Chapter M8: The Operating Budget
Multiple Choice
1.
An operating budget --
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is a company's long-range plan.
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plans for the purchase of expensive, long-term assets.
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was originally used as a control device.
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includes an estimated balance sheet, income statement, and
statement of cash flows.
Hint for question 1
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An operating budget is prepared for a specific period of time, usually one to five
years, that establishes who is responsible for the day-to-day operation of a
business during that time.
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2.
A well-prepared budget --
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should be adjusted if new opportunities become available during the
year.
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can help management see trouble spots in advance and decide where
to allocate its limited resources.
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can become the performance standard against which firms can
compare the actual results.
 all of the above are true.
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Hint for question 2
The process of preparing a budget requires managers from different functional
areas to work together and communicate performance levels they both want and
can attain. What are some of the benefits of going through this process?
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3.
There are many different approaches to the preparation of the operating
budget. In zero-based budgeting --
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the prior year's budgeted amounts or actual results are used to build
the new operating budget.
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the budget is prepared by the top managers.
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managers must justify each item within the operating budget as if it
were a new budget item.
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the budget is updated every month.
Hint for question 3
What does the term zero-based indicate?
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4.
There are many different approaches to the preparation of the operating
budget. In bottom-up budgeting --
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lower-level managers and employees initially prepare the budget.
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managers and employees at all levels must prepare the budgets.
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the budget is prepared by the top managers.
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top management sets figures for all operating activities and these
amounts are not negotiable.
Hint for question 4
What does the term bottom-up indicate?
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5.
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The cornerstone, or starting point for the operating budget is --
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projected net income.
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the sales forecast.
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the cash budget.
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prior year's financial statements.
Hint for question 5
What is the first piece of information needed to start developing next year's
operating budget?
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6.
The following statement is true regarding the sales forecast and the
budgeting process:
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The sales forecast will be inaccurate.
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If the sales forecast is inaccurate, the operating budget will be
inaccurate.
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The operating budget will be inaccurate.
 All of the above are true.
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*
Hint for question 6
The accuracy of the sales forecast depends on the ability to forecast the state of
the general economy, changes in the industry, actions of the competition, and
developments in technology.
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7.
Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning accounts receivable $20,000; budgeted sales for
January $100,000; collections for sales are 60% in the month of sale and
40% the next month; gross margin is 30% of sales; and administrative
costs are $10,000 each month. For January, budgeted cash collections
are -
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$20,000.
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$60,000.
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$68,000.
 $80,000.
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*
Hint for question 7
In January, cash is collected for sales from which months?
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8.
*
Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning accounts receivable $20,000; budgeted sales for
January $100,000; collections for sales are 60% in the month of sale and
40% the next month; gross margin is 30% of sales; and administrative
costs are $10,000 each month. At the end of January, budgeted accounts
receivable is -
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$20,000.
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$40,000.
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$60,000.
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none of the above.
Hint for question 8
Collections for sales are 60% in the month of sale and 40% the next month. At the
end of January, customers will still owe what amount?
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9.
Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning accounts receivable $20,000; budgeted sales for
January $100,000; collections for sales are 60% in the month of sale and
40% the next month; gross margin is 30% of sales; and administrative
costs are $10,000 each month. For January, budgeted cost of goods sold
is -
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$20,000.
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$30,000.
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$40,000.
 $70,000.
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*
Hint for question 9
Gross margin is 30% of sales. How does gross margin relate to COGS?
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10.
Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning accounts receivable $20,000; budgeted sales for
January $100,000; collections for sales are 60% in the month of sale and
40% the next month; gross margin is 30% of sales; and administrative
costs are $10,000 each month. For January, budgeted net income is --
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$20,000.
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$30,000.
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$40,000.
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none of the above.
Hint for question 10
The information from which three budgets is needed to prepare the budgeted
income statement?
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11.
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Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning inventory $14,000; beginning accounts payable
$60,000; budgeted sales for January $100,000 and February $200,000;
purchases are paid in full the following month; gross margin is 30% of
sales; desired ending inventory is 20% of next month's COGS. For
January, budgeted cash payments are -
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$14,000.
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$60,000.
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$70,000.
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none of the above.
Hint for question 11
In January, cash is paid for purchases made in which month?
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12.
*
Questions 7 through 12 develop the January operating budget for Casey
Corporation. The information from one question may be useful for the
next question. Beginning inventory $14,000; beginning accounts payable
$60,000; budgeted sales for January $100,000 and February $200,000;
purchases are paid in full the following month; gross margin is 30% of
sales; desired ending inventory is 20% of next month's COGS. At the end
of January, budgeted ending inventory is -
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$20,000.
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$28,000.
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$40,000.
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none of the above.
Hint for question 12
How does gross margin relate to COGS? At the end of January, Casey
Corporation will want how much inventory on hand?
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Submit for Grade
Chapter M8: The Operating Budget
True or False
1.
The usual starting point in budgeting is to make a forecast of net income.
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TRUE
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*
Hint for question 1
All budgets are dependent on what?
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2.
If amounts in the sales forecast change, amounts in all other budgets will
also change.
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TRUE
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FALSE
Hint for question 2
All budgets are dependent on what?
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3.
After a budget is agreed upon and finalized by the management team, the
amounts should not be changed for any reason.
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TRUE
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FALSE
Hint for question 3
What is the purpose of a budget?
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4.
The preparation of the operating budget is extremely time consuming and
complicated.
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TRUE
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FALSE
Hint for question 4
How many different budgets comprise the operating budget? If an amount
changes in one budget, does this affect the other budgets?
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5.
When the operating budget is used as a control device, managers may be
motivated to budget for higher sales than actually anticipated.
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TRUE
FALSE
Hint for question
Does a favorable or unfavorable variance look better? Would budgeting higher
sales than actually anticipated be more likely to result in a favorable or
unfavorable variance?
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Submit for Grade
Chapter M8: The Operating Budget
Fill In The Blanks
1.
The __________ budget consists of the estimated income statement,
balance sheet, and statement of cash flows.
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sales
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capital
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production
 operating
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Hint for question 1
Which budget plans for the routine, day-to-day operation of the business for the
next year?
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2.
The budgeted __________ is developed from the sales budget, the costs
of goods sold budget, and the selling and administrative expense budget.
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income statement
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balance sheet
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statement of owners' equity
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statement of cash flows
Hint for question 2
Which financial statement reports sales, COGS, and selling and administrative
expenses?
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3.
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For a manufacturer, the amount of desired ending inventory is reported in
the __________ budget.
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sales
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cash
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production
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cost of goods sold
Hint for question 3
Which budget deals with inventory amounts?
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4.
For a merchandiser, the budgeted amounts for supervisor salaries, rent,
and utilities will be found in the __________ budget.
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selling and administrative expense
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production
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purchases
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cost of goods sold
Hint for question 4
For a merchandiser, are these costs product or period costs?
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5.
The __________ approach to budgeting uses the prior year's budget or
actual results to build the new operating budget.
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perpetual
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participative
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imposed
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incremental
Last year's budget is step one, then this year's budget is step two.
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Submit for Grade
Chapter M8: The Operating Budget
Essay Questions
1.
Describe the benefits of preparing an operating budget.
2.
Describe some of the drawbacks of using the operating budget as a control
device.
3.
List the three budgeted financial statements contained in the operating
budget. For each budgeted financial statement, state which other budgets
supply the information needed for preparation.
Submit for Grade
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