ending materials inventory, less (3) the estimated beginning materials inventory.
34. The budgeted direct materials purchases is normally computed as the sum of (1) the materials for production
and (2) the desired ending inventory.
35. The production budget is the starting point for preparation of the direct labor cost budget.
36. The sales budget is the starting point for preparation of the direct labor cost budget.
37. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead
cost budget.
38. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the operating
expenses budget.
39. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost budget.
40. Detailed supplemental schedules based on department responsibility are often prepared for major items in
the operating expenses budget.
41. The capital expenditures budget summarizes future plans for acquisition of fixed assets.
42. The cash budget summarizes future plans for acquisition of fixed assets.
43. The cash budget is affected by the sales budget, the various budgets for manufacturing costs and operating
expenses, and the capital expenditures budget.
44. The cash budget presents the expected inflow and outflow of cash for a specified period of time.
45. The budgeted balance sheet assumes that all operating and financing plans are met.
46. The master budget is an integrated set of budgets that tie together a company’s operating, financing and
investing activities into an integrated plan for the coming year.
47. The capital expenditures budget is part of the planned investing activities of a company.
48. Consulting the persons affected by a budget when it is prepared can provide an effective means of
motivation and cooperation.
49. A budget can be an effective means of communicating management’s plans to the employees of a business.
50. Past performance is the best overall basis for evaluating current performance and assessing the need for
corrective action.
51. Budget preparation is best determined in a top-down managerial approach.
52. The task of preparing a budget should be the sole task of the most important department in an organization.
53. The responsibility for coordinating the preparation of a master budget should be assigned to the CEO of a
firm.
54. The financial budgets of a business include the cash budget, the budgeted income statement, and the
budgeted balance sheet.
55. The sales budget is derived from the production budget.
56. A capital expenditures budget is prepared before the operating budgets.
57. Part of the cash budget is based on information drawn from the capital expenditures budget.
58. A formal written statement of management’s plans for the future, expressed in financial terms, is a:
59. The budget process involves doing all the following except:
60. The budgetary unit of an organization which is led by a manager who has both the authority over and
responsibility for the unit’s performance is known as a:
61. The benefits of comparing actual performance of the operations against planned goals include all of the
following except:
62. Budgeting supports the planning process by encouraging all of the following activities except:
63. When management seeks to achieve personal departmental objectives that may work to the detriment of the
entire company, the manager is experiencing:
64. The budgeting process does not involve which of the following activities:
65. Budgets need to be fair and attainable for employees to consider the budget important in their normal daily
activities. Which of the following is not considered a human behavior problem?
66. Which of the following budgets allow for adjustments in activity levels?
67. The process of developing budget estimates by requiring all levels of management to estimate sales,
production, and other operating data as though operations were being initiated for the first time is referred to as:
68. A variant of fiscal-year budgeting whereby a twelve-month projection into the future is maintained at all
69. Scott Manufacturing Co.’s static budget at 10,000 units of production includes $40,000 for direct labor and
$4,000 for electric power. Total fixed costs are $25,000. At 12,000 units of production, a flexible budget would
show:
70. Bob and Sons’ static budget for 10,000 units of production includes $50,000 for direct materials, $44,000 for
direct labor, variable utilities of $5,000, and supervisor salaries of $25,000. A flexible budget for 12,000 units
of production would show:
71. A disadvantage of static budgets is that they:
72. A series of budgets for varying rates of activity is termed a(n):
73. For January, sales revenue is $700,000; sales commissions are 5% of sales; the sales manager’s salary is
$96,000; advertising expenses are $90,000; shipping expenses total 2% of sales; and miscellaneous selling
expenses are $2,100 plus 1/2 of 1% of sales. Total selling expenses for the month of January are:
74. For February, sales revenue is $700,000; sales commissions are 5% of sales; the sales manager’s salary is
$96,000; advertising expenses are $80,000; shipping expenses total 2% of sales; and miscellaneous selling
expenses are $2,500 plus 1/2 of 1% of sales. Total selling expenses for the month of February are:
75. For March, sales revenue is $1,000,000; sales commissions are 5% of sales; the sales manager’s salary is
$80,000; advertising expenses are $75,000; shipping expenses total 1% of sales; and miscellaneous selling
expenses are $2,100 plus 1% of sales. Total selling expenses for the month of March are:
76. Cameron Manufacturing Co.’s static budget at 5,000 units of production includes $40,000 for direct labor
and $5,000 for variable electric power. Total fixed costs are $20,000. At 8,000 units of production, a flexible
budget would show:
77. Tanya Inc.’s static budget for 10,000 units of production includes $60,000 for direct materials, $44,000 for
direct labor, fixed utilities costs of $5,000, and supervisor salaries of $20,000. A flexible budget for 12,000
units of production would show:
78. The primary difference between a static budget and a flexible budget is that a static budget
79. At the beginning of the period, the Cutting Department budgeted direct labor of $155,000, direct material of
$165,000 and fixed factory overhead of $15,000 for 9,000 hours of production. The department actually
completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses
flexible budgeting?
80. At the beginning of the period, the Assembly Department budgeted direct labor of $110,000, direct material
of $170,000 and fixed factory overhead of $28,000 for 8,000 hours of production. The department actually
completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses
flexible budgeting.
81. The production budgets are used to prepare which of the following budgets.
82. Principal components of a master budget include which of the following?
83. The first budget customarily prepared as part of an entity’s master budget is the:
84. Motorcycle Manufacturers, Inc. projected sales of 78,000 machines for 2012. The estimated January 1,
2012, inventory is 6,500 units, and the desired December 31, 2012, inventory is 7,000 units. What is the
budgeted production (in units) for 2012?
85. The budget that needs to be completed first when preparing the master budget is the:
86. Which of the following budgets is not directly associated with the production budget?
87. Below is budgeted production and sales information for Flushing Company for the month of December:
Product XXX
Product ZZZ
Estimated beginning inventory
32,000 units
20,000 units
Desired ending inventory
34,000 units
17,000 units
Region I, anticipated sales
320,000 units
260,000 units
Region II, anticipated sales
180,000 units
140,000 units
The unit selling price for product XXX is $5 and for product ZZZ is $15.
Budgeted sales for the month are:
88. Below is budgeted production and sales information for Flushing Company for the month of December:
Product XXX
Product ZZZ
Estimated beginning inventory
32,000 units
20,000 units
Desired ending inventory
34,000 units
17,000 units
Region I, anticipated sales
320,000 units
260,000 units
Region II, anticipated sales
180,000 units
140,000 units
The unit selling price for product XXX is $5 and for product ZZZ is $15.
Budgeted production for product XXX during the month is:
89. Below is budgeted production and sales information for Flushing Company for the month of December:
Product XXX
Product ZZZ
Estimated beginning inventory
32,000 units
20,000 units
Desired ending inventory
34,000 units
17,000 units
Region I, anticipated sales
320,000 units
260,000 units
Region II, anticipated sales
180,000 units
140,000 units
The unit selling price for product XXX is $5 and for product ZZZ is $15.
Budgeted production for product ZZZ during the month is:
90. Manicotti Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units,
estimated beginning inventory is 108,000 units, and desired ending inventory is 90,000 units. The quantities of
direct materials expected to be used for each unit of finished product are given below.
Material A .50 lb. per unit @ $ .60 per pound
Material B 1.00 lb. per unit @ $1.70 per pound
Material C 1.20 lb. per unit @ $1.00 per pound
The dollar amount of direct material A used in production during the year is:
91. Mandy Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units,
estimated beginning inventory is 98,000 units, and desired ending inventory is 80,000 units. The quantities of
direct materials expected to be used for each unit of finished product are given below.
Material A .50 lb. per unit @ $ .60 per pound
Material B 1.00 lb. per unit @ $1.70 per pound
Material C 1.20 lb. per unit @ $1.00 per pound
The dollar amount of direct material B used in production during the year is:
92. Mandy Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units,
estimated beginning inventory is 98,000 units, and desired ending inventory is 80,000 units. The quantities of
direct materials expected to be used for each unit of finished product are given below.
Material A .50 lb. per unit @ $ .60 per pound
Material B 1.00 lb. per unit @ $1.70 per pound
Material C 1.20 lb. per unit @ $1.00 per pound
The dollar amount of direct material C used in production during the year is:
93. Production and sales estimates for March for the Robin Co. are as follows:
Estimated inventory (units), March 1
18,000
Desired inventory (unit), March 31
21,300
Expected sales volume (units):
Area M
7,000
Area L
8,000
Area O
9,000
Unit sales price
$15
The number of units expected to be manufactured in March is:
94. Production and sales estimates for May for the Robin Co. are as follows:
Estimated inventory (units), May 1
19,500
Desired inventory (unit), May 31
19,300
Expected sales volume (units):
Area W
6,000
Area X
7,000
Area Y
9,000
Unit sales price
$20
The number of units expected to be sold in May is:
95. Production and sales estimates for June are as follows:
Estimated inventory (units), June 1
21,000
Desired inventory (units), June 30
19,000
Expected sales volume (units):
Area X
7,000
Area Y
4,000
Area Z
5,500
Unit sales price
$20
The number of units expected to be manufactured in June is:
96. Production and sales estimates for June are as follows:
Estimated inventory (units), June 1
8,000
Desired inventory (units), June 30
9,000
Expected sales volume (units):
Area X
4,000
Area Y
10,000
Area Z
6,000
Unit sales price
$20
The budgeted total sales for June is:
97. If the expected sales volume for the current period is 8,000 units, the desired ending inventory is 1,400
units, and the beginning inventory is 1,200 units, the number of units set forth in the production budget,
representing total production for the current period, is:
98. Production estimates for August are as follows:
Estimated inventory (units), August 1
12,000
Desired inventory (units), August 31
9,000
Expected sales volume (units), August
75,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($5 per lb.)
3 lbs.
Direct material B ($18 per lb.)
1/2 lb.
The number of pounds of materials A and B required for August production is:
99. Production estimates for August are as follows:
Estimated inventory (units), August 1
12,000
Desired inventory (units), August 31
9,000
Expected sales volume (units), August
75,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($5 per lb.)
3 lbs.
Direct material B ($18 per lb.)
1/2 lb.
The total direct materials purchases (assuming no beginning or ending inventory of material) of materials A and B required for August production
100. Based on the following production and sales estimates for May, determine the number of units expected to
be manufactured in May.
Estimated inventory (units), May 1
20,000
Desired inventory (units), May 31
25,000
Expected sales volume (units):
South region
20,000
West region
40,000
North region
20,000
Unit sales price
$10
101. Which of the following budgets provides the starting point for the preparation of the direct labor cost
budget?
102. Production and sales estimates for April are as follows:
Estimated inventory (units), April
19,000
Desired inventory (units), April 30
18,000
Expected sales volume (units):
Area A
3,500
Area B
4,750
Area C
4,250
Unit sales price
$20
The number of units expected to be manufactured in April is:
103. Production and sales estimates for April are as follows:
Estimated inventory (units), April 1
9,000
Desired inventory (units), April 30
8,000
Expected sales volume (units):
Area A
3,500
Area B
4,750
Area C
4,250
Unit sales price
$20
The budgeted total sales for April is:
104. If the expected sales volume for the current period is 7,000 units, the desired ending inventory is 400 units,
and the beginning inventory is 300 units, the number of units set forth in the production budget, representing
total production for the current period, is:
105. Production estimates for July are as follows:
Estimated inventory (units), July 1
8,500
Desired inventory (units), July 31
10,500
Expected sales volume (units), July
76,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($5 per lb.)
3 lbs.
Direct material B ($18 per lb.)
1/2 lb.
The number of pounds of materials A and B required for July production is:
106. Production estimates for July are as follows:
Estimated inventory (units), July 1
8,500
Desired inventory (units), July 31
10,500
Expected sales volume (units), July
76,000
For each unit produced, the direct materials requirements are as follows:
Direct material A ($5 per lb.)
3 lbs.
Direct material B ($18 per lb.)
1/2 lb.
The total direct materials purchases of materials A and B (assuming no beginning or ending material inventory) required for July production is:
107. The Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for
the next four months were: January – 200,000 units; February – 180,000 units; March – 210,000 units; and April
– 230,000 units. The Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of
the following months sales.
What should the budgeted production be for January?
108. The Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for
the next four months were: January – 200,000 units; February – 180,000 units; March – 210,000 units; and April
– 230,000 units. The Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of
the following months sales.
What would be the budgeted production for February?
109. The Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for
the next four months were: January – 200,000 units; February – 180,000 units; March – 210,000 units; and April
– 230,000 units. The Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of
the following months sales.
What would be the budgeted production for March?
110. The Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for
the next four months were: January – 200,000 units; February – 180,000 units; March – 210,000 units; and April
– 230,000 units. The Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of
the following months sales.
What would be the budgeted inventory for March 31st?
111. The budget that summarizes future plans for the acquisition of fixed assets is the: