Chapter 9 – Profit Planning
1. A strategic plan identifies strategies for future activities and operations, generally covering at least five years.
a.
True
b.
False
True
2. Budgets are financial plans for the future.
a.
True
b.
False
True
3. The master budget is composed of operating budgets and financial budgets.
a.
True
b.
False
True
4. Control is achieved by comparing actual results with budgeted results on a periodic basis.
a.
True
b.
False
True
5. Planning is looking ahead to see what actions should be taken to realize particular goals.
a.
True
b.
False
True
6. Budgets identify objectives and the actions needed to achieve them because they are foresighted financial plans.
a.
True
b.
False
True
7. A firm should develop a strategic plan before preparing a budget.
a.
True
b.
False
True
8. A firm acquires information that can be used to improve decision making from a budgetary system.
a.
True
b.
False
True
9. Comparing actual results with budgeted results on a periodic basis provides control in a budgetary system.
a.
True
b.
False
10. A large difference between actual and planned results is feedback that the system is providing adequate control.
Chapter 9 – Profit Planning
a.
True
b.
False
False
11. Communication and coordination are served by budgets.
a.
True
b.
False
True
12. The master budget is typically a comprehensive financial plan for the organization for the past fiscal year.
a.
True
b.
False
False
13. A continuous budget is a moving 12-month budget.
a.
True
b.
False
True
14. The department manager reviews the budget, provides policy guidelines and budgetary goals, and 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.
a.
True
b.
False
False
15. The budget director is the person responsible for directing and coordinating the organization’s overall budgeting
process.
a.
True
b.
False
True
16. The first budget to be prepared is the sales budget.
a.
True
b.
False
True
17. The production budget is prepared in units and in dollars.
a.
True
b.
False
False
The production budget is prepared in units only, not dollars.
18. The direct materials purchases budget is based on the sales budget.
a.
True
b.
False
Chapter 9 – Profit Planning
False
The direct materials purchases budget is based on the production budget.
19. There are as many direct materials purchases budgets as there are products.
a.
True
b.
False
False
20. The direct labor budget includes: units to be produced, direct labor time needed per unit, and total direct labor cost for
the period.
a.
True
b.
False
True
21. The selling and administrative expenses budget is part of the operating budgets.
a.
True
b.
False
True
22. The sales budget is used directly in the development of the production budget.
a.
True
b.
False
True
23. In preparing the direct labor budget, the average wage rate is used to calculate total direct labor cost.
a.
True
b.
False
True
24. The cash budget includes the beginning balance of cash, cash receipts, cash disbursements, and the ending balance of
cash.
a.
True
b.
False
True
25. If the initial cash budget indicates a cash deficiency, the company must go out of business.
a.
True
b.
False
False
26. Cash receipts must be at least as much as sales.
a.
True
b.
False
False
27. Cash budgets are often prepared monthly or even weekly.
Chapter 9 – Profit Planning
a.
True
b.
False
True
28. The output of the cost of goods sold budget is entered into the pro forma balance sheet.
a.
True
b.
False
False
The output of the cost of goods sold budget is entered into the pro forma income statement.
29. Individual behavior that is in basic conflict with the goals of the organization is called goal congruence.
a.
True
b.
False
False
30. Pseudoparticipation is one of the potential problems with participative budgeting.
a.
True
b.
False
True
31. Budgets should be based on ideal standards to encourage everyone to reach for the highest level of performance.
a.
True
b.
False
False
32. Ideally, managers are held accountable for controllable costs.
a.
True
b.
False
True
33. Myopic behavior is one of the advantages of participative budgeting.
a.
True
b.
False
False
34. Monetary incentives include salary increases, bonuses, and promotions.
a.
True
b.
False
True
35. __________________ is looking ahead to see what actions should be taken to realize particular goals.
Planning
36. The ________________ plots a direction for an organization’s future activities and operations; it generally covers at
least five years.
Chapter 9 – Profit Planning
37. Budgets improve _________________.
38. The _________________ is the comprehensive financial plan for the organization as a whole.
39. A __________________ is a moving 12-month budget.
40. The controller of the company usually serves as the __________________.
41. The cash budget and budgeted balance sheet are part of the ________________.
42. The _______________ tells how many units must be produced to meet sales needs and to satisfy ending inventory
requirements.
43. The __________________ shows the expected cost of all production costs other than direct materials and direct labor.
44. Salaries expense, advertising expense and depreciation expense would be included in the ______________________
budget.
45. The basic structure of a ______________ includes cash receipts, cash disbursements, any excess or deficiency of cash,
and financing.
46. _________________ consists of beginning cash balance and the expected cash receipts.
47. The alignment of managerial and organizational goals is often referred to as _______________.
48. ____________________ is individual behavior that is in basic conflict with the goals of the organization.
49. ______________ are the means an organization uses to influence a manager to exert effort to achieve an
organization’s goals.
50. Examples of ________________ include job enrichment, increased responsibility and autonomy, and recognition
programs.
Chapter 9 – Profit Planning
51. _____________________ allows subordinate managers considerable say in how the budgets are established.
Participative budgeting
52. ___________________ exists when a manager deliberately underestimates revenues or overestimates cost in an effort
to make the future period appear less attractive in the budget than they think it will be in reality.
53. When top management assumes total control of the budgeting process and only seeks superficial participation from
lower-level managers this is known as ________________.
54. _________________ are used to ensure that budgeted costs can be realistically compared with costs for actual levels
of activity.
Flexible budgets
55. Which of the following is an advantage of budgeting?
a.
Forces managers to plan.
b.
Provides information useful for control.
c.
Provides information for improved decision making.
d.
Improves communication.
e.
All of these.
56. Which of the following is a use of budgets for control?
a.
Plans can be made for the future.
b.
If conditions change between the formation of the budget and the current time, budgets can be quickly
adapted.
c.
Budgets set a standard against which results can be compared.
d.
Communication is improved.
e.
All of these.
57. Which of the following budgets can be used for control?
a.
Production budget
b.
Cash budget
c.
Budgeted income statement
d.
Selling and administrative expense budget
e.
All of these
58. In a (n) ____, as one month expires, an additional month in the future is added to the budget so that the company
always has a 12-month plan on hand.
a.
continuous budget
b.
financial budget
c.
operational budget
d.
yearly budget
Chapter 9 – Profit Planning
e.
master budget
a
59. The ____ is the person responsible for directing and coordinating the organization’s overall budget process.
a.
budget master
b.
controller
c.
chief financial planner
d.
budget director
e.
chief accountant
60. Looking backward to determine what actually happened and comparing it with the previously planned outcomes is
a.
control.
b.
communicating.
c.
decision making.
d.
strategic planning.
e.
budgeting.
a
61. Budgets are
a.
key components of planning.
b.
financial plans for the future.
c.
an identifier of objectives and the actions needed to achieve them.
d.
used for communication and coordination.
e.
all of these.
e
62. The master budget is
a.
the selective financial plan for the organization as a whole.
b.
typically for a 1-year period corresponding to the fiscal year of the company.
c.
broken down into daily and weekly budgets.
d.
used for misinformation and coordination.
e.
all of these.
63. Which of the following is not true?
a.
The sales forecast is done before the sales budget.
b.
The master budget is the comprehensive plan for the organization as a whole.
c.
The production budget is prepared in units and dollars.
d.
One approach to forecasting sales is the bottom-up approach.
e.
In creating the sales forecast, outside factors such as the state of the economy, should be considered.
c
64. The first step in creating the master budget is the creation of the
a.
production budget.
Chapter 9 – Profit Planning
b.
direct labor budget.
c.
cash budget.
d.
sales budget.
e.
budgeted income statement.
65. The budget that describes how many units must be produced in order to meet sales needs and ending inventory
objectives is the
a.
production budget.
b.
direct materials purchases budget.
c.
cash budget.
d.
budgeted income statement.
e.
none of these.
66. Direct materials needed for production is calculated by
a.
multiplying units to be produced by direct materials per unit.
b.
subtracting units to be produced from direct materials per unit.
c.
dividing units to be produced by direct materials per unit.
d.
adding units to be produced to direct materials per unit.
e.
subtracting direct materials per unit from units to be produced.
67. In preparing the overhead budget, many companies use
a.
activity-based costing.
b.
multiple drivers for a simple budget.
c.
participative costing.
d.
a unit-based driver such as direct labor hours.
e.
none of these.
68. Which of the following statements is true?
a.
The overhead budget is typically composed of variable overhead and fixed overhead.
b.
The direct labor budget uses an average wage rate for direct labor.
c.
The production budget is not converted into dollars.
d.
The sales budget includes both units and dollars.
e.
All of these.
69. The ending finished goods inventory budget supplies information needed for the
a.
sales budget.
b.
cash budget.
c.
budgeted income statement.
d.
cost of goods sold budget.
e.
all of these.
Chapter 9 – Profit Planning
70. Which of the following budgets are needed to calculate a budgeted unit cost?
a.
Direct materials purchases budget
b.
Direct labor budget
c.
Overhead budget
d.
Direct materials purchases budget and overhead budget
e.
Direct materials purchases budget, direct labor budget, and overhead budget
e
71. The selling and administrative expenses budget includes
a.
cost of goods sold.
b.
overhead.
c.
fixed production expense.
d.
variable cost of selling.
e.
all of these.
72. Budgeted operating income includes
a.
budgeted interest expense.
b.
budgeted income taxes.
c.
budgeted cost of goods sold.
d.
budgeted net income.
e.
none of these.
c
73. Depreciation expense on sales equipment appears in a separate line on which of the following budgets?
a.
Cash budget
b.
Selling and administrative expenses budget
c.
Direct labor budget
d.
Production budget
e.
Overhead budget
74. Rodriquez Company budgeted the following sales in units:
January
30,000
February
20,000
March
40,000
Rodriquez’s 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
a.
20,000.
b.
28,000.
c.
40,000.
d.
26,500.
Chapter 9 – Profit Planning
e.
24,000.
Sales
30,000
20,000
+ Desired EI
Units needed
34,000
28,000
Production
26,500
24,000
75. 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?
a.
It will increase
b.
It will decrease
c.
It will stay the same
d.
It will be twice the size of the desired ending inventory of raw materials
e.
None of these
a
76. A company expects the following sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Units
40,000
30,000
60,000
80,000
Average selling price
$5
$5
$5
$6
Budgeted sales revenue for the year is
a.
$1,050,000
b.
$1,260,000
c.
$1,155,000
d.
$1,130,000
e.
it is impossible to tell from this information
Budgeted sales = [(40,000 + 30,000 + 60,000) × $5] + (80,000 × $6) = $1,130,000
77. A company provided the following information on sales for the coming year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Units
40,000
40,000
30,000
80,000
Average selling price
$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?
a.
Quarter 4
b.
Quarter 3
c.
Quarter 2
d.
Quarter 1
e.
All quarters have the same production
Chapter 9 – Profit Planning
78. Belant Company budgeted 200,000 units of production for June, 210,000 units for July and 300,000 units for August.
Each unit requires 0.25 direct labor hours. How many direct labor hours are budgeted for August?
a.
50,000
b.
5,000
c.
75,000
d.
52,500
e.
300,000
Direct labor hours = 0.25 × 300,000 = 75,000
79. In budgeting direct labor hours for the coming year, it is important to
a.
multiply production in units by the direct labor hours per unit.
b.
divide production in units by the direct labor hours per unit.
c.
subtract production in units from the direct labor hours per unit.
d.
subtract direct labor hours per unit from production in units.
e.
multiply production in units by the labor wage rate.
a
80. 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?
a.
$165,000
b.
$146,000
c.
$214,000
d.
$184,000
e.
$75,000
Cost of goods sold = $165,000 + $15,000 − $34,000 = $146,000
81. A production budget is most important for which of the following?
a.
retail stores
b.
manufacturing firms
Sales
40,000
40,000
30,000
80,000
+ Desired ending inventory
10,000
20,000
Units needed
50,000
47,500
50,000
Production
47,000
37,500
42,500
Chapter 9 – Profit Planning
c.
not-for-profit agencies
d.
local government agencies
e.
all of these
82. A company requires 200 pounds of plastic to meet the production needs of a product. It currently has 20 pounds of
plastic inventory. The desired ending inventory of plastic is 60 pounds. How many pounds of plastic should be budgeted
for purchasing during the coming period?
a.
200 pounds
b.
240 pounds
c.
260 pounds
d.
280 pounds
e.
160 pounds
Pounds of plastic to purchase = 200 + 60 − 20 = 240
83. A company plans on selling 400 units. The selling price per unit is $5. There are 40 units in beginning inventory, and
the company would like to have 75 units in ending inventory. How many units should be produced for the coming period?
a.
435
b.
400
c.
365
d.
2,000
e.
2,035
Units to produce = 400 + 75 − 40 = 435
84. A company has provided a sales budget for the next four months. It bases its production budget on the sales budget,
and has a policy that each month’s ending inventory of finished product must be equal to 25% of the following month’s
sales needs. The direct materials purchases budget is based on the production budget. The company’s policy for each
month’s ending inventory of raw materials is that they must be equal to 10% of the following month’s production needs for
raw materials. Given this information, the company can prepare direct materials purchases budgets for how many months?
a.
One
b.
Two
c.
Three
d.
Four
e.
Five
85. Which of the following is the most common starting point in the information gathering process for budgeting?
a.
The personnel forecast
b.
The sales forecast
c.
The production forecast
Chapter 9 – Profit Planning
d.
The projected income statement
86. Which of the following is an operating budget?
a.
Budgeted statement of cash flows
b.
Capital expenditures budget
c.
Budgeted income statement
d.
Cash budget
c
87. What is the formula used to compute the units to be produced?
a.
Units produced = Units sold
b.
Units produced = Units sold + Units in beginning inventory + Units in ending inventory
c.
Units produced = Units sold + Units in beginning inventory − Units in ending inventory
d.
Units Produced = Units sold − Units in beginning inventory + Units in ending inventory
88. Candace Company produces and sells pillows. It expects to sell 10,000 pillows in the next year and had 1,000 pillows
in finished goods inventory at the end of the prior year. Candace would like to complete operations next year with at least
1,250 completed pillows in inventory. There is no ending work-in-process inventory. The pillows sell for $5 each. How
many pillows would be produced in the next year?
a.
10,000 pillows
b.
11,000 pillows
c.
11,250 pillows
d.
10,250 pillows
89. Bright Lamp Company manufactures lamps. The estimated number of lamp sales for the last three months of the
current year are as follows:
Month
Sales
October
10,000
November
14,000
December
13,000
Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is budgeted to equal
25% of the next month’s sales. Bright Lamp expects to sell the lamps for $25 each. In January of the next year, sales are
projected at 16,000 lamps. How many lamps should be produced in November?
a.
11,000 lamps
b.
10,500 lamps
c.
14,000 lamps
d.
13,750 lamps
90. In going from the sales budget to the production budget, adjustments to the sales budget need to be made for
Chapter 9 – Profit Planning
a.
finished goods inventories.
b.
cash receipts.
c.
factory overhead costs.
d.
selling expenses.
a
91. Watson Corporation manufactures boxes. The estimated numbers of boxes sold for the first three months of the
current year are as follows:
Month
Sales
January
3,000
February
4,200
March
3,900
Finished goods inventory at the end of December was 600 units. Ending finished goods inventory is equal to 20% of the
next month’s sales. Watson Corporation expects to sell the boxes for $5 each. April sales are projected at 4,500 boxes.
How many boxes should be produced in February?
a.
4,140 boxes
b.
4,200 boxes
c.
4,260 boxes
d.
3,900 boxes
SUPPORTING CALCULATIONS:
Figure 9-1.
Saphire Company budgeted the following production in units for the second quarter of the year:
April
45,000
May
38,000
June
42,000
Each unit requires four pounds of raw material. Saphire’s policy is to have 30% of the following month’s production needs
for materials in inventory. This policy was met in March.
92. Refer to Figure 9-1. Raw materials purchases budgeted for May in pounds equal:
a.
156,800
b.
202,400
c.
45,600
d.
171,600
e.
225,600
Production
× materials per unit
Raw materials for production
Desired ending inventory
Raw materials needed
Less: beginning inventory
Purchases
Chapter 9 – Profit Planning
93. Refer to Figure 9-1. Desired ending inventory for April in pounds equals:
a.
45,600
b.
11,400
c.
10.500
d.
38,300
e.
54,000
April
Production
× materials per unit
Raw materials for production
Desired ending inventory
Raw materials needed
Less: beginning inventory
Purchases
Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:
SR200
TX500
May
8,000
20,000
June
13,000
32,000
July
11,000
39,000
August
18,000
46,000
Kenner’s ending inventory policy is that SR200 should have 15% of next month’s sales in ending inventory and TX500
should have 40% of next month’s sales in ending inventory. On May 1, there were 1,200 units of SR200 and 9,000 units of
TX500.
TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of component A in
inventory on May 1. Kenner wants to have 20% of the following month’s production needs in inventory for Component A.
94. Refer to Figure 9-2. How many units of TX500 are budgeted for production in June?
a.
47,600
b.
34,800
c.
32,000
d.
45,000
e.
12,800
Sales
Desired ending inventory
Units needed
Less: beginning inventory
Production
95. Refer to Figure 9-2. What is the budgeted production of SR200 for May in units?
a.
8,750
b.
9,950
c.
8,000
Chapter 9 – Profit Planning
d.
1,200
e.
10,500
Sales
Production
96. Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May?
a.
41,760
b.
142,800
c.
154,560
d.
164,600
e.
66,600
Production
Production
97. Refer to Figure 9-2. What is the desired ending inventory of component A for May?
a.
86,000
b.
180,000
c.
58,500
d.
41,760
e.
30,000
Production
Production
Figure 9-3.
Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is budgeted as
follows:
August
26,000
Chapter 9 – Profit Planning
September
48,000
October
31,000
Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour. Monthly overhead averages
$8 per direct labor hour plus fixed overhead of $4,300.
98. Refer to Figure 9-3. What is the direct labor cost budgeted for September?
a.
$820,000
b.
$750,000
c.
$140,000
d.
$936,000
e.
$625,000
September direct labor cost = 48,000 × 1.50 × $13 = $936,000
99. Refer to Figure 9-3. What is the total overhead budgeted for the month of September?
a.
$680,000
b.
$580,300
c.
$142,100
d.
$460,000
e.
$362,100
Budgeted overhead = ($8 × 48,000 × 1.50) + $4,300 = $580,300
Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford’s policy is that 10%
of the following month’s sales must be in ending inventory. On November 1, there were 14,000 units in inventory.
It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable overhead is
applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month.
100. Refer to Figure 9-4. What is the direct labor cost budgeted for November?
a.
$1,181,500
b.
$950,600
c.
$707,600
d.
$2,152,000
e.
$622,800
101. Refer to Figure 9-4. What is the budgeted production in units for November?
a.
100,000
b.
140,000
c.
121,000
Chapter 9 – Profit Planning
d.
125,600
e.
139,000
November production = 135,000 + (0.10 × 180,000) − 14,000 = 139,000 units
102. Refer to Figure 9-4. What is the budgeted overhead for November?
a.
$444,500
b.
$280,700
c.
$404,000
d.
$348,420
e.
$192,920
Figure 9-5.
Sully Company provided the following information for last month.
Production in units
3,000
Direct materials cost
$7,000
Direct labor cost
$10,000
Overhead cost
$9,600
Sales commission per unit sold
$4
Price per unit sold
$29
Fixed selling and administrative expense
$7,000
There were no beginning and ending inventories.
103. Refer to Figure 9-5. What is Sully’s cost of goods sold per unit?
a.
$12.60
b.
$8.87
c.
$10.00
d.
$12.50
e.
$16.60
Direct materials cost
Direct labor cost
Overhead cost
Total manufacturing costs
Units produced
Cost of goods sold per unit
104. Refer to Figure 9-5. What is gross margin for Sully Company last month?
a.
$54,000
b.
$64,600
c.
$32,400
d.
$47,400
Chapter 9 – Profit Planning
e.
$60,400
Sales ($29 × 3,000)
Cost of goods sold ($7,000 + 10,000 + 9,600)
Gross margin
105. Refer to Figure 9-5. What is operating income for Sully Company for last month?
a.
$24,000
b.
$34,600
c.
$49,400
d.
$27,400
e.
$41,400
Sales ($29 × 3,000)
Cost of goods sold ($7,000 + 10,000 + 9,600)
Gross margin
Less: commission ($4 × 3,000)
Less: fixed selling and admin. expense
Operating income
Figure 9-10.
Connor Company produces speaker systems for cars. Estimated sales (in units) in January are 40,000; in February 37,000;
and in March 34,000. Each unit is priced at $60. Connor wants to have 35% of the following month’s sales in ending
inventory. That requirement was met on January 1.
Each speaker system requires 3 boxes and 15 yards of wire. Boxes cost $4 each and wire is $0.60 per yard. Connor wants
to have 20% of the following month’s production needs in ending raw materials inventory. On January 1, Connor had
24,000 boxes and 100,000 yards of wire in inventory.
106. Refer to Figure 9-10. What is Connor’s expected sales revenue for February?
a.
$2,020,000
b.
$1,900,000
c.
$60
d.
$1,125,000
e.
$2,220,000
February revenue = 37,000 × $60 = $2,220,000
107. Refer to Figure 9-10. How many units does Connor expect to produce in February?
a.
25,700
b.
30,500
c.
23,750
d.
35,950
e.
25,000
Sales
Desired ending inventory (35%)
Chapter 9 – Profit Planning
108. Refer to Figure 9-10. How many boxes does Connor expect to purchase in January?
a.
159,650
b.
114,420
c.
214,550
d.
148,500
e.
138,420
Production
× raw materials per unit
Raw materials for production
Desired ending inventory
Units needed
Less: beginning inventory
Purchases in units
Figure 9-11.
Pallen Company estimated sales of 11,000 units at $40 each, unit cost of goods sold of $22, marketing expense of $65,000
and a 10% commission on each unit sold. Administrative expense is budgeted at $50,000.
109. Refer to Figure 9-11. What is total selling expense?
a.
$65,000
b.
$44,000
c.
$84,000
d.
$109,000
e.
$39,000
110. Refer to Figure 9-11. What is Pallen’s budgeted operating income?
a.
$281,000
b.
$39,000
c.
$198,000
d.
$83,000
e.
$440,000
111. Budgets are prepared in which of the following orders?
Units needed
Less: beginning inventory
Production