Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Chapter 6 Master Budget and Responsibility Accounting
6.1 Distinguish the long-term from the short-term benefits of budgets (pro forma
financial statements).
1) A budget is a quantitative expression for a set time period of a proposed future plan of action by
management.
2) A budget is limited in that it can only cover financial aspects of plans.
3) The master budget embraces the impact of both operating decisions and financing decisions as related
to acquisitions and uses of scarce resources.
4) The budget constraint describes only financial limitations that are within the company‘s control.
5) Budgeting is done in place of “strategic analysis.”
6) Management at all levels should understand and support the budget and all aspects of the
management control system.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
7) Budgeted financial statements are also referred to as pro forma statements.
8) Budgets can play both planning and control roles for management.
9) Benchmarks encourage the setting of stretch goals.
10) It is best to compare this year’s performance with last year’s actual performance rather than this year’s
budget.
11) Planning the performance of the organization, providing a frame of reference, and investigating
variances are part of the
A) budgetary cycle.
B) cash budget.
C) financing budget.
D) master budget.
E) production budget.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
12) The master budget embraces the impact of
A) operating and managerial decisions.
B) operating and financing decisions.
C) financing and managerial decisions.
D) operating, managerial, and financing decisions.
E) the differences between the budget and the actual costs, for a given cycle.
13) A master budget
A) includes only financial aspects of a plan and excludes nonfinancial aspects.
B) is an aid to coordinating what needs to be done to implement a plan.
C) includes broad expectations and visionary results.
D) should not be altered after it has been agreed upon.
E) is based upon budget constraints outside of management control.
14) Budgets are advantageous because they
A) compel planning that includes the implementation of plans, provide performance criteria, and
promote goodwill.
B) provide performance criteria, promote goodwill, and save money.
C) compel planning that includes the implementation of plans, provide performance criteria, and
promote communication and coordination within the organization.
D) compel planning that includes the implementation of plans, require organizing, and ensure
controlling.
E) ensure that the organization meets its goals.
15) Strategic analysis is the
A) comparison of how well an operating budget meets the overall organizational objectives.
B) investigation of external factors that may affect production.
C) evaluation of how well the organization has combined its own capabilities with the relevant features
of the competitive environment.
D) analysis of organizational and financial structures of the company.
E) development of contingency plans.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
16) The process of getting a company’s objectives understood and accepted by all departments and
functions is known as
A) communication.
B) compilation.
C) continuity.
D) coordination.
E) administration.
17) Long-run planning (strategic plans) involves the preparation of the
A) operating budget.
B) cash budget.
C) budget standards.
D) profit plan.
E) capital budget.
18) A limitation of comparing a company’s performance against actual results of last year is that
A) it includes adjustments for future conditions.
B) feedback is no longer a possibility.
C) the benchmark may be unrealistic.
D) past results can contain inefficiencies of the past year.
E) the budgeting time period is set at one year.
19) Stretch goals in budgeting tend to
A) decrease line-management participation in attaining corporate goals.
B) increase failure.
C) increase anxiety without motivation.
D) motivate improved performance beyond the status quo.
E) improve communication and coordination.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
20) Winnie and Pooh have just purchased a small honey manufacturing company that was having
financial difficulties. After a brief operating period, they decided that the company’s main problem was
lack of any financial planning. The company made a good product and market potential was great.
Required:
Explain why a company needs a good budgeting plan. Specifically address the need for a master budget.
Answer: The master budget is a series of interrelated budgets that quantify management’s expectations
about a company’s revenues, expenses, net income, cash flows, and financial position. As the culmination
of the planning process, it provides the basis for:
1. reassessing the company’s objectives,
2. coordinating the activities of various segments of the organization,
3. communicating management’s plans throughout the organization, and
4. evaluating employee performance.
Diff: 1 Type: ES
Skill: Comprehension
Objective: LO 6-1
6.2 Prepare a master operating budget and all supporting budgets or schedules.
1) Budgets that change (rolling or continuous) are better for the planning than budgets that do not
change.
2) The financial budget is that part of the master budget that comprises the capital budget, cash budget,
operating budget, and budgeted balance sheet.
3) The production budget of a manufacturing company is prepared after the revenue budget.
4) Budgetary slack is automatically included in the revenue budget.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
5) The actual data resulting from a strategy should be compared to budgeted results.
6) A rolling budget encourages management to be thinking about the next 12 months.
7) The revenue budget and the budgeted income statement are used to prepare the budgeted balance
sheet and the budgeted statement of cash flows.
8) The usual starting point in budgeting is to forecast net income.
9) Clare’s Bears manufactures stuffed bears. The company updates it annual budget every month in order
to force management to think about the forthcoming 12 months and not just the current budget. This is an
example of a
A) master budget.
B) moving budget.
C) target budget.
D) timing budget.
E) rolling budget.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
10) The financial budget is that part of the master budget that comprises
A) the capital budget and the cash budget.
B) the capital budget and the budgeted balance sheet.
C) the cash budget, operating budget and budgeted balance sheet.
D) the cash budget, the budgeted statement of cash flows, and the retained earnings budget.
E) the capital budget, the cash budget, budgeted balance sheet, and the budgeted statement of cash flows.
11) The first three schedules to complete when preparing the master operating budget are the
A) revenue budget, production budget, and direct materials purchases and usage budget.
B) costs of goods sold budget, production budget, and cash budget.
C) revenue budget, overhead budget, and production budget.
D) revenue budget, cash inflows, and production expenditures.
E) revenue budget, costs of goods sold budget, and production budget.
12) A production budget expressed in units is equal to
A) budgeted sales plus beginning finished goods inventory plus targeted ending finished goods
inventory.
B) budgeted sales less beginning finished goods inventory less targeted ending finished goods inventory.
C) budgeted sales less beginning finished goods inventory plus targeted ending finished goods
inventory.
D) budgeted sales plus beginning finished goods inventory less targeted ending finished goods
inventory.
E) last year’s sales plus beginning finished goods inventory plus targeted ending finished goods
inventory.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
13) Unit sales of Product 1 are currently 20,000, while unit sales of Product 2 are currently double those of
Product 1. What will the company’s sales forecast be assuming sales of Product 1 increase by 10 percent
and those of Product 2 go up by 8,000 units from the current level?
A) 20,000 and 40,000 units, respectively
B) 22,000 and 44,000 units, respectively
C) 22,000 and 46,000 units, respectively
D) 76,000 units
E) 22,000 and 48,000 units, respectively
14) For next year Flexsteel Company has budgeted sales of 40,000 units, target ending finished goods
inventory of 2,000 units, and a beginning finished goods inventory of 1,200 units. All other inventories
are zero. How many units should be produced?
A) 39,200 units
B) 40,000 units
C) 41,800 units
D) 42,800 units
E) 40,800 units
15) Randy Company has budgeted sales of 12,000 units, target ending finished good inventory of 2,000
units, and a beginning finished goods inventory of 600 units. How many units should be produced?
A) 14,600 units
B) 13,400 units
C) 10,600 units
D) 9,400 units
E) 7,250 units
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
16) Cooper Company has a production schedule of 18,000 units and a budgeted sales volume of 20,000
units for the current year. In addition, 4,000 units are in beginning finished goods inventory. How many
units are targeted for ending finished goods inventory?
A) 20,000 units
B) 14,000 units
C) 6,000 units
D) 2,000 units
E) 1,900 units
17) The direct materials usage budget is based on
A) the units to be produced during a period.
B) budgeted sales dollars.
C) the predetermined factory overhead rate.
D) the amount of labour hours worked.
E) direct materials purchases.
18) Direct material purchases equal
A) usage plus production needs.
B) production needs plus target ending inventories.
C) beginning inventories plus production needs.
D) usage plus target ending inventories less beginning inventories.
E) the number of units to be produced times the amount of direct material in each unit.
19) Manufacturing overhead costs for the budget include
A) factory utility costs.
B) direct materials and supervision.
C) direct labour and direct materials.
D) sales supervisors’ salaries.
E) direct labour and indirect labour.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Use the information below to answer the following question(s).
Berry’s Boxes manufactures boxes. It expects to sell 20,000 boxes in 2012. The company had enough
beginning inventory of direct materials to produce 24,000 units. Beginning inventory of finished units
totalled 2,000 with a target ending inventory of 2,500 units. The boxes sell for $3.00 and the company
keeps no work-in–process inventory. Direct materials costs for each box total $1.00 while direct labour is
$0.50. Factory overhead is $0.20 per box.
20) What will be Berry’s Boxes budgeted revenue?
A) $54,000
B) $60,000
C) $78,000
D) $79,500
E) $72,000
21) How many boxes should Berry’s Boxes produce in 2012?
A) 24,000 boxes
B) 20,000 boxes
C) 19,500 boxes
D) 20,500 boxes
E) 22,500 boxes
22) What will be Berry’s Boxes cost of goods sold in 2012?
A) $42,000
B) $24,000
C) $38,000
D) $30,000
E) $34,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
23) What will be Berry’s Boxes production costs incurred for direct materials, direct manufacturing
labour, and manufacturing overhead, respectively, for 2012?
A) $20,500; $10,250; $4,100
B) $19,500; $9,750; $3,900
C) $10,000; $5,000; $4,000
D) $22,500; 11,250; $4,500
E) $12,000; $6,000; $4,800
Use the information below to answer the following question(s).
Country Heather manufactures flowerpots. It expects to sell 40,000 flowerpots in 2007. The company had
enough beginning inventory of direct materials to produce 48,000 units. Beginning inventory of finished
units totalled 4,000 with a target ending inventory of 5,000 units. The flowerpots sell for $6.00 and the
company keeps no work-in-process inventory. Direct materials costs for each flowerpot total $2.00 while
direct labour is $1.00. Factory overhead is $0.40 per flowerpot.
24) What will be Country Heather’s budgeted revenue?
A) $216,000
B) $240,000
C) $312,000
D) $318,000
E) $300,500
25) How many flowerpots should Country Heather produce in 2007?
A) 48,000 flowerpots
B) 44,000 flowerpots
C) 41,000 flowerpots
D) 39,000 flowerpots
E) 18,000 flowerpots
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
26) What will be Country Heather’s cost of goods sold?
A) $122,400
B) $136,000
C) $139,400
D) $149,600
E) $101,500
27) What will be Country Heather’s total costs incurred for direct materials, direct manufacturing labour,
and manufacturing overhead, respectively, for 2007?
A) $0; $40,000; $16,000
B) $0; $41,000; $16,000
C) $80,000; $40,000; $16,000
D) $82,000; $41,000; $16,400
E) $84,000; $40,000; $16,400
Use the information below to answer the following question(s).
Fair Score Company manufactures scoreboards for athletic events. It expects to sell 20,000 scoreboards in
2012. The company has enough beginning inventory of direct materials to produce 8,000 units. Beginning
work-in-process inventory totals 2,000 units and is 100 percent complete as to material and 50 percent
complete as to labour and overhead. Beginning finished units total 4,000 with a target ending finished
inventory of 3,000 units. The scoreboards sell for $800. There is no ending work–in-process inventory.
Direct materials costs for each scoreboard total $200 while direct labour is $80. Manufacturing overhead is
$60 per scoreboard.
28) What will be Fair Score Company’s budgeted total sales for 2012?
A) $18,400,000
B) $17,600,000
C) $16,000,000
D) $15,200,000
E) $12,300,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
29) How many scoreboards should Fair Score Company produce in 2012?
A) 23,000
B) 21,000
C) 20,000
D) 19,000
E) 16,000
30) What will be Fair Score Company’s budgeted total cost of direct materials used in 2012?
A) $3,400,000
B) $3,800,000
C) $3,600,000
D) $3,200,000
E) $3,155,000
31) What will be the Fair Score Company budgeted amount of cost of goods sold?
A) $8,160,000
B) $6,800,000
C) $6,460,000
D) $6,120,000
E) $5,975,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Use the information below to answer the following question(s).
Layne Cedar manufactures cedar chests. The estimated number of chests for the first three months of
2012 is as follows:
Month
Sales
January
10,000
February
14,000
March
13,000
Finished goods inventory at the end of December is 3,000 units. Ending finished goods are equal to 30
percent of next month‘s sales. April 2012 sales are expected to total 16,000 units.
32) What should be the budgeted number of chests produced in January 2012?
A) 8,800 chests
B) 11,200 chests
C) 13,000 chests
D) 14,200 chests
E) 14,700 chests
33) How many chests should be budgeted to be produced in the first quarter of 2012?
A) 37,000 chests
B) 44,800 chests
C) 41,800 chests
D) 38,800 chests
E) 48,400 chests
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Use the information below to answer the following question(s).
Contempo Futon manufactures futons. The estimated number of sales for the last quarter of 2012 is as
follows:
Month
Sales #
October
20,000
November
25,000
December
30,000
Beginning finished goods inventory should be equal to 30 percent of that month’s budgeted sales plus 10
percent of the following month’s budgeted sales. January and February 2013 sales are anticipated to be
15,000 futons in each month. The cost to produce a futon is $125.
34) What should be the number of futons Contempo Futon budgets to be produced in November?
A) 34,000 futons
B) 32,500 futons
C) 26,200 futons
D) 25,000 futons
E) 23,000 futons
35) How many futons will Contempo Futon budget to be produced in the three months?
A) 72,500 futons
B) 75,000 futons
C) 82,500 futons
D) 90,000 futons
E) 98,650 futons
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
36) What will be Contempo Futon’s cost of goods manufactured for December?
A) $3,937,500
B) $3,750,000
C) $2,812,500
D) $2,625,000
E) $3,187,500
Answer the following question(s) using the information below.
Furniture Inc. estimates the following number of mattress sales for the first four months of 2013:
Month
Sales
January
5,000
February
7,000
March
6,500
April
8,000
Finished goods inventory at the end of December 2012 is 1,500 units. Target ending finished goods
inventory is 30% of the next month’s sales.
37) How many mattresses need to be produced in January 2013?
A) 4,400 mattresses
B) 5,000 mattresses
C) 6,500 mattresses
D) 7,100 mattresses
E) 5,600 mattresses
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
38) How many mattresses need to be produced in the first quarter (January, February, March) of 2013?
A) 18,500 mattresses
B) 19,400 mattresses
C) 20,900 mattresses
D) 22,400 mattresses
E) 18,000 mattresses
39) In going from the sales budget to the production budget, adjustments need to be made for
A) finished goods inventories.
B) overhead charges.
C) direct materials inventories.
D) sales returns and allowances.
E) changing from revenue to costs.
40) The budgeting process generally concludes with the preparation of the
A) cash budget.
B) selling expense budget.
C) budgeted financial statements.
D) research and development budget.
E) production budget.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Use the information below to answer the following question(s).
Boone Hobbies, a wholesaler, has a sales budget for next month of $600,000. Cost of units sold is expected
to be 40 percent of sales. All units are paid for in the month following purchase. The beginning inventory
of units is $20,000, and an ending amount of $24,000 is desired. Beginning accounts payable is $152,000.
41) Boone Hobbies gross margin for next month is expected to be
A) $280,000.
B) $336,000.
C) $356,000.
D) $360,000.
E) $240,000.
42) Boone Hobbies budgeted purchases for next month is expected to be
A) $240,000.
B) $264,000.
C) $225,000.
D) $360,000.
E) $244,000.
43) A rolling budget is a budget or plan that
A) rolls several budgets together for forecasting purposes.
B) has one budget category roll into the next category.
C) rolls all budget categories together into a master budget.
D) is always available for a specified future period by replacing time periods as the lapse.
E) is not used to guide operations.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
44) The operating budget includes the
A) capital budget.
B) cash budget.
C) budgeted balance sheet.
D) budgeted cash flow statement.
E) production budget.
Use the information below to answer the following question(s).
Konrade Inc. expects to sell 30,000 athletic uniforms for $80 each in 2012. Direct materials costs are $20,
direct manufacturing labour is $8, and manufacturing overhead is $6 for each uniform. Each uniform
requires 2.0 square metres (sq. m.) of material which is all added at the start of production. The following
inventory levels are expected to apply to 2012:
Beginning inventory
Ending inventory
Direct materials
12,000 units
9,000 units
Work-in-process inventory
0 units
0 units
Finished goods inventory
6,000 units
5,000 units
45) What is the amount budgeted for cost of goods manufactured in 2012?
A) $1,020,000
B) $986,000
C) $1,156,000
D) $1,190,000
E) $1,054,000
46) What is the amount budgeted for cost of goods sold in 2012?
A) $1,156,000
B) $986,000
C) $840,000
D) $2,400,000
E) $1,020,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 6 – Master Budget and Responsibility Accounting
Use the information below to answer the following question(s).
Daniel Inc. expects to sell 6,000 ceramic vases for $20 each in 2012. Direct materials costs are $2, direct
manufacturing labour is $10, and manufacturing overhead is $3 per vase. Each vase requires 0.5
kilograms (kg) of material which is all added at the start of production. The units in work–in-process
beginning and ending inventory were half complete as to direct labour and manufacturing overhead
costs; the units in beginning inventory are completed before new units are started. Each vase requires one
hour of direct labour, and manufacturing overhead is allocated based on direct labour hours. The
following inventory levels are expected to apply to 2012:
Beginning inventory
Ending inventory
Direct materials
1,000 kg
800 kg
Work-in-process inventory
100 units
300 units
Finished goods inventory
400 units
500 units
47) On the 2012 budgeted income statement, what amount will be reported for gross margin?
A) $122,000
B) $90,000
C) $48,000
D) $30,000
E) $120,000
48) How many ceramic vases need to be produced in 2012?
A) 5,900 vases
B) 6,100 vases
C) 7,000 vases
D) 6,000 vases
E) 6,300 vases