Chapter 7—Profit Planning Key
1. A strategic plan identifies strategies for future activities and operations, generally covering at least five
years.
2. Budgets are used only for planning.
3. The master budget is composed of operating budgets and financial budgets.
4. The first budget to be prepared is the production budget.
5. The production budget is prepared in units only, not dollars.
6. The direct materials purchases budget is based on the production budget.
7. There are as many direct materials purchases budgets as there are products.
8. The direct labor budget includes: units to be produced, direct labor time needed, and the beginning
inventory.
9. The output of the Cost of Goods Sold Budget is entered into the pro forma income statement.
10. The selling and administrative expense budgets are part of the financial budgets.
11. The cash budget includes the beginning balance of cash, cash receipts, cash disbursements, and the ending
balance of cash.
12. If the initial cash budget indicates a cash deficiency, the company must go out of business.
13. Cash receipts must be at least as much as sales.
14. Cash budgets are often prepared monthly or even weekly.
15. Individual behavior that is in basic conflict with the goals of the organization is called dysfunctional
behavior.
16. Pseudoparticipation is one of the potential problems with participative budgeting.
17. Budgets should be based on ideal standards to encourage everyone to reach for the highest level of
performance.
18. Ideally, managers are held accountable for controllable costs.
19. Myopic behavior is one of the advantages of participative budgeting.
20. Monetary incentives include job satisfaction, increased responsibility, and firm recognition of a job well
done.
21. The sales forecast created by the marketing department is used directly in the development of the production
budget.
22. In preparing the direct labor budget, the wage rate anticipated for each worker must be used.
23. Control is looking ahead to see what actions should be taken to realize particular goals.
24. Planning is looking ahead to see what actions should be taken to avoid particular goals.
25. Budgets identify objectives and the actions needed to achieve them because they are foresighted financial
plans.
26. A firm should develop a strategic plan before preparing a budget.
27. A firm acquires information that can be used to improve decision making from a budgetary system.
28. Comparing actual results with budgeted results on a periodic basis provides control in a budgetary system.
29. A large difference between actual and planned results is feedback that the system is providing adequate
control.
30. Communication and coordination are served by budgets.
31. The master budget is typically a comprehensive financial plan for the organization for the past fiscal year.
32. A continuous budget is a moving 12-month budget.
33. The department manager reviews the budget, provides policy guidelines and budgetary goals, resolves
differences that arise as the budget is prepared, approves the final budget, and monitors the actual performance
of the organization as the year unfolds.
34. The budget director is the person responsible for directing and coordinating the organization’s overall
budgeting process.
35. Which of the following is an advantage of budgeting?
36. Which of the following is a use of budgets for control?
37. The first step in creating the master budget is the creation of the:
38. The budget that described how many units must be produced in order to meet sales needs and ending
inventory objectives is the:
39. Direct materials needed for production is calculated by:
40. In preparing the overhead budget, many companies use:
41. Which of the following statements is true?
42. The ending finished goods budget supplies information needed for the:
43. Which of the following budgets are needed to calculate a budgeted unit cost?
44. The selling and administrative expenses budget includes:
45. Budgeted operating income includes:
46. Bank loan officers would find which of the following budgets to be most important in determining whether
or not to give a company a loan?
47. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible. Which
of the following statements is true?
48. A company’s planned borrowings and repayments appear on the:
49. Depreciation appears in a separate line on which of the following budgets?
50. The planned ending cash balance for the year appears on which of the following statement?
51. The alignment of managerial and organizational goals is referred to as goal:
52. Traditional organization theory uses which of the following to motivate workers?
53. ____ occurs when a manager deliberately underestimates revenues or overestimates costs.
54. Which of the following is true of the master budget?
55. Aces Company budgeted the following sales in units:
January
30,000
February
20,000
March
40,000
Aces’ policy is to have 20% of the following month’s sales in inventory. On January 1, inventory equaled 7,500 units. February production in units
is:
56. Figure 7-1.
Diamond Company budgeted the following production in units for the first quarter of the year:
January
30,000
February
20,000
March
40,000
Each unit requires 3 pounds of raw material. Diamond’s policy is to have 20% of the following month’s production needs for materials in inventory.
On January 1, the raw materials inventory equaled 11,000 pounds.
Refer to Figure 7-1. Raw materials purchases budgeted for February in pounds equal:
57. Figure 7-1.
Diamond Company budgeted the following production in units for the first quarter of the year:
January
30,000
February
20,000
March
40,000
Each unit requires 3 pounds of raw material. Diamond’s policy is to have 20% of the following month’s production needs for materials in inventory.
On January 1, the raw materials inventory equaled 11,000 pounds.
Refer to Figure 7-1. Desired ending inventory for January in pounds equals:
58. Figure 7-2.
Wilmer Company produces two products: OldX and NewX. Budgeted sales for four months are as follows:
OldX
NewX
May
10,000
40,000
June
20,000
70,000
July
15,000
80,000
August
30,000
90,000
Wilmer’s ending inventory policy is that OldX should have 10% of next month’s sales in ending inventory and NewX should have 20% of next
month’s sales in ending inventory. On May 1, there were 1,000 units of OldX and 9,000 units of NewX.
NewX requires 4 units of component A. (OldX does not use component A.) There were 2,100 units of component A in inventory on May 1. Wilmer
wants to have 30 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 7-2. How many units of NewX are budgeted for production in June?
59. Figure 7-2.
Wilmer Company produces two products: OldX and NewX. Budgeted sales for four months are as follows:
OldX
NewX
May
10,000
40,000
June
20,000
70,000
July
15,000
80,000
August
30,000
90,000
Wilmer’s ending inventory policy is that OldX should have 10% of next month’s sales in ending inventory and NewX should have 20% of next
month’s sales in ending inventory. On May 1, there were 1,000 units of OldX and 9,000 units of NewX.
NewX requires 4 units of component A. (OldX does not use component A.) There were 2,100 units of component A in inventory on May 1. Wilmer
wants to have 30 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 7-2. What is budgeted production of OldX for May in units?
60. Figure 7-2.
Wilmer Company produces two products: OldX and NewX. Budgeted sales for four months are as follows:
OldX
NewX
May
10,000
40,000
June
20,000
70,000
July
15,000
80,000
August
30,000
90,000
Wilmer’s ending inventory policy is that OldX should have 10% of next month’s sales in ending inventory and NewX should have 20% of next
month’s sales in ending inventory. On May 1, there were 1,000 units of OldX and 9,000 units of NewX.
NewX requires 4 units of component A. (OldX does not use component A.) There were 2,100 units of component A in inventory on May 1. Wilmer
wants to have 30 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 7-2. What is the budgeted amount of component A to be purchased in May?
61. Figure 7-2.
Wilmer Company produces two products: OldX and NewX. Budgeted sales for four months are as follows:
OldX
NewX
May
10,000
40,000
June
20,000
70,000
July
15,000
80,000
August
30,000
90,000
Wilmer’s ending inventory policy is that OldX should have 10% of next month’s sales in ending inventory and NewX should have 20% of next
month’s sales in ending inventory. On May 1, there were 1,000 units of OldX and 9,000 units of NewX.
NewX requires 4 units of component A. (OldX does not use component A.) There were 2,100 units of component A in inventory on May 1. Wilmer
wants to have 30 percent of the following month’s production needs in inventory for Component A.
Refer to Figure 7-2. What is the desired ending inventory of component A for May?
62. A company has had stable sales and production for several years. Next year, sales are expected to increase
by at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished
product and direct materials purchases, what will be the likely effect on the desired ending inventory of finished
product?
63. A company expects the following sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
40,000
30,000
60,000
80,000
$5
$5
$5
$6
Budgeted sales revenue for the year is
64. A company provided the following information on sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
40,000
40,000
30,000
80,000
$5
$5
$5
$6
Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next quarter’s sales in ending inventory,
which quarter will have the lowest production?
65. Belant Company budgeted 200,000 units for June, 210,000 for July and 300,000 for August. Each unit
requires 0.25 direct labor hours. How many direct labor hours are budgeted for August?
66. In budgeting direct labor hours for the coming year, it is important to:
67. Figure 7-3.
Birrell Company manufactures pottery. Production of large garden pots for the coming three months is budgeted
as follows:
May
20,000
June
40,000
July
35,000
Each pot requires 30 minutes of direct labor time. Direct labor wages average $15 per hour. Monthly overhead averages $4 per direct labor hour plus
fixed overhead of $2,100.
Refer to Figure 7-3. What is the direct labor cost budgeted for June?
68. Figure 7-3.
Birrell Company manufactures pottery. Production of large garden pots for the coming three months is budgeted
as follows:
May
20,000
June
40,000
July
35,000
Each pot requires 30 minutes of direct labor time. Direct labor wages average $15 per hour. Monthly overhead averages $4 per direct labor hour plus
fixed overhead of $2,100.
Refer to Figure 7-3. What is the total overhead budgeted for the month of June?
69. Figure 7-4.
PJ Lynn Company plans to sell 100,000 units in March and 140,000 units in April. PJ Lynn’s policy is that 15%
of the following month’s sales must be in ending inventory. On March 1, there were 13,400 units in inventory.
It takes 15 minutes of direct labor time to make one unit. Direct labor wages average $20 per hour. Variable
overhead is applied at the rate of $3 per direct labor hour. Fixed overhead is budgeted at $44,500 per month.
Refer to Figure 7-4. What is the direct labor cost budgeted for March?
70. Figure 7-4.
PJ Lynn Company plans to sell 100,000 units in March and 140,000 units in April. PJ Lynn’s policy is that 15%
of the following month’s sales must be in ending inventory. On March 1, there were 13,400 units in inventory.
It takes 15 minutes of direct labor time to make one unit. Direct labor wages average $20 per hour. Variable
overhead is applied at the rate of $3 per direct labor hour. Fixed overhead is budgeted at $44,500 per month.
Refer to Figure 7-4. What is budgeted production in units for March?
71. Figure 7-4.
PJ Lynn Company plans to sell 100,000 units in March and 140,000 units in April. PJ Lynn’s policy is that 15%
of the following month’s sales must be in ending inventory. On March 1, there were 13,400 units in inventory.
It takes 15 minutes of direct labor time to make one unit. Direct labor wages average $20 per hour. Variable
overhead is applied at the rate of $3 per direct labor hour. Fixed overhead is budgeted at $44,500 per month.
Refer to Figure 7-4. What is the budgeted overhead for March?
72. Galvern Company provided the following data for July:
Direct materials
$50,000
Direct labor
$25,000
Overhead
$90,000
Beginning finished goods
$15,000
Ending finished goods
$34,000
Production in units
10,000
What is the cost of goods sold?
73. Figure 7-5.
Birmingham Company provided the following information for last month.
Production in units
1,000
Direct materials cost
$3,000
Direct labor cost
$4,000
Overhead cost
$7,600
Sales commission per unit sold
$2
Price per unit sold
$24
Fixed selling and administrative expense
$5,000
There were no beginning and ending inventories.
Refer to Figure 7-5. What is Birmingham’s cost of goods sold per unit?
74. Figure 7-5.
Birmingham Company provided the following information for last month.
Production in units
1,000
Direct materials cost
$3,000
Direct labor cost
$4,000
Overhead cost
$7,600
Sales commission per unit sold
$2
Price per unit sold
$24
Fixed selling and administrative expense
$5,000
There were no beginning and ending inventories.
Refer to Figure 7-5. What is gross profit for Birmingham Company last month?
75. Figure 7-5.
Birmingham Company provided the following information for last month.
Production in units
1,000
Direct materials cost
$3,000
Direct labor cost
$4,000
Overhead cost
$7,600
Sales commission per unit sold
$2
Price per unit sold
$24
Fixed selling and administrative expense
$5,000
There were no beginning and ending inventories.
Refer to Figure 7-5. What is operating income for Birmingham Company for last month?
76. Figure 7-6.
Sorrell Company makes all its sales on account. Accounts receivable payment experience is as follows:
Percent paid in the month of sale
30%
Percent paid in the month after the sale
60%
Percent paid in the second month after the sale
8%
Sorrell provided information on sales as follows:
May
$100,000
June
$120,000
July
$130,000
August (expected)
$150,000
Refer to Figure 7-6. How much of May’s sales are expected to be uncollectible?
77. Figure 7-6.
Sorrell Company makes all its sales on account. Accounts receivable payment experience is as follows:
Percent paid in the month of sale
30%
Percent paid in the month after the sale
60%
Percent paid in the second month after the sale
8%
Sorrell provided information on sales as follows:
May
$100,000
June
$120,000
July
$130,000
August (expected)
$150,000
Refer to Figure 7-6. How much of June credit sales are expected to be collected in the month of July?
78. Figure 7-6.
Sorrell Company makes all its sales on account. Accounts receivable payment experience is as follows:
Percent paid in the month of sale
30%
Percent paid in the month after the sale
60%
Percent paid in the second month after the sale
8%
Sorrell provided information on sales as follows:
May
$100,000
June
$120,000
July
$130,000
August (expected)
$150,000
Refer to Figure 7-6. What is budgeted cash to be collected on account for the month of August?
79. Casper Company purchased $40,000 of goods in July and expects to purchase $60,000 of goods in August.
Casper typically pays for 25% of purchases in the month of purchase and 75% in the following month. What are
Casper Company’s total expected cash disbursements for purchases in the month of August?
80. Figure 7-7.
Lambert Company purchased $140,000 of goods in September and expects to purchase $130,000 of goods in
October. Lambert typically pays for 20% of purchases in the month of purchase and 80% in the following
month.
Every month, Lambert must make the following payments:
Rent
$ 5,000
Wages
$14,000
Utilities
$ 3,000
Telephone
$ 400
Loan on equipment
$ 1,200
In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card. Typically, the credit card bill is paid in full in the
following month. September credit card purchases totaled $6,000.
Refer to Figure 7-7. What is Lambert’s expected cash disbursement for purchases of goods in October?
81. Figure 7-7.
Lambert Company purchased $140,000 of goods in September and expects to purchase $130,000 of goods in
October. Lambert typically pays for 20% of purchases in the month of purchase and 80% in the following
month.
Every month, Lambert must make the following payments:
Rent
$ 5,000
Wages
$14,000
Utilities
$ 3,000
Telephone
$ 400
Loan on equipment
$ 1,200
In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card. Typically, the credit card bill is paid in full in the
following month. September credit card purchases totaled $6,000.
Refer to Figure 7-7. What are the total cash disbursements expected by Lambert during the month of October?
82. Figure 7-8.
Cohlmia Company makes all its sales on account. Cohlmia’s accounts receivable payment experience is as
follows:
Percent paid in the month of sale
20%
Percent paid in the month after the sale
75%
Percent paid in the second month after the sale
2%
Cohlmia provided information on sales as follows:
September
$100,000
October
$120,000
November
$200,000
December (expected)
$250,000
Refer to Figure 7-8. What are the expected cash receipts for the month of November?
83. Figure 7-8.
Cohlmia Company makes all its sales on account. Cohlmia’s accounts receivable payment experience is as
follows:
Percent paid in the month of sale
20%
Percent paid in the month after the sale
75%
Percent paid in the second month after the sale
2%
Cohlmia provided information on sales as follows:
September
$100,000
October
$120,000
November
$200,000
December (expected)
$250,000
Refer to Figure 7-8. What are the expected cash receipts for December?
84. A company has the following accounts receivable payment history
Paid in the month of sale
10%
Paid in the month following sale
30%
Paid in the second month following sale
40%
Paid in the third month following sale
10%
Which of the following actions might increase the cash receipts over the coming year?
85. Which of the following appears on the budgeted balance sheet?
86. Cash budgeting is important to which of the following?
87. A production budget is most important for which of the following?