Chapter 08: The Master Budget IM 9
publicly accessible website, in whole or in part.
b. Cost of Goods Manufactured Schedule
manufactured.
c. Income Statement
i. A pro forma (projected) income statement can now be prepared using much of the
d. Balance Sheet
i. A budgeted balance sheet showing the company’s pro forma financial position at the end
ii. Text Exhibit 8.22 (p. 322) presents the expected ending asset, liability, and stockholders’
e. Statement of Cash Flows
functions:
Judging the company’s ability to handle fixed cash outflow commitments;
Adapting to adverse changes in business conditions;
Undertaking new commitments; and
Assessing the quality of company earnings by indicating the relationship between net
Chapter 08: The Master Budget IM 10
publicly accessible website, in whole or in part.
E. Concluding Comments
1. Benefits of a well-prepared budget
a. Budgets are guides to help managers align resource activities and resource allocations with
organizational goals.
coordination.
c. Budgets help managers carry out their managerial functions of planning, controlling, problem
both internal and external factors.
e. Budgets serve as a model that provides a rigorous view of future performance of a business
in time to consider alternative measures.
2. Demand must be predicted as accurately and with as many details as is possible because of its
distribution facilities; different customers have different credit terms and payment schedules;
3. Estimated sales demand has a pervasive impact on the master budget.
a. Managers use as much information as is available and may combine several estimation
estimates and reduce uncertainty.
c. Ways of estimating future demand include:
i. canvassing sales personnel for a subjective consensus;
4. Care should be taken to use realistic, rather than optimistic or pessimistic forecasts of revenues
and costs.
made to one or more factors.
Chapter 08: The Master Budget IM 11
5. A master budget is normally prepared for a year. Some companies use a continuous budget.
a. A Continuous budget is an ongoing 12-month budget at all points in time during a budget
expires.
b. Benefits of a continuous budget include:
i. eliminating a fiscal year mind-set by recognizing that business is an on-going operation
and should be managed accordingly;
and
iv. reducing or eliminating the budget planning process that occurs at the end of each fiscal
year.
expected, although management might decide not to alter the budget so that the positive
performance is highlighted.
6. Budget slack is the intentional underestimation of revenues and/or overestimation of expenses
efficiency.
c. Top management can try to reduce slack by tying actual performance to the budget through a
bonus system.
making by top management and operating personnel.
8. An imposed budget is a budget that top management develops with little or no input from
constraints.
9. Managers should consider extending their budgeting process to recognize the concepts of
LO.7: (Appendix) How does a budget manual facilitate the budgeting process?
Chapter 08: The Master Budget IM 12
F. The Budget Manual
1. The budget manual is a detailed set of documents that provides information and guidelines
c. a calendar of scheduled budgetary activities;
2. The statements of budgetary purpose should flow from general to specific.
3. The budgetary activities should be listed by position, not by person.
directly to the activities list.
5. The sample forms should be easy to understand and may include standardized worksheets.
6. The final section includes the budgets generated by the budgeting process.
Chapter 08: The Master Budget IM 13
Multiple Choice Questions
1. (LO.1) Short-tem planning that produces “single use” plans such as the annual budget is referred
to as
a. strategic planning.
2. (LO.1) A budget sets the resource constraints under which managers must operate for the
a. making actual-to-budget comparisons.
3. (LO.2) All of the following are operating budgets except:
a. selling and administrative budget.
4. (LO2) When preparing the series of annual operating budgets, management usually starts the
process with the:
a. cash budget.
5. (LO.3) G Company has beginning inventory of 4,000 units. Management estimates that 35,000
a. $84,700
b. $115,050
c. $126,000
d. $127,050
6. (LO.3) L Company’s budget calls for the following production:
Quarter 1 45,000 units Quarter 3 34,000 units
Quarter 2 38,000 units Quarter 4 48,000 units
would be:
a. 114,600.
b. 89,400.
c. 38,200.
d. 29,800.
Chapter 08: The Master Budget IM 14
7. (LO.3) The following beginning and ending inventory levels (in units) are planned for the
upcoming fiscal year:
Beginning of Year End of Year
Raw material 40,000 50,000
manufacture during the year would be:
a. 510,000 units.
8. (LO.3) D Company is planning to sell 2,000 units and produce 2,200 units during the upcoming
month. Each unit requires 2 ounces of raw material at a cost of $15.00 per ounce and one-half
the upcoming month?
a. $27,500
9. (LO.3) E Company is planning to sell 2,000 units and produce 2,200 units during the upcoming
month. Each unit requires 2 ounces of raw material at a cost of $15.00 per ounce and one-half
hour of direct labor at a rate of $12.50 per hour. Overhead is applied at a rate of 120% of direct
labor costs. The company has 2,000 ounces of raw material in its beginning inventory and wants
the upcoming month?
a. $27,500
January $124,000
February 120,000
March 135,000
April 140,000
May 142,000
a. $135,000
b. $128,300
c. $67,500
d. $60,800
Chapter 08: The Master Budget IM 15
11. (LO.4) M Company budgeted direct materials purchases of $150,000 in April and $240,000 in
May. It is the company’s practice to pay for 70% of its purchases in the month of purchase and
Wages expense
$75,000
Purchase of office equipment
36,000
Selling and administrative expenses
24,000
Depreciation expense
18,000
a. $366,000
b. $348,000
c. $324,000
d. $213,000
12. (LO.5) Select the correct formula to compute cost of goods manufactured.
d. Beginning WIP + Raw Materials Used + Direct Labor + Factory Overhead – Ending WIP
13. (LO.6) A continuous budget:
month or quarter is completed.
c. presents the plan for only one level of activity and does not adjust to changes in the level of
activity.
activity.
14. (LO.6) All of the following are benefits of budgeting except:
c. budgeting requires managers to plan ahead.
d. budgeting provides specific benchmarks for evaluating performance.
15. (LO.7) (Appendix) Which of the following items should be included in a company’s budget
manual?
a. Sample budgetary forms
b. Calendar of scheduled budgetary activities
c. Original, revised, and approved budgets
Chapter 08: The Master Budget IM 16
Multiple Choice Solutions
1. c
2. d
3. c
4. c
5. d
6. a (CMA Adapted)
Q1 Q2 Q3 Q4
Direct material in pounds:
Production needs 135,000 114,000 102,000 144,000
7. c (CMA Adapted)
Units to be sold 480,000
Desired ending inventory 50,000
8. c
9. b
10. b
11. b
12. d
14. a
15. d