CHAPTER 8: BUDGETING FOR PLANNING AND CONTROL
1. A budget is a financial plan for the future used for planning, controlling, and decision making.
a. True
b. False
ANSWER: True
2. Budgeting means to set standards, receive feedback, and executing corrective action.
a. True
b. False
ANSWER: False
3. The budget director is responsible for directing and coordinating the budgeting process.
a. True
b. False
ANSWER: True
4. The master budget is composed of the operations budget and the future budget.
a. True
b. False
ANSWER: False
5. A continuous budget is a moving twelve-month budget.
a. True
b. False
ANSWER: True
6. The sales forecast is the basis for the sales budget.
a. True
b. False
ANSWER: True
7. The sales budget shows the expected sales quantity and price of each product or service.
a. True
b. False
ANSWER: True
8. The first section of the master budget is the financial budget.
a. True
b. False
ANSWER: False
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Chapter 8: Budgeting for Planning and Control
9. The production budget describes how many units must be produced in order to meet sales and inventory needs.
a. True
b. False
ANSWER: True
10. In a for-profit service firm, the sales budget is also the production budget.
a. True
b. False
ANSWER: True
11. Once all the operating budgets have been completed, the net income can be estimated.
a. True
b. False
ANSWER: False
12. The capital expenditures budget is a long-term financial plan.
a. True
b. False
ANSWER: True
13. The cash budget is the least priority budget in the master budget.
a. True
b. False
ANSWER: False
14. The cash excess or deficiency section of the cash budget compares expected available cash to the expected cash
needed.
a. True
b. False
ANSWER: True
15. The budgeted income statement depends partly on information in the budgets in the master budget.
a. True
b. False
ANSWER: False
16. A static budget is one developed for a single level of activity.
a. True
b. False
ANSWER: True
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Chapter 8: Budgeting for Planning and Control
17. Static budgets show costs for varying levels of activities.
a. True
b. False
ANSWER: False
18. A flexible budget is sometimes referred to as a variable budget.
a. True
b. False
ANSWER: True
19. A flexible budget compares actual costs to budgeted costs.
a. True
b. False
ANSWER: True
20. Activity-based budgeting recognizes interdependencies among departments.
a. True
b. False
ANSWER: True
21. The activity-based budget begins with output and then determines the resources necessary to create that output.
a. True
b. False
ANSWER: True
22. An ideal budgeting system is one that achieves goals and encourages managers to achieve goals ethically.
a. True
b. False
ANSWER: True
23. Feedback is not important to managers as a measuring tool of their performance.
a. True
b. False
ANSWER: False
24. Incentives are the means used to encourage managers to achieve goals.
a. True
b. False
ANSWER: True
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Chapter 8: Budgeting for Planning and Control
25. Participative budgeting detracts from a manager’s sense of responsibility and creativity.
a. True
b. False
ANSWER: False
26. The quantitative expressions of plans stated in either physical or financial terms are
called __________ .
ANSWER: budgets
27. The process of setting standards, receiving feedback, and taking corrective action whenever performance deviates
from standards is called __________ .
ANSWER: control
28. The body responsible for reviewing the budget, providing policy guidelines and budgetary goals, resolving
differences that may arise, and approving the final budget is the __________ committee.
ANSWER: budget
29. The comprehensive financial plans made up of departmental and activity budgets are
the __________ .
ANSWER: master budgets
30. The
income statement is the culmination of the operating budget.
ANSWER: budgeted
31. Operating expense budgets include the marketing expense budget and the __________ expense budget.
ANSWER: administrative
32. The
budget shows the projected sales and prices.
ANSWER: sales
33. Cash disbursements and cash excess or deficiency are components of the __________ budget.
ANSWER: cash
34. The accounts receivable aging schedule aids in determining the timing of cash __________ .
ANSWER: receipts
shows projected assets, liabilities, and shareholders’ equity of the end of the budget
35. The budgeted
period.
ANSWER: balance sheet
36. A
budget is developed around one particular level of activity.
ANSWER: static
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Chapter 8: Budgeting for Planning and Control
37. Volume variances examine differences between the
budget and the __________ budget.
ANSWER: flexible; static
38. The budgeting that recognizes interdependencies among departments is called
budgeting.
ANSWER: activity-based
39. Activity-based budgets also focus on __________ processes.
ANSWER: business
40. When managers intentionally underestimate or overestimate revenues and costs it is called
budgetary __________ .
ANSWER: slack
41. The quantitative expression of a plan stated in either physical or financial terms or both is called a:
a. Cost of goods sold statement
b. Financial statement
c. Budget
d. Cost of goods manufactured statement
ANSWER: c
42. Which of the following is NOT a component of the master budget?
a. Sales Budget
b. Capital Budget
c. Cost of Goods Sold Budget
d. Budget to Actual Variance Analysis
ANSWER: d
43. Which of the following statement is correct regarding a continuous budget?
a. The budget is prepared for a one-year period that corresponds to the company’s fiscal year.
b. A continuous budget is a monthly budget.
c. As a month/period expires in the budget, an additional month/period in the future is added so the company always
has a 12-month budget on hand.
d. None of these
ANSWER: c
44. Control can be defined as
a. the process of setting standards, receiving feedback on actual performance, and taking corrective action
whenever actual performance deviates significantly from plan.
b. a quantification of plans, stated in either physical or financial terms, or both.
c. identification of corporate objectives.
d. a comprehensive financial plan.
ANSWER: a
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Chapter 8: Budgeting for Planning and Control
45. 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
d. the projected income statement
ANSWER: b
46. Which of the following is NOT an advantage of budgeting?
a. It forces managers to plan.
b. It provides resource information that can be used to improve decision making.
c. It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent
evaluation of performance.
d. It provides organizational independence.
ANSWER: d
47. The process of setting standards, receiving feedback on actual performance, and taking corrective action whenever
actual performance deviates significantly from planned performance.
a. Control
b. Monitoring
c. Eye balling
d. Comparing
ANSWER: a
48. Which of the following factors is NOT an advantage of preparing operating budgets?
a. It provides resource information that can be used to improve decision making.
b. It improves communication and coordination.
c. It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent
evaluation of performance.
d. It saves time and resources.
ANSWER: d
49. The budget committee
a. has the responsibility to review the budget.
b. resolves differences that may arise as the budget is prepared.
c. prepares financial statements for the auditor.
d. both a and b
ANSWER: d
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Chapter 8: Budgeting for Planning and Control
50. The body that has the responsibility to review the budget, provide policy guidelines and budgetary goals, resolve
differences that may arise as the budget is prepared, approve the final budget, and monitor the actual performance
of the organization as the year unfolds is called the:
a. budget director
b. budget committee
c. controller
d. president
ANSWER: b
51. The budgets that are comprehensive financial plans made up of various individual departmental and activity budgets
are the:
a. Operating budgets
b. Master budgets
c. Financial budgets
d. Continuous budgets
ANSWER: b
52. The budgets that are concerned with the income-generating activities of a firm are called the:
a. Operating budgets
b. Master budgets
c. Financial budgets
d. Continuous budgets
ANSWER: a
53. The budgets that are concerned with the inflows and outflows of cash and with financial position are called the:
a. Operating budgets
b. Master budgets
c. Financial budgets
d. Continuous budgets
ANSWER: c
54. Operating budgets are
a. a forecast of expected operating expenses.
b. a forecast of operating expenses and related revenues.
c. a forecast of units of production.
d. concerned with the income-generating activities of a firm.
ANSWER: d
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Chapter 8: Budgeting for Planning and Control
55. The following is responsible for directing and coordinating the overall budgeting process:
a. budget committee
b. budget director
c. president
d. treasurer
ANSWER: b
56. Wheeling Company produces and sells bikes. It expects to sell 20,000 bikes in April 2016 and had 1,200 bikes in
finished goods inventory at the end of March 2016. Wheeling Company would like to complete operations in April
with at least 1,500 completed bikes in inventory. The bikes sell for $100 each.
What would be the total sales for April 2016?
a. $1,150,000
b. $1,850,000
c. $2,000,000
d. $1,730,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 20,000 × $100 = $2,000,000
57. Wheeling Company produces and sells bikes. It expects to sell 20,000 bikes in April 2016 and had 1,200 bikes in
finished goods inventory at the end of March 2016. Wheeling Company would like to complete operations in April
with at least 1,500 completed bikes in inventory. The bikes sell for $100 each.
How many bikes would be produced in April 2016?
a. 20,000 bikes
b. 20,300 bikes
c. 19,700 bikes
d. 18,800 bikes
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 20,000 + 1,500 – 1,200 = 20,300 bikes
58. The type of budget that is a moving twelve-month budget is called the:
a. zero-based budget
b. flexible budget
c. continuous budget
d. both a and b
ANSWER: c
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Chapter 8: Budgeting for Planning and Control
59. 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
ANSWER: c
Figure 8-1
Armando Company produces and sells mattresses. It expects to sell 10,000 mattresses in the year 2017 and had
1,000 mattresses in finished goods inventory at the end of 2016. Armando would like to complete operations in the
year 2017 with at least 1,250 completed mattresses in inventory. There is no ending work-in-process inventory. The
mattresses sell for $300 each.
60. Refer to Figure 8-1. What would be the total sales for the year 2017?
a. $3,375,000
b. $3,675,000
c. $3,000,000
d. $3,300,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 10,000 × $300 = $3,000,000
61. Refer to Figure 8-1. How many mattresses would be produced in the year 2015?
a. 10,000
b. 11,000
c. 11,250
d. 10,250
mattresses
mattresses
mattresses
mattresses
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 10,000 + 1,250 – 1,000 = 10,250 mattresses
62. Which of the following is NOT a responsibility of the budget committee?
a. prepare actual financial statements
b. provide policy guidelines
c. provide budgeting goals
d. resolve differences that may arise as the budget is prepared
ANSWER: a
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Chapter 8: Budgeting for Planning and Control
Figure 8-2
Asian Lamp Company manufactures lamps. The estimated number of lamp sales for the last three months of 2016
are as follows:
Month
October
November
December
Sales
10,000
14,000
13,000
Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is budgeted to
equal 25 percent of the next month's sales. Asian Lamp expects to sell the lamps for $25 each. January 2016 sales
is projected at 16,000 lamps.
63. Refer to Figure 8-2.What is the expected sales revenue for December?
a. $250,000
b. $350,000
c. $325,000
d. $100,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 13,000 × $25 = $325,000
64. Refer to Figure 8-2. How many lamps should be produced in November?
a. 11,000 lamps
b. 10,500 lamps
c. 14,000 lamps
d. 13,750 lamps
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: (13,000 × .25) + 14,000 – (14,000 × .25) = 13,750 lamps
65. Refer to Figure 8-2. In going from the sales budget to the production budget, adjustments to the sales budget need
to be made for
a. finished goods inventories.
b. cash receipts.
c. factory overhead costs.
d. selling expenses.
ANSWER: a
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Chapter 8: Budgeting for Planning and Control
66. Refer to Figure 8-2. How many lamps should be produced in October?
a. 10,000 lamps
b. 14,000 lamps
c. 9,500 lamps
d. 10,500 lamps
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: (14,000 × .25) + 10,000 – 3,000 = 10,500 lamps
67. Molina Company has the following sales forecast for the next quarter: April, 20,000 units; May, 24,000 units; June,
28,000 units. Sales totaled 16,000 units in March. The March finished goods inventory was 4,000 units. End-ofmonth finished goods inventory levels are planned to be equal to 20 percent of the next month's planned sales.
The planned ending inventory of finished goods for May is
a. 5,600 units.
b. 4,000 units.
c. 5,000 units.
d. 3,200 units.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 28,000 × 0.20 = 5,600 units
68. Molina Company has the following sales forecast for the next quarter: April, 20,000 units; May, 24,000 units; June,
28,000 units. Sales totaled 16,000 units in March. The March finished goods inventory was 4,000 units. End-ofmonth finished goods inventory levels are planned to be equal to 20 percent of the next month's planned sales.
The planned production for Ben Company for April is
a. 19,200 units.
b. 20,800 units.
c. 21,200 units.
d. 24,800 units.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 20,000 + (0.20 × 24,000) – 4,000 = 20,800 units
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Chapter 8: Budgeting for Planning and Control
69. The following forecasted sales pertain to Alicia Company:
Month
April
May
June
July
Sales
$200,000
250,000
150,000
100,000
Finished goods inventory as of March 31
4,000 units
The company has a selling price of $20 per unit and expects to maintain ending inventories equal to 20 percent of
the next month's sales.
How many units are expected to be produced in April?
a. 8,500 units
b. 12,500 units
c. 14,500 units
d. 10,500 units
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($200,000/$20) + [($250,000/$20) × 0.2] – 4,000 = 8,500 units
70. The following forecasted sales pertain to Rapid City:
Month
June
July
August
September
Sales
$160,000
200,000
120,000
80,000
Finished goods inventory as of May 31
6,000 units
Rapid City has a selling price of $5 per unit and expects to maintain ending inventories equal to 25 percent of next
month's sales.
How many units are expected to be produced in June?
a. 36,000 units
b. 50,000 units
c. 82,000 units
d. 42,000 units
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $160,000/$5 + [($200,000/$5) × 0.25] – 6,000 = 36,000 units
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Chapter 8: Budgeting for Planning and Control
71. Alana Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2. Scheduled
production of books for the next two months is 1,000 and 1,200 units, respectively. Beginning inventory is 4,000 units
of A1 and 30 units of A2. The ending inventory of A1 is planned to decrease 500 units in each of the next two
months, and the A2 inventory is expected to increase 5 units in each of the next two months.
How many units of A1 does Alana Company expect to use in production during the second month?
a. 12,000 units
b. 12,500 units
c. 10,000 units
d. 10,750 units
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 1,200 × 10 = 12,000 units
72. Alana Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2. Scheduled
production of books for the next two months is 1,000 and 1,200 units, respectively. Beginning inventory is 4,000 units
of A1 and 30 units of A2. The ending inventory of A1 is planned to decrease 500 units in each of the next two
months, and the A2 inventory is expected to increase 5 units in each of the next two months.
How many units of A2 are expected in the raw material inventory at the end of the second month?
a. 30 units
b. 45 units
c. 40 units
d. 35 units
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 30 + 5 + 5 = 40 units
73. Alana Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2. Scheduled
production of books for the next two months is 1,000 and 1,200 units, respectively. Beginning inventory is 4,000 units
of A1 and 30 units of A2. The ending inventory of A1 is planned to decrease 500 units in each of the next two
months, and the A2 inventory is expected to increase 5 units in each of the next two months.
Based on this information, the number of units of A1 that needs to be purchased by Alana during the first month is
a. 9,500 units.
b. 10,000 units.
c. 1,000 units.
d. 10,500 units.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: (1,000 × 10) + 3,500 – 4,000 = 9,500 units
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Chapter 8: Budgeting for Planning and Control
74. Foremost Corporation manufactures boxes. The estimated number of boxes sold for the first three months of 2016
are:
Month
January
February
March
Sales
3,000
4,200
3,900
Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is equal to 20
percent of the next month's sales. General Corporation expects to sell the boxes for $5 each. April 2016 sales is
projected at 4,500 boxes.
What is the expected sales revenue for March?
a.
b.
c.
d.
$15,000
$21,000
$19,500
$4,500
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 3,900 × $5 = $19,500
75. Foremost Corporation manufactures boxes. The estimated number of boxes sold for the first three months of 2016
are as follows:
Month
January
February
March
Sales
3,000
4,200
3,900
Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is equal to 20
percent of the next month's sales. General Corporation expects to sell the boxes for $5 each. April 2016 sales is
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
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 4,200 + (0.20 × 3,900) – (0.20 × 4,200) = 4,140 boxes
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Chapter 8: Budgeting for Planning and Control
76. Foremost Corporation manufactures boxes. The estimated number of boxes sold for the first three months of 2016
are as follows:
Month
January
February
March
Sales
3,000
4,200
3,900
Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is equal to 20
percent of the next month's sales. General Corporation expects to sell the boxes for $5 each. April 2016 sales is
projected at 4,500 boxes.
How many boxes should be produced in January?
a. 3,060 boxes
b. 2,940 boxes
c. 3,000 boxes
d. 3,840 boxes
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: (0.20 × 4,200) + 3,000 – 900 = 2,940 boxes
Figure 8-3
Roaming Vehicles Company manufactures buggies. Manufacturing a buggy takes 20 units of wood and 1 unit of
steel. Scheduled production of buggies for the next two months is 500 and 600 units, respectively. Beginning
inventory is 4,000 units of wood and 30 units of steel. The ending inventory of wood is planned to decrease 500
units in each of the next two months, and the steel inventory is expected to increase 5 units in each of the next two
months.
77. Refer to Figure 8-3. How many units of wood are expected to be used in production during the second month?
a. 12,500 units
b. 10,000 units
c. 15,000 units
d. 12,000 units
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 600 × 20 = 12,000 units
78. Refer to Figure 8-3. How many units of steel are expected in the material inventory at the end of the second
month?
a. 30 units
b. 45 units
c. 40 units
d. 35 units
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 30 + 5 + 5 = 40 units
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Chapter 8: Budgeting for Planning and Control
79. Refer to Figure 8-3. What is the number of units of wood that need to be purchased by Roaming Vehicles
Company during the first month?
a. 1,000 units
b. 9,500 units
c. 500 units
d. 10,000 units
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: (500 × 20) + 3,500 – 4,000 = 9,500 units
80. Olga’s Company has a sales budget for next month of $150,000. Cost of goods sold is expected to be 40 percent of
sales. All goods are purchased in the month used and paid for in the month following purchase. The beginning
inventory of merchandise is $5,000, and an ending inventory of $6,000 is desired. Beginning accounts payable is
$38,000.
How much merchandise inventory will Olga’s need to purchase next month?
a. $61,000
b. $60,000
c. $65,000
d. $59,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $60,000 + $6,000 – $5,000 = $61,000
81. Olga’s Company has a sales budget for next month of $150,000. Cost of goods sold is expected to be 40 percent of
sales. All goods are purchased in the month used and paid for in the month following purchase. The beginning
inventory of merchandise is $5,000, and an ending inventory of $6,000 is desired. Beginning accounts payable is
$38,000.
The cost of goods sold for next month is expected to be
a. $40,000.
b. $60,000.
c. $90,000.
d. $89,000.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $150,000 × 0.40 = $60,000
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Chapter 8: Budgeting for Planning and Control
82. Moriah Manufacturing Company expects to incur the following per unit costs for 1,000 units of production:
Direct materials
Direct labor
Variable overhead
Fixed overhead
3 lb. @ $5 = $15
1 hr @ $6 = $6
75% of direct labor costs
50% of direct labor costs
What is the total amount of direct labor included in the direct labor budget?
a. $6,000
b. $28,500
c. $6
d. $7,500
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $6 × 1,000 = $6,000
83. Moriah Manufacturing Company expects to incur the following per unit costs for 1,000 units of production:
Direct materials
Direct labor
Variable overhead
Fixed overhead
3 lb. @ $5 = $15
1 hr @ $6 = $6
75% of direct labor costs
50% of direct labor costs
What is the total amount of overhead included in the overhead budget?
a. $4,500
b. $3,000
c. $11,250
d. $7,500
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $6,000 × (0.75 + 0.50) = $7,500
84. Alpha Beta Company has a sales budget for next month of $50,000. Cost of goods sold is expected to be 60 percent
of sales. All goods are purchased in the month used and paid for in the month following their purchase. The
beginning inventory of merchandise is $1,500 and an ending inventory of $2,000 is desired. Beginning accounts
payable is $13,000.
How much merchandise inventory will Alpha Beta Company need to purchase next month?
a. $29,000
b. $29,500
c. $30,000
d. $30,500
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($50,000 × 0.60) + $2,000 – $1,500 = $30,500
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Chapter 8: Budgeting for Planning and Control
85. Alpha Beta Company has a sales budget for next month of $50,000. Cost of goods sold is expected to be 60 percent
of sales. All goods are purchased in the month used and paid for in the month following their purchase. The
beginning inventory of merchandise is $1,500 and an ending inventory of $2,000 is desired. Beginning accounts
payable is $13,000.
The cost of goods sold for next month is expected to be
a. $29,500.
b. $30,500.
c. $50,000.
d. $30,000.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $50,000 × 0.60 = $30,000
86. The following forecasted sales pertain to Shankar Company:
Month
May
June
July
August
Sales
$200,000
250,000
150,000
100,000
Finished goods inventory as of April 30
4,000 units
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 30 percent of the
next month's sales.
What is the budgeted beginning balance in units for finished goods inventory on July 1?
a. 4,000 units
b. 3,500 units
c. 5,500 units
d. 4,500 units
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($150,000/$10) × 0.30 = 4,500 units
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Chapter 8: Budgeting for Planning and Control
87. Colorado Corporation has the following sales forecast for the next quarter:
July, 4,000 units; August, 4,800 units; September, 5,600 units
Sales totaled 3,200 units in June. The June ending finished goods inventory was 800 units. End-of-month finished
goods inventory levels are planned to be equal to 30 percent of next month's planned sales.
The planned production for Colorado Corporation for July is
a. 3,360 units.
b. 4,640 units.
c. 1,440 units.
d. 5,440 units.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 4,000 + (0.30 × 4,800) – 800 = 4,640 units
88. Colorado Corporation has the following sales forecast for the next quarter:
July, 4,000 units; August, 4,800 units; September, 5,600 units
Sales totaled 3,200 units in June. The June ending finished goods inventory was 800 units. End-of-month finished
goods inventory levels are planned to be equal to 30 percent of the next month's planned sales.
The planned ending inventory of finished goods for August is
a. 1,200 units.
b. 1,680 units.
c. 1,460 units.
d. 3,200 units.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 5,600 × 0.30 = 1,680 units
89. Colorado Corporation has the following sales forecast for the next quarter:
July, 4,000 units; August, 4,800 units; September, 5,600 units
Sales totaled 3,200 units in June. The June ending finished goods inventory was 800 units. End-of-month finished
goods inventory levels are planned to be equal to 30 percent of the next month's planned sales. Records showed that
each unit is budgeted at 2 pounds of materials costing $3 per pound. Direct labor was budgeted at .5 direct labor
hours per unit at a wage of $20 per hour. Budgeted variable overhead is $1.50 per direct labor hour. Fixed overhead
is budgeted at $250,000 for the year, and 50,000 units are expected to be produced.
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
After preparing a finished goods inventory budget for August, what is the total ending inventory cost?
a. $26,100
b. $31,755
c. $69,600
d. $36,540
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
5,600 × 0.30 = 1,680 units × $21.75 = $36,540
DM 2 × $3
DL .5 × $20
VOH .5 × $1.50
FOH $250,000/50,000
Total unit cost
=
=
=
=
$ 6.00
$ 10.00
$ 0.75
$ 5.00
$ 21.75
90. Colorado Corporation has the following sales forecast for the next quarter:
July, 4,000 units; August, 4,800 units; September, 5,600 units
Sales totaled 3,200 units in June. The June ending finished goods inventory was 800 units. End-of-month finished
goods inventory levels are planned to be equal to 30 percent of the next month's planned sales. Records showed that
each unit is budgeted at 2 pounds of materials costing $3 per pound. Direct labor was budgeted at .5 direct labor
hours per unit at a wage of $20 per hour. Budgeted variable overhead is $1.50 per direct labor hour. Fixed overhead
is budgeted at $250,000 for the year, and 50,000 units are expected to be produced.
The beginning finished inventory is valued at $31,320.
After preparing a finished goods inventory budget for August, what is the cost of goods sold for August?
a. $104,400
b. $109,620
c. $67,860
d. $140,940
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
DM 2 × $3
=
DL .5 × $20
=
VOH .5 × $1.50
=
FOH $250,000/50,000
=
Total unit cost
4800 × $21.75
=
$ 6.00
$10.00
$ 0.75
$ 5.00
$ 21.75
$104,400
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Chapter 8: Budgeting for Planning and Control
91. The following forecasted sales pertain to Rapid City:
Month
June
July
August
September
Sales
$160,000
200,000
120,000
80,000
Finished goods inventory as of May 31
6,000 units
Rapid City has a selling price of $5 per unit and expects to maintain ending inventories equal to 25 percent of next
month's sales.
What is the budgeted beginning balance in units for finished goods inventory on August 1?
a. 8,000 units
b. 6,000 units
c. 10,000 units
d. 6,400 units
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($120,000 × 0.25)/$5 = 6,000 units
92. Dali, Inc. is constructing its marketing budget.
Sales
Production
1st quarter
30,000
35,000
2nd quarter
40,000
45,000
3rd quarter
50,000
55,000
4th quarter
60,000
65,000
Commissions are $3 per unit sold. Salesperson salaries are $100,000 per quarter. Depreciation is $25,000 per
quarter. Travel is $10,000 per quarter. Advertising is $50,000 in the first quarter; $40,000 in the second quarter;
$60,000 in the third quarter; and $55,000 in the fourth quarter. What is the budgeted marketing expense for the
third quarter?
a. $795,000
b. $735,000
c. $360,000
d. $345,000
ANSWER: d
RATIONALE:
Commissions $3 × $50,000
Salaries
Depreciation
Travel
Advertising
Marketing Budget
3rd Quarter
$150,000
$100,000
$25,000
$10,000
$60,000
$345,000
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Chapter 8: Budgeting for Planning and Control
93. In a merchandising organization, the merchandise purchases budget replaces what budget from a manufacturing
firm?
a. the administrative expense budget
b. the pro-forma income statement
c. the production budget
d. the cost of goods sold budget
ANSWER: c
94. 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
ANSWER: d
95. Which of the following is a financial budget?
a. capital expenditures budget
b. sales budget
c. budgeted income statement
d. overhead budget
ANSWER: a
96. Which of the following is NOT a component of the Cash Budget?
a. Sales forecast
b. Cash Disbursements
c. Financing
d. Cash excess or deficiency
ANSWER: a
97. Which of the following is a financial budget?
a. cost of goods sold budget
b. budgeted balance sheet
c. marketing expense budget
d. production budget
ANSWER: b
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Chapter 8: Budgeting for Planning and Control
98. Mikhail Corporation has the following sales forecasts for the first three months of 2016:
Month
January
February
March
Sales
$36,000
24,000
40,000
Sixty-five percent of sales are collected in the month of the sale and the remainder are collected in the following
month. Mikhail will borrow from its bank to maintain its minimum cash balance.
Accounts receivable balance (January 1, 2016)
Cash balance (January 1, 2016)
Minimum cash balance needed
$16,000
12,000
20,000
What is the cash balance at the end of January, assuming that cash is received only from customers and that
$48,000 is paid out during January?
a. $19,400
b. $23,400
c. $20,000
d. $21,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
$12,000 + $16,000 + (0.65 × $36,000) – $48,000 =
Amount borrowed to meet minimum
Total
$ 3,400
20,000
$23,400
99. Mikhail Corporation has the following sales forecasts for the first three months of 2016:
Month
January
February
March
Sales
$36,000
24,000
40,000
Sixty-five percent of sales are collected in the month of the sale and the remainder are collected in the following
month.
Accounts receivable balance (January 1, 2016)
$16,000
Cash balance (January 1, 2016)
12,000
Minimum cash balance is $20,000. Cash can be borrowed in $1,000 increments from the local bank (assume no
interest charges).
How much cash would be collected in March from sales?
a. $32,000
b. $58,400
c. $48,000
d. $34,400
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($40,000 × 0.65) + ($24,000 × 0.35) = $34,400
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Chapter 8: Budgeting for Planning and Control
Figure 8-4
Discus Productions needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 10
percent of total sales each month. Historically, sales on account have been collected as follows: 60 percent in the
month of sale, 30 percent in the month after the sale, and the remaining 10 percent two months after the sale. Sales
for the quarter are projected as follows: April, $120,000; May, $100,000; and June, $80,000. Accounts receivable on
March 31 were $60,000.
100. Refer to Figure 8-4. The expected cash collections of Discus Productions for June are
a. $48,000.
b. $98,000.
c. $68,000.
d. $89,000.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($80,000 × 0.10) + ($80,000 × 0.90 × 0.60) +
($100,000 × 0.90 ×0.30) + ($120,000 × 0.90 × 0.10) = $89,000
101. Refer to Figure 8-4. Discus Productions would expect to have an accounts receivable balance on June 30 of
a. $37,800.
b. $42,000.
c. $32,000.
d. $28,800.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($80,000 × 0.90 × 0.40) + ($100,000 × 0.90 × 0.10) = $37,800
102. Shiller Corporation has the following sales forecasts for the selected three-month period in 2016:
Month
July
August
September
Sales
$24,000
14,000
16,000
All sales are on account. Seventy percent of sales are collected in the month of the sale, and the remainder are
collected in the following month.
Accounts receivable balance (July 1, 2016)
Cash balance (July 1, 2016)
$20,000
10,000
Minimum cash balance is $10,000. Cash can be borrowed in $1,000 increments from the local bank (assume no
interest charges).
How much cash would be collected in September from sales?
a. $15,400
b. $17,000
c. $16,000
d. $20,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($16,000 × 0.70) + ($14,000 × 0.30) = $15,400
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Chapter 8: Budgeting for Planning and Control
103. Shiller Corporation has the following sales forecasts for the selected three-month period in 2016:
Month
July
August
September
Sales
$24,000
14,000
16,000
All sales are on account. Seventy percent of sales are collected in the month of the sale, and the remainder are
collected in the following month.
Accounts receivable balance (July 1, 2016)
Cash balance (July 1, 2016)
$20,000
10,000
Minimum cash balance is $10,000. Cash can be borrowed in $1,000 increments from the local bank (assume no
interest charges).
What is the cash balance at the end of July, assuming that cash is received only from customers and that $40,000 is
paid out during July?
a. $20,000
b. $16,800
c. $6,800
d. $10,800
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
$10,000 + $20,000 + ($24,000 × 0.70) – $40,000 = $ 6,800
Amount borrowed to meet minimum 4,000
Total $10,800
104. Natasha Company has a sales budget for next month of $150,000. Cost of goods sold is expected to be 40 percent
of sales. All goods are purchased in the month used and paid for in the month following purchase. The beginning
inventory of merchandise is $5,000, and an ending inventory of $6,000 is desired. Beginning accounts payable is
$38,000.
For Natasha Company, the ending accounts payable should be
a. $39,000.
b. $61,000.
c. $89,000.
d. $91,000.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($150,000 × 0.40) + $6,000 – $5,000 = $61,000
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Chapter 8: Budgeting for Planning and Control
105. Quicksand Corporation has a sales budget for next month of $50,000. Cost of goods sold is expected to be 60
percent of sales. All goods are purchased in the month used and paid for in the month following their purchase. The
beginning inventory of merchandise is $1,500 and an ending inventory of $2,000 is desired. Beginning accounts
payable is $13,000.
The ending accounts payable for Quicksand Corporation should be
a. $30,500.
b. $30,000.
c. $13,000.
d. $29,500.
ANSWER:
a
RATIONALE: SUPPORTING CALCULATIONS: ($50,000 × 0.60) + $2,000 – $1,500 = $30,500
Figure 8-5
The following forecasted sales pertain to Spyware Corporation:
Month
Sales
September
$40,000
October
50,000
November
30,000
December
20,000
Collection pattern:
65 percent in month of sale
35 percent in month following sale
Accounts receivable as of August 31
Finished goods inventory as of August 31
$7,000
1,500 units
Spyware Corporation has a selling price of $2.50 per unit and expects to maintain ending inventories equal to 25
percent of the next month's sales.
106. Refer to Figure 8-5. How many dollars are expected to be collected in September?
a. $7,000
b. $40,000
c. $33,000
d. $21,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: ($40,000 × 0.65) + $7,000 = $33,000
107. Refer to Figure 8-5. How many dollars are expected to be collected in December?
a. $30,500
b. $37,000
c. $26,500
d. $23,500
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: (0.65 × $20,000) + (0.35 × $30,000) = $23,500
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Chapter 8: Budgeting for Planning and Control
Figure 8-6
The records of Morgantown, Inc. show the following forecasted sales:
Month
September
October
November
December
Sales
$400,000
500,000
300,000
200,000
Collection pattern:
60 percent in month of sale
40 percent in month following the sale
Accounts receivable as of August 31
Finished goods inventory as of August 31
$70,000
8,000 units
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20 percent of
next month's sales.
108. Refer to Figure 8-6. How many dollars are expected to be collected in October?
a. $420,000
b. $460,000
c. $240,000
d. $510,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($500,000 × 0.60) + ($400,000 × 0.40) = $460,000
109. Refer to Figure 8-6. How much is Accounts Receivable as of October 31?
a. $420,000
b. $460,000
c. $240,000
d. none of the above
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($500,000 × 0.40) = $200,000
110. Firefly Manufacturing Company needs to know its anticipated cash inflows for the next quarter by month. Cash
sales are 20 percent of total sales each month. Historically, sales on account have been collected as follows: 50
percent in the month of the sale, 35 percent in the month after the sale, and the remaining 15 percent two months
after the sale. Sales for the quarter are projected as follows: January, $60,000; February, $30,000; and March,
$90,000.
Accounts receivable on December 31 were $45,000.
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Chapter 8: Budgeting for Planning and Control
The expected cash collections of Firefly Manufacturing Company for March are
a. $90,000.
b. $69,600.
c. $64,500.
d. $114,600.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($90,000 × 0.20) + ($90,000 × 0.80 × 0.50) +
($30,000 × 0.80 ×0.35) + ($60,000 × 0.80 × 0.15) = $69,600
111. Firefly Manufacturing Company needs to know its anticipated cash inflows for the next quarter by month. Cash
sales are 20 percent of total sales each month. Historically, sales on account have been collected as follows: 50
percent in the month of the sale, 35 percent in the month after the sale, and the remaining 15 percent two months
after the sale. Sales for the quarter are projected as follows: January, $60,000; February, $30,000; and March,
$90,000.
Accounts receivable on December 31 were $45,000.
Firefly Manufacturing Company would expect to have an accounts receivable balance on March 31 of
a. $45,000.
b. $55,500.
c. $39,600.
d. $90,000.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: ($30,000 × 0.80 × 0.15) + ($90,000 × 0.80 × 0.50) = $39,600
Figure 8-7
Macheski Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget.
Data for the July master budget are given below:
The June 30th balance sheet follows:
Cash
Accounts receivable
Inventory
Building and equipment (net)
$ 25,000
110,000
54,000
250,000
Accounts
payable stock
Capital
Retained
earnings
$ 45,000
300,000
94,000
Actual sales for June and budgeted sales for July, August, and September are given below:
June
July
August
September
$137,500
360,000
400,000
320,000
Sales are 20 percent for cash and 80 percent on credit. All credit sales are collected in the month following the
sale. There are no bad debts.
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Chapter 8: Budgeting for Planning and Control
The gross margin percentage is 40 percent of sales. The desired ending inventory is equal to 25 percent of the
following month's sales. One fourth of the purchases are paid for in the month of purchase and the others are
purchased on account and paid in full the following month.
The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000.
112. Refer to Figure 8-7. What is the balance of the accounts receivable at the end of July?
a. $110,000
b. $288,000
c. $360,000
d. $398,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 80% × 360,000 = $288,000
113. Refer to Figure 8-7. What is the balance of the accounts payable at the end of July?
a. $55,500
b. $93,000
c. $120,000
d. $166,500
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: Purchases = $216,000 + (0.25 × $240,000) - $54,000 =
$222,000 0.75 × $222,000 = $166,500
114. Refer to Figure 8-7. What is the balance of the inventory account at the end of July?
a. $54,000
b. $60,000
c. $124,000
d. $216,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 0.25 × (0.60 × $400,000) = $60,000
115. Refer to Figure 8-7. What is the balance of the building and equipment (net) account at the end of July?
a. $243,000
b. $250,000
c. $257,000
d. $300,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $250,000 - $7,000 = $243,000
116. Refer to Figure 8-7. What is the balance of the retained earnings account at the end of July?
a. $94,000
b. $188,000
c. $360,000
d. $398,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $94,000 + ($360,000 - $216,000 - $43,000 - $7,000) = $188,000
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Chapter 8: Budgeting for Planning and Control
117. Refer to Figure 8-7. What is the balance of the cash account at the end of July?
a. $8,500
b. $15,500
c. $62,500
d. $114,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $25,000 + $72,000 + $110,000 – $45,000 – 56,500 – 43,000
= $62,500
118. Refer to Figure 8-7. What are the total assets at the end of July?
a. $439,000
b. $446,500
c. $515,500
d. $653,500
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $62,500 + $288,000 + $60,000 + $243,000 = $653,500
119. A budget that is developed around one particular level of activity is
a. a static budget.
b. a continuous budget.
c. an incremental budget.
d. none of these.
ANSWER: a
120. When budgets are used for control,
a. budgeted amounts from different years are compared.
b. actual amounts from different years are compared.
c. budgeted amounts are compared to actual amounts.
d. none of these.
ANSWER: c
Figure 8-8
Rammazzotti, Inc., is looking for feedback on company performance. The company compares the budget for the year
with the actual costs. Data have been collected below:
Rammazzotti Inc., had the following budgeted data:
Unit sales for 2016
Unit production for 2016
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
26,000
26,000
$ 800
2,000
100
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Chapter 8: Budgeting for Planning and Control
Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$0.15
0.20
0.02
0.05
0.02
The following actually occurred:
Actual unit sales for 2016
Actual unit production for 2016
24,000
28,000
Actual fixed overhead for 2016:
Supervision
Depreciation
Rent
$ 850
2,000
100
Actual variable costs:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$3,500
4,900
530
1,250
470
121. Refer to Figure 8-8. The total budgeted costs for 2016 were
a. $11,440.
b. $13,510.
c. $14,340.
d. $13,460.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
FC:
$800 + $2,000 + $100 =
VC:
TC:
$3,900 + $5,200 + $520 + $1,300 + $520 =
$ 2,900
11,440
$14,340
122. Refer to Figure 8-8. The budgeted cost for direct labor for 2016 was
a. $1,200.
b. $1,300.
c. $4,800.
d. $5,200.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 26,000 × $0.20 = $5,200
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Chapter 8: Budgeting for Planning and Control
123. Refer to Figure 8-8. The static budget variance for rent is
a. $100 F.
b. $100 U.
c. $-0-.
d. $50 U.
ANSWER: c
RATIONALE:
SUPPORTING CALCULATIONS:
Actual
Budget
Variance
$100
100
$ -0-
124. Refer to Figure 8-8. The actual cost for direct materials for 2016 was
a. $3,600.
b. $3,900.
c. $4,500.
d. $3,500.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $3,500 is given.
125. Refer to Figure 8-8. The static budget variance for total fixed overhead is
a. $50 U.
b. $50 F.
c. $-0-.
d. $100 U.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$2,950
Budget
2,900
Variance
$ 50 U
126. Refer to Figure 8-8. The static budget variance for direct materials is
a. $100 F.
b. $100 U.
c. $400 F.
d. $400 U.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$3,500
Budget
3,900
Variance
$ 400 F
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Chapter 8: Budgeting for Planning and Control
127. Refer to Figure 8-8. The static budget variance for total variable costs is
a. $90 U.
b. $180 U.
c. $790 F.
d. $880 F.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$10,650
Budget
11,440
Variance
$ 790 F
128. Refer to Figure 8-8. The total flexible budgeted costs for 2016 are
a. $10,560.
b. $13,460.
c. $13,510.
d. $15,220.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $2,900 + ($0.44 × 28,000) = $15,220
129. Refer to Figure 8-8. The flexible budget for direct materials cost in 2016 is
a. $3,500.
b. $3,600.
c. $3,900.
d. $4,200.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 28,000 × $0.15 = $4,200
130. Refer to Figure 8-8. The flexible budget variance for indirect labor for 2016 is
a. $1,250 F.
b. $50 F.
c. $150 F.
d. $1,200 U.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$1,250
Budget ($0.05 × 28,000)
1,400
Variance
$ 150 F
131. Refer to Figure 8-8. The flexible budget for rent in 2016 is
a. $100.
b. $200.
c. $2,900.
d. $2,950.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $100 is given.
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Chapter 8: Budgeting for Planning and Control
132. Refer to Figure 8-8. The flexible budget variance for supervision for 2016 is
a. $67 F.
b. $67 U.
c. $50 F.
d. none of these.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$850
Budget
800
Variance
$ 50 U
133. Refer to Figure 8-8. The flexible budget variance for total cost for 2016 is
a. $90 F.
b. $140 F.
c. $1,620 F.
d. $50 F.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual $10,650 + $2,950
$13,600
Budget ($0.44 × 28,000) + $2,900
15,220
Variance
$ 1,620 F
134. Refer to Figure 8-8. The total actual costs for 2016 were
a. $13,550.
b. $10,650.
c. $13,600.
d. $13,510.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $3,500 + $4,900 + $530 + $1,250 + $470 + $850 + $2,000 +
$100 = $13,600
135. Refer to Figure 8-8. The static budget variance for supervision is
a. $50 U.
b. $50 F.
c. 100 U.
d. 100 F.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$850
Budget
800
Variance
$ 50 U
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
136. Refer to Figure 8-8. The static budget variance for supplies is
a. $10 U.
b. $10 F.
c. $50 U.
d. $50 F.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$530
Budget
520
Variance
$ 10 U
137. The budget most appropriate for control purposes is the
a. static budget.
b. flexible budget.
c. continuous budget.
d. incremental budget.
ANSWER: b
138. Laramie, Inc., has an operating environment with considerable uncertainty. The company prepares the budget for
several different volume levels.
Laramie had the following budgeted data: Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$ 7.00
10.00
1.00
0.50
0.05
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$4,000
3,000
2,000
What are the budgeted costs for materials if 5,000 units were produced?
a. $9,000
b. $4,000
c. $50,000
d. $35,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: 5,000 × $7 = $35,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
139. Laramie, Inc., has an operating environment with considerable uncertainty. The company prepares the budget for
several different volume levels.
Laramie had the following budgeted data: Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$ 7.00
10.00
1.00
0.50
0.05
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$4,000
3,000
2,000
What are the budgeted costs for rent if 5,000 units were produced?
a. $2,000
b. $100,000
c. $9,000
d. $45,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $2,000 is given.
140. Laramie, Inc., has an operating environment with considerable uncertainty. The company prepares the budget for
several different volume levels.
Laramie had the following budgeted data: Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$ 7.00
10.00
1.00
0.50
0.05
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$4,000
3,000
2,000
What are the total budgeted costs for 5,000 units?
a. $9,000
b. $92,750
c. $101,750
d. $110,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: ($18.55 × 5,000) + $9,000 = $101,750
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
141. Laramie, Inc., has an operating environment with considerable uncertainty. The company prepares the budget for
several different volume levels.
Laramie had the following budgeted data: Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$ 7.00
10.00
1.00
0.50
0.05
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$4,000
3,000
2,000
What is the difference in total budgeted costs between the volume range of 4,000 and 5,000 units?
a. $-0b. $18,550
c. $1,000
d. $9,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 1,000 × $18.55 = $18,550
142. Laramie, Inc., has an operating environment with considerable uncertainty. The company prepares the budget for
several different volume levels.
Laramie had the following budgeted data: Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$ 7.00
10.00
1.00
0.50
0.05
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$4,000
3,000
2,000
What are the total budgeted costs for 3,000 units?
a. $3,000
b. $55,650
c. $64,650
d. $27,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: ($18.55 × 3,000) + $9,000 = $64,650
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
143. If the static budget variance for materials is $250 F and the budgeted cost for materials is $52,000, then the actual
cost of materials is
a. $51,950
b. $52,150.
c. $51,150.
d. $51,750.
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
Budget
$52,000
Variance
250 F
Actual
$51,750
144. The static budget variance for materials is $250 F and the budgeted cost for materials is $52,000. If the budgeted
volume is 13,000 and the actual volume is 13,500, then the flexible budget variance is
a. $2,250 F.
b. $3,050 F.
c. $2,050 F.
d. $1,850 F.
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Budget
Variance
Actual
Flexible budget ($52,000/13,000) × 13,500
Variance
$52,000
250 F
$51,750
54,000
$ 2,250 F
145. A budget that is developed around one particular level of activity is
a. a static budget.
b. a continuous budget.
c. an incremental budget.
d. none of these.
ANSWER: a
146. If production was budgeted at 400 units and the actual production was 420 units, what would be the static budget
variance for materials if the actual cost of materials was $4,150 and the budgeted cost per unit is $10?
a. $50 F
b. $200 U
c. $100 F
d. $150 U
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$4,150
Budget (400 × $10)
4,000
Variance
$ 150 U
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
147. If production was budgeted at 400 units and the actual production was 420 units, what would be the flexible budget
variance for materials if the actual cost of materials was $4,150 and the budgeted cost per unit is $10?
a. $50 F
b. $200 U
c. $100 F
d. $150 U
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$4,150
Budget
4,200
Variance
$ 50 F
148. Flexible budgets do NOT provide
a. expected costs for a range of activity.
b. budgeted costs for the actual level of activity.
c. budgeted costs for a predetermined level of activity.
d. expected costs for the actual performance level.
ANSWER: c
149. If a static budget forecasted 100,000 units to be sold in the fiscal year and actual units sold amounted to 120,000,
what assumption could be made under a flexible budget process?
a. Since the actual volume exceeds the budgeted volume, there is an unfavorable volume variance for output.
b. Fixed costs would increase in the flexible budget due to the volume change.
c. The effectiveness of the manager is in question.
d. Variable costs will be higher than projected in the static budget due to the volume variance.
ANSWER: d
150. Volume variances examine differences between
a. the static budget and actual costs.
b. the flexible budget and static budget.
c. the static budget and the rolling budget.
d. none of these.
ANSWER: b
151. Activity-based budgets
a. use the knowledge of cost behavior to split the functional-based line items into fixed and variable
components.
b. start with output and then determine the resources necessary to create that output.
c. rely on the use of functional-based line items.
d. work in environments where the products are homogenous and the production process is simple.
ANSWER: b
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
152. Activity-based budgeting is most useful when
a. output is homogeneous.
b. production processes are simple.
c. diverse products are produced.
d. volume levels are stable.
ANSWER: c
153. With an activity flexible budget, a budget variance is calculated
a. based on a flexible budget based on cost for actual units produced.
b. based on a flexible budget based on various activity drivers for actual units produced.
c. based on a flexible budget based on flexible manufacturing.
d. based on a flexible budget based on committed resources for actual units produced.
ANSWER: b
154. Which is NOT one of the four steps needed to build an activity-based budget?
a. Determine output level.
b. Determine the activities and their drivers needed to produce output.
c. Estimate the demand for each activity to produce the output.
d. Estimate the committed capacity.
ANSWER: d
155. Activity-based budgets compare costs for items based on activities such as
a. direct material.
b. direct labor.
c. setups.
d. power.
ANSWER: c
156. A flexible-based budgeting system
a. uses functional-based line items.
b. splits costs into variable and fixed components.
c. prepares budgets for a range of activity levels.
d. all of these.
ANSWER: d
157. A functional-based approach to budgeting compares costs for functional line items such as
a. setups.
b. direct materials.
c. ordering.
d. inspections.
ANSWER: b
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
158. Walterboro, Inc., has done a cost analysis for its production of decals. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Setups
Purchasing
Cost Formula
$11,000 + $0.11 per machine hour
$25,000 + $0.50 per machine hour
$50 per batch
$200 + $45 per purchase order
Following are the actual costs of producing 85,000 decals: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Setups
Purchasing
$11,500
28,300
550
1,000
What is the budgeted cost per decal? (Round to three decimal places.)
a. $0.468
b. $0.478
c. $0.486
d. $0.487
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($11,000 + $550 + $25,000 + $2,500 + $500 +
$200 +$900)/85,000 = $0.478 $40,650/85,000 = $0.478
159. Walterboro, Inc., has done a cost analysis for its production of decals. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Setups
Purchasing
Cost Formula
$11,000 + $0.11 per machine hour
$25,000 + $0.50 per machine hour
$50 per batch
$200 + $45 per purchase order
Following are the actual costs of producing 85,000 decals: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Setups
Purchasing
$11,500
28,300
550
1,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
What is the budget variance for setups in an activity-based performance report?
a. $50 F
b. $50 U
c. $800 U
d. none of these
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
Actual
$550
Budget
500
Variance
$ 50 U
160. Walterboro, Inc., has done a cost analysis for its production of decals. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Setups
Purchasing
Cost Formula
$11,000 + $0.11 per machine hour
$25,000 + $0.50 per machine hour
$50 per batch
$200 + $45 per purchase order
Following are the actual costs of producing 85,000 decals: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Setups
Purchasing
$11,500
28,300
550
1,000
What is the budget variance for maintenance in an activity-based performance report?
a. $50 F
b. $50 U
c. $550 U
d. $550 F
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $11,000 + (5,000 × $0.11)
Variance
$11,500
11,550
$
50 F
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
161. Walterboro, Inc., has done a cost analysis for its production of decals. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Setups
Purchasing
Cost Formula
$11,000 + $0.11 per machine hour
$25,000 + $0.50 per machine hour
$50 per batch
$200 + $45 per purchase order
Following are the actual costs of producing 85,000 decals: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Setups
Purchasing
$11,500
28,300
550
1,000
What is the budget variance for machining in an activity-based performance report?
a. $50 F
b. $50 U
c. $800 U
d. $800 F
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $25,000 + (5,000 × $0.50)
Variance
$28,300
27,500
$
800 U
162. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the budgeted maintenance cost if there was production of 50,000 reflectors that will require 8,000 machine
hours, 25 batches, and 15,000 purchase orders?
a. $15,000
b. $32,000
c. $47,000
d. $79,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $15,000 + ($4 × 8,000) = $47,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
163. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the budgeted inspection cost if there was production of 50,000 reflectors that will require 8,000 machine
hours, 25 batches, and 15,000 purchase orders?
a. $18,750
b. $60,000
c. $66,000
d. $78,750
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $60,000 + ($750 × 25) = $78,750
164. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the budgeted setup costs if there was production of 50,000 reflectors that will require 8,000 machine hours,
25 batches, and 15,000 purchase orders?
a. $1,000
b. $25,000
c. $8,000,000
d. $15,000,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: 25 × $1,000 = $25,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
165. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the budgeted purchasing cost if there was production of 50,000 reflectors that will require 8,000 machine
hours, 25 batches, and 15,000 purchase orders?
a. $150,000
b. $200,000
c. $100,000
d. none of these
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $50,000 + ($10 × 15,000) = $200,000
166. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the machining cost for production of 50,000 reflectors that will require 8,000 machine hours, 25 batches,
and 15,000 purchase orders?
a. $47,000
b. $43,000
c. $38,410,000
d. none of these
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $35,000 + ($1 × 8,000) = $43,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
167. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the total cost for production of 50,000 reflectors that will require 8,000 machine hours, 25 batches, and
15,000 purchase orders?
a. $393,750
b. $933,410
c. $3,937,500
d. $38,410,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $15,000 + $32,000 + $35,000 + $8,000 + $60,000 + $18,750 +
$25,000 + $50,000 + $150,000 = $393,750
168. Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers
have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$15,000 + $4 per machine hour
$35,000 + $1 per machine hour
$60,000 + $750 per batch
$1,000 per batch
$50,000 + $10 per purchase order
What is the budget for maintenance if 20,000 reflectors were made that required 3,500 machine hours, 12 batches,
and 5,000 purchase orders?
a. $3,500
b. $15,000
c. $29,000
d. $14,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $15,000 + ($4 × 3,500) = $29,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
169. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
What is the budget variance for maintenance in an activity-based performance report?
a. $1,000 U
b. $3,000 U
c. $3,000 F
d. none of these
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $11,000 + (5,000 × $2)
Variance
$20,000
21,000
$ 1,000 F
170. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
What is the budget variance for machining in an activity-based performance report?
a. $1,000 U
b. $2,000 U
c. $3,000 U
d. none of these
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $55,000 + (5,000 × $3)
Variance
$73,000
70,000
$ 3,000 U
171. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
What is the budget variance for inspection in an activity-based performance report?
a. $1,000 F
b. $2,000 F
c. $3,000 F
d. none of these
ANSWER:
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $70,000 + (10 × $500)
Variance
$73,000
75,000
$ 2,000 F
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
172. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
What is the budget variance for setups in an activity-based performance report?
a. $1,000 F
b. $2,000 F
c. $3,000 F
d. none of these
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget ($2,000 × 10)
Variance
$18,000
20,000
$ 2,000 F
173. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 8: Budgeting for Planning and Control
What is the budget variance for purchasing in an activity-based performance report?
a. $1,000 U
b. $2,000 U
c. $3,000 U
d. none of these
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $80,000 + (20 × $150)
Variance
$82,000
83,000
$ 1,000 F
174. Bienestar, Inc., has done a cost analysis for its production of vests. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$11,000 + $2 per machine hour
$55,000 + $3 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 vests: 5,000 machine hours; 10 batches; 20 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
$20,000
73,000
73,000
18,000
82,000
What is the budget variance for total costs in an activity-based performance report?
a. $1,000 F
b. $2,000 F
c. $3,000 F
d. none of these
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $21,000 + $70,000 + $75,000 + $20,000 + $83,000
Variance
$266,000
269,000
$ 3,000 F
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Chapter 8: Budgeting for Planning and Control
175. Villanova, Inc., has done a cost analysis for its production of rubber stamps. The following activities and cost
drivers have been developed:
Activity
Design
Machining
Setups
Purchasing
Cost Formula
$5,000 + $0.05 per machine hour
$25,000 + $0.01 per machine hour
$35 per batch
$50 + $15 per purchase order
Following are the actual costs of producing 35,000 rubber stamps: 1,000 machine hours; 5 batches; 30 purchase
orders
Design
Machining
Setups
Purchasing
$5,080
?
?
$600
The following variances were given in the activity performance report:
Design
Machining
Setups
Purchasing
?
$40 F
15 F
?
What is the actual cost of machining?
a. $24,970
b. $25,010
c. $25,050
d. none of these
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Variance
Budget $25,000 + (1,000 × $0.01)
Actual
$
40 F
25,010
$24,970
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Chapter 8: Budgeting for Planning and Control
176. Villanova, Inc., has done a cost analysis for its production of rubber stamps. The following activities and cost
drivers have been developed:
Activity
Design
Machining
Setups
Purchasing
Cost Formula
$5,000 + $0.05 per machine hour
$25,000 + $0.01 per machine hour
$35 per batch
$50 + $15 per purchase order
Following are the actual costs of producing 35,000 rubber stamps: 1,000 machine hours; 5 batches; 30 purchase
orders
Design
Machining
Setups
Purchasing
$5,080
?
?
$600
The following variances were given in the activity performance report:
Design
Machining
Setups
Purchasing
?
$40 F
$15 F
?
What is the actual cost of setups?
a. $160
b. $190
c. $300
d. none of these
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
Variance
Budget $35 × 5
Actual
$ 15 F
175
$160
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Chapter 8: Budgeting for Planning and Control
177. Villanova, Inc., has done a cost analysis for its production of rubber stamps. The following activities and cost
drivers have been developed:
Activity
Design
Machining
Setups
Purchasing
Cost Formula
$5,000 + $0.05 per machine hour
$25,000 + $0.01 per machine hour
$35 per batch
$50 + $15 per purchase order
Following are the actual costs of producing 35,000 rubber stamps: 1,000 machine hours; 5 batches; 30 purchase
orders
Design
Machining
Setups
Purchasing
$5,080
?
?
$600
The following variances were given in the activity performance report:
Design
Machining
Setups
Purchasing
?
$40 F
$15 F
?
What is the activity variance for design?
a. $40 F
b. $30 U
c. $15 F
d. d. $100 U
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $5,000 + (1,000 × $0.05)
Variance
$5,080
5,050
$ 30 U
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Chapter 8: Budgeting for Planning and Control
178. Villanova, Inc., has done a cost analysis for its production of rubber stamps. The following activities and cost
drivers have been developed:
Activity
Design
Machining
Setups
Purchasing
Cost Formula
$5,000 + $0.05 per machine hour
$25,000 + $0.01 per machine hour
$35 per batch
$50 + $15 per purchase order
Following are the actual costs of producing 35,000 rubber stamps: 1,000 machine hours; 5 batches; 30 purchase
orders
Design
Machining
Setups
Purchasing
$5,080
?
?
$600
The following variances were given in the activity performance report:
Design
Machining
Setups
Purchasing
?
$40 F
$15 F
?
What is the activity variance for purchasing?
a. $500 U
b. $100 U
c. $50 U
d. none of these
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
Actual
Budget $50 + (30 × $15)
Variance
$600
500
$100 U
179. Goal congruence means
a. there is alignment of organizational and managerial goals.
b. the organization is aligned to the needs of the environment.
c. the organization is aligned to shareholder goals.
d. there is no divergence between organization and stockholder goals.
ANSWER: a
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Chapter 8: Budgeting for Planning and Control
180. The ideal budget system creates
a. extreme caution in managers.
b. drive and risk avoidance in managers.
c. drive and goal congruence in managers.
d. none of these.
ANSWER: c
181. When budgets are used to evaluate performance, which factor might NOT have a significant behavioral effect?
a. concern for status
b. concern for financial matters
c. concern for career
d. concern for company profit
ANSWER: d
182. Analysis that fosters management by exception is
a. value analysis.
b. process analysis.
c. sensitivity analysis.
d. variance analysis.
ANSWER: d
183. When the reaction to a budget is negative, resulting in managerial behavior that is negative for the organization, the
resulting behavior is known as
a. dysfunctional behavior.
b. psychopathic behavior.
c. congruent behavior.
d. sociopathic behavior.
ANSWER: a
184. Which of the following is NOT a key feature of an ideal budgetary system?
a. participation
b. incentives
c. accountability for noncontrollable costs
d. feedback on performance
ANSWER: c
185. Which of the following is NOT a key feature of an ideal budgetary system?
a. controllable costs
b. single measure for performance
c. incentives
d. frequent feedback
ANSWER: b
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Chapter 8: Budgeting for Planning and Control
186. Which of the following is NOT an advantage of participative budgeting?
a. encourages incrementalism
b. encourages communication
c. encourages responsibility
d. encourages creativity
ANSWER: a
187. Myopic behavior occurs when
a. actions improve budgetary performance in the short-run but are harmful in the long run.
b. there is uncertainty.
c. there is focus on immediate costs.
d. actions improve budgetary performance in the distant time horizon.
ANSWER: a
188. An example of a negative incentive is
a. promotion.
b. nonfinancial incentive.
c. feedback reports.
d. termination of employment.
ANSWER: d
189. Which of the following is NOT a potential disadvantage of participative budgeting?
a. pseudoparticipation
b. performance feedback
c. unrealistic standards
d. budgetary slack
ANSWER: b
190. Participative budgeting has which of the following potential problems?
a. building slack into a budget
b. encourages individual behavior that is in basic conflict with the goals of the organization
c. using budgets as a part of performance evaluations could lead to unethical behavior
d. managers take action that will improve performance in the short run but has long-term consequences
ANSWER: a
191. The condition that exists when managers deliberately underestimate revenues or overestimate costs to provide
flexibility is called:
a. Realistic standards
b. Monetary incentives
c. Budgetary slack
d. Management by exception
ANSWER: c
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Chapter 8: Budgeting for Planning and Control
192. Realistic budgets reflect
a. actual levels of activity, full capacity usage, efficiencies, and general economic trends.
b. actual levels of activity, seasonal variations, efficiencies, and general economic trends.
c. ideal levels of activity, full capacity usage, efficiencies, and general economic trends.
d. ideal levels of activity, full capacity usage, and efficiencies.
ANSWER: b
193. Controllable costs are those that a manager
a. has no authority over.
b. cannot avoid.
c. does not participate in authorizing.
d. can influence through decision making.
ANSWER: d
194. Define budgeting and control. How are budgets used in planning? How are budgets used to control? What are
some of the reasons for budgeting?
ANSWER: Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies
of an organization into operational terms.
Control is the process of setting standards, receiving feedback on actual performance, and taking
corrective action whenever actual performance deviates significantly from planned performance.
Budgets are the standards, and they are compared with actual costs and revenues to provide feedback.
Budgeting forces managers to plan, provides resource information for decision making, sets
benchmarks for control and evaluation, and improves the functions of communication and coordination.
195. This problem can be broken into components…
a. Given the following information, prepare a quarterly sales budget and production budget, in units:
Last year sales = 500,000 units. The organization is planning a 10 percent increase in sales for the year 2012. The
company is a retail organization that sees higher sales due to the holidays in the 4th quarter. 40 percent of the
sales occur in the 4th quarter and the remaining units are sold equally over the other three quarters.
The beginning inventory for the year amounts to 20,000 units. The estimated sales for the first quarter of 2013
amount to 115,000 units. The company requires an ending inventory of 20 percent of the next quarters’ sales.
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Chapter 8: Budgeting for Planning and Control
b. Given the schedules above, if the projected sales price is $50 per unit, what is the expected revenue per quarter?
Also, given the following information, what is the estimated costs of production?
Materials: Each unit requires 1 yard of fabric and 1/2 pound of fiberfill stuffing. Fabric can be purchased at $9.00
per yard and fiberfill sells for $4.00 per pound. Inventories of materials are listed as follows:
Qtr1
17,000
5,000
Fabric/yds
Fiberfill/lbs
Qtr2
20,000
6,700
Qtr3
18,000
8,000
Qtr4
19,000
8,500
Beginning inventory of fabric is 16,000 yards and 6,000 lbs of fiberfill.
It takes an estimated time of .25 hours to produce one unit of output. The labor cost per hour is $25 per hour and
the taxes and benefit load is 25 percent.
ANSWER: a
Sales and production budgets:
Sales – Lastyear
500,000
10% increase
550,000
Sales Budget
Qtr 1
Units
Selling Price
Projected Revenue
110,000
$50.00
$5,500,000
Qtr 2
110,000
$50.00
$5,500,000
Qtr 3
110,000
$50.00
$5,500,000
Qtr 4
220,000
$50.00
$11,000,000
Total
550,000
$50.00
$27,500,000
Q1–2013
(next Qtr)
115,000
Production Budget
Qtr 1
Qtr 2
Qtr 3
Qtr 4
Desired El
Sales–units
22,000
110,000
22,000
110,000
44,000
110,000
23,000
220,000
Units needed
Less: Beg Invty
132,000
20,000
132,000
22,000
154,000
22,000
243,000
44,000
Projected Revenue/Purch. 112,000
110,000
132,000
199,000
*Desired El is
20% of next
qtr sales
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Chapter 8: Budgeting for Planning and Control
ANSWER: b
Materials Budget
Required:
1 yrd of fabric per unit @
0.5 lb of fiberfill per unit @
0.25 hours of direct labor @
$9.00 per yard
$4.00 per pound
$31.25 per hour (includes load)
Fabric
Qtr 1
Qtr 2
Qtr 3
Qtr 4
17,000
20,000
18,000
19,000
Yards required for units purchased
112,000
110,000
132,000
199,000
Yards needed in production
129,000
130,000
150,000
218,000
Beginning inventory in yards
16,000
17,000
20,000
18,000
113,000
113,000
130,000
200,000
$9.00
$9.00
$9.00
$9.00
$1,017,000 $1,017,000
$1,170,000
$1,800,000
Desired El in yards
Yards needed to purchase
Cost per yard
Amount of purchase
given from
production budget*
1 yrd per unit
$5,004,000
Fiberfill
Qtr 1
Qtr 2
Qtr 3
Qtr 4
5,000
6,700
8,000
8,500
Lbs. required for units purchased
56,000
55,000
66,000
99,500
Lbs. needed in production
61,000
61,700
74,000
108,000
Beginning inventory-in lbs
6,000
5,000
6,700
8,000
55,000
56,700
67,300
100,000
$4.00
$4.00
$4.00
$4.00
$220,000
$226,800
$269,200
$400,000
112,000
110,000
132,000
199,000
Hours per unit
0.25
0.25
0.25
0.25
Hours required
28,000
27,500
33,000
49,750
Cost per hour
$31.25
$ 31.25
$31.25
$31.25
$875,000
$859,375
$1,031,250
$1,554,688
Desired El inyards
Lbs. needed to purchase
Cost per yard
Amount of purchase
given from
production budget*
.5 lb per unit
$1,116,000
Direct labor
Units to Produce
DL budget
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Chapter 8: Budgeting for Planning and Control
196. Modern Goods Corporation has the following budgeted sales for the selected six-month period:
Month
January
February
March
April
May
June
Unit Sales
15,000
20,000
35,000
25,000
30,000
20,000
There were 7,500 units of finished goods in inventory at the beginning of January. Plans are to have an inventory of
finished product equal to 20 percent of the unit sales for the next month.
Three pounds of materials are required for each unit produced. Each pound of material costs $20. Inventory levels
for materials equal 30 percent of the needs for the next month. Materials inventory on January 1 was 5,000 pounds.
Required:
a.
b.
Prepare production budgets in units for February, March, and April.
Prepare a purchases budget in pounds and dollars for February, March, and April.
ANSWER:
a.
Sales
Add: Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced
February
March
April
20,000
7,000
27,000
4,000
23,000
35,000
5,000
40,000
7,000
33,000
25,000
6,000
31,000
5,000
26,000
b.
February
Units to be Produced
Desired ending inventory*
Production needs***
Total Needs
Less: Beginning inventory
Purchases needed in lbs.
Cost ($20 per lb.)
Total purchase cost
March
23,000
33,000
29,700
23,400
69,000
99,000
98,700
122,400
20,700 **** 29,700
78,000
92,700
× $20
× $20
$1,560,000
$1,854,000
April
26,000
25,200 **
78,000
103,200
23,400
79,800
× $20
$1,596,000
* 0.30 times next month's needs
** (30,000 + 4,000 - 6,000) × 3 × 0.30
*** 3 lbs. times units to be produced
**** 23,000 × 3 × .3
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Chapter 8: Budgeting for Planning and Control
197. Harlan manufactures picture frames. Sales for July are expected to be 10,000 units of various sizes. Historically, the
average frame requires five foot of framing, one square foot of glass, and one square foot of backing. Beginning
inventory includes 7,000 feet of framing, 1,500 square feet of glass, and 2,500 square feet of backing. Current prices
are $0.90 per foot of framing, $4.50 per square foot of glass, and $1.50 per square foot of backing. Ending
inventory should be 150 percent of beginning inventory. Purchases are paid for in the month acquired.
Required:
a.
b.
Determine the quantity of framing, glass, and backing that is to be purchased during July.
Determine the total amount of cash needed for July purchases.
ANSWER:
a.
Desired ending inventory
Production needs (10,000 units)
Total needs
Less: Beginning inventory
Direct materials to be purchased
b. Cash need:
Framing
Glass
Backing
Total
Framing
Glass
Backing
10,500
50,000
60,500
7,000
53,500
2,250
10,000
12,250
1,500
10,750
3,750
10,000
13,750
2,500
11,250
(53,500 × $0.90)
(10,750 × $4.50)
(11,250 × $1.50)
$ 48,150
48,375
16,875
$113,400
198. Lumberton Company has the following projected account balances for June 30, 2016:
Accounts payable
Accounts receivable
Depreciation, factory
Inventories (5/31)
Inventories (6/30)
Materials used
Office expenses
Insurance, factory
Factory wages
Bonds payable
$20,000
50,000
12,000
90,000
90,000
100,000
40,000
2,000
70,000
80,000
Sales
Capital stock
Retained earnings
Maintenance, factory
Cash
Equipment, net
Buildings, net
Utilities, factory
Selling expenses
$400,000
200,000
????
14,000
28,000
120,000
200,000
8,000
30,000
Required:
a.
b.
Prepare a budgeted income statement for June 2016.
Prepare a budgeted balance sheet as of June 30, 2016.
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Chapter 8: Budgeting for Planning and Control
ANSWER: a.
Lumberton Company
Budgeted Income Statement
For the Month of June 2016
Sales
Cost of goods sold:
Beginning inventory
Materials used
Factory Wages
Factory Depreciation
Factory Insurance
Factory Maintenance
Factory Utilities
Ending inventory
Gross margin
$400,000
$ 90,000
100,000
70,000
12,000
2,000
14,000
8,000
(90,000)
Operating expenses:
Selling expenses
Office expenses
Net income
$ 30,000
40,000
206,000
$194,000
70,000
$124,000
b.
Lumberton Company Budgeted Balance Sheet June 30, 2016
Assets
Cash
Accounts receivable, net
Inventories
Equipment, net
Buildings, net
Total
$ 28,000
50,000
90,000
120,000
200,000
$488,000
Liabilities. and Owners' Equity
Accounts payable
$ 20,000
Bonds payable
80,000
Capital stock
200,000
Retained earnings
188,000
0
Total
$488,000
199. High Life Corporation has the following sales budget for the last four months of 2016:
Month
September
October
November
December
Sales
$400,000
320,000
440,000
360,000
Historically, the following trend has been established regarding cash collection of sales:
65 percent in month of sale
25 percent in month following sale
8 percent in second month following sale
2 percent uncollectible
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Chapter 8: Budgeting for Planning and Control
The company allows a 2 percent cash discount for payments made by customers during the month of the sale. July
and August sales were $400,000 and $240,000, respectively.
Required:
Prepare a schedule of budgeted cash collections from sales for September, October, and November.
ANSWER:
July
August
September
October
November
Total cash collections
($400,000)
($240,000)
($400,000)
($320,000)
($440,000)
September
$ 32,000
60,000
254,800
$346,800
October
$ 19,200
100,000
203,840
$323,040
November
$ 32,000
80,000
280,280
$392,280
200. Sales for October, November, and December are expected to be $200,000, $180,000, and $220,000, respectively,
for the Gurumai Company. All sales are on account (terms 2/15, net 30 days) and are collected 50 percent in the
month of sale and 50 percent in the following month. One-half of all sales discounts are taken on the average.
Materials are purchased one month before being needed, and all purchases and expenses are paid for as incurred.
Activities for the quarter are expected to be:
Materials used
Salaries
Maintenance and repairs
Depreciation
Utilities and other
Dividends paid
Payment on bonds
October
$40,000
70,000
18,000
36,000
14,000
-08,000
November
$36,000
68,000
18,000
36,000
14,000
10,000
8,000
December
$44,000
72,000
18,000
36,000
14,000
-08,000
Required:
Using the given information, prepare a cash budget for November.
ANSWER:
Cash receipts:
Sales:
October ($200,000 × 0.50 × 0.99*)
November ($180,000 × 0.50 × 0.99*)
Total
Cash disbursements:
Materials
Salaries and wages
Maintenance and repairs
Utilities and other
Dividends
Payment on bonds
Net cash inflow (outflow)
$99,000
89,100
$188,100
$44,000
68,000
18,000
14,000
10,000
8,000
162,000
$ 26,100
*Average discount is 1% (2% × 1/2)
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Chapter 8: Budgeting for Planning and Control
201. Thunderbolt Corporation is in the process of preparing its budget for next year. Cost of goods sold has been
estimated at 60 percent of sales. Merchandise purchases are to be made during the month preceding the month of
the sales. Thunderbolt pays 60 percent in the month of purchase, and 40 percent in the month following. Wages are
estimated at 20 percent of sales and are paid during the month of sale. Other operating costs amounting to 10
percent of sales are to be paid in the month following the sale. The accounts payable balance on June 30 was
$48,000.
Month
June
July
August
September
October
November
Sales
$170,000
200,000
120,000
150,000
160,000
100,000
Required:
Prepare a schedule of cash disbursements for July, August, and September.
ANSWER:
Sales
Cost of Goods Sold
July
$200,000
× 0.60
$120,000
August
$120,000
× 0.60
$ 72,000
July
Cash Paid to Suppliers
June
July ($72,000)
August ($90,000)
September ($96,000)
Total cash paid to suppliers
Cash paid for wages
Cash paid for operating cost
Total cash disbursements
$ 48,000
43,200
September
$150,000
× 0.60
$ 90,000
August
$ 28,800
54,000
October
$160,000
× 0.60
$ 96,000
September
$ 91,200
$ 82,800
$ 36,000
57,600
$ 93,600
40,000
17,000
$148,200
24,000
20,000
$126,800
30,000
12,000
$135,600
202. Edison, Inc., a retailer of specialty art supplies, prepares a monthly master budget. Data for the September master
budget are given below:
a.
The August 31st balance sheet:
Cash
Accounts receivable
Inventory
Building and equipment (net)
$ 25,500
90,000
28,800
200,000
Accounts payable
Capital stock
Retained earnings
$ 53,760
265,000
25,540
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Chapter 8: Budgeting for Planning and Control
b.
Actual sales for August and budgeted sales for September, October,
and November are given below:
August
September
October
November
$120,000
360,000
200,000
180,000
c.
Sales are 25 percent for cash and 75 percent on credit. All credit sales are collected in the month
following the sale. There are no bad debts.
d.
The gross margin percentage is 60 percent of sales. The desired ending inventory is equal to 20 percent of
the following month's cost of goods sold. One fifth of the purchases are paid for in the month of purchase
and the others are purchased on account and paid in full the following month.
e.
The monthly cash operating expenses are $80,000, including the monthly depreciation expense of $7,000.
f.
During September, Edison, Inc., will purchase new office equipment for $17,000 cash.
g.
Dividends of $13,500 were declared and paid in September.
h.
The company must maintain a minimum cash balance of $25,000. A line of credit is used to maintain this
balance. Borrowing will be made in increments of $1,000. All borrowing is done at the beginning of the
month and repayments are made at the end of the month. The annual interest rate is 12 percent, paid when
the loan is repaid (ignore accrual of interest).
Required:
Prepare a balance sheet, income statement, and cash budget for the month of September.
ANSWER:
Balance Sheet:
Cash
Accounts receivable
Inventory
Building and equipment (net)
Income Statement:
Revenue
COGS
Gross margin
Operating expenses
Net income
$ 25,000
270,000
16,000
210,000
$521,000
Accounts payable
Loans payable
Capital stock
Retained earnings
$104,960
3,000
265,000
148,040
$521,000
$360,000
144,000
$216,000
80,000
$136,000
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Chapter 8: Budgeting for Planning and Control
Cash budget:
Beginning cash balance
Cash receipts:
September
August
Cash available
Cash disbursements:
Purchases-August (Accounts Payable)
Purchases-September
Cash expenses
Equipment purchase
Dividends
Total disbursements
$ 25,500
90,000
90,000
$205,500
$ 53,760
26,240
73,000
17,000
13,500
Excess of cash
183,500
$ 22,000
Borrow
Repay
Interest
3,000
-0-0-
Ending cash balance
$ 25,000
203. The city of Charleston had the following sales of water for the selected months of 2016:
Month
February
March
April
May
June
July
Sales
$50,000
45,000
60,000
42,500
70,000
120,000
All sales are on credit. Historically, 50 percent is collected in the month of sale, 35 percent during the first month
following the sale, and 15 percent in the second month following the sale.
Cost of water averages 75 percent of sales. Water is purchased in the month of sale. All purchases are paid during
the month following the purchase.
Operating costs of $10,000 are paid each month.
The April 1 cash balance is expected to be the minimum balance of $5,000.
Money can be borrowed from a local bank in increments of $1,000. (Do not include interest charges in your
budget.)
Required:
Prepare a cash budget for April, May, and June
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Chapter 8: Budgeting for Planning and Control
ANSWER:
April
May
June
Total
Beginning cash balance
Plus: Cash collections:
Month of sale (0.50)
Month following (0.35)
Second mo. following (0.15)
Total cash available
$ 5,000
$14,500
$ 8,500
$ 5,000
30,000
15,750
7,500
$58,250
21,250
21,000
6,750
$63,500
35,000
14,875
9,000
$67,375
86,250
51,625
23,250
$166,125
Less disbursements:
Water
Operating costs
Total disbursements
Ending cash balance
$33,750
10,000
$43,750
$14,500
$45,000
10,000
$55,000
$ 8,500
$31,875
10,000
$41,875
$25,500
$110,625
30,000
$140,625
$ 25,500
204. Ruger, Inc., is looking for feedback on performance. The company compares the budget for the year with the
actual costs.
Ruger had the following budgeted data:
Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$11.00
15.00
0.80
1.00
0.10
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
$ 9,000
13,000
12,000
Required:
Prepare a flexible budget for production costs for the following range of activity: 2,500 units; 4,000 units; 6,000 units.
ANSWER:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$11.00
15.00
0.80
1.00
0.10
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
Total costs
2,500 Units
$ 27,500
37,500
2,000
2,500
250
9,000
13,000
12,000
$103,750
4,000 Units 6,000 Units
$ 44,000
$ 66,000
60,000
90,000
3,200
4,800
4,000
6,000
400
600
9,000
13,000
12,000
$145,600
9,000
13,000
12,000
$201,400
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Chapter 8: Budgeting for Planning and Control
205. Missoula, Inc., is looking for feedback on performance. The company compares the budget for the year with the
actual costs.
Missoula, Inc., had the following budgeted data:
Unit sales for 2016
Unit production for 2016
Budgeted fixed overhead for 2016:
Supervision
Depreciation
Rent
Budgeted variable costs per unit:
Direct materials
Direct labor
Supplies
Indirect labor
Power
10,000
10,000
$18,000
20,000
10,000
$18.00
25.00
0.20
1.00
0.10
The following actually occurred:
Actual unit sales for 2016
11,000
Actual unit production for 2016
12,000
Actual fixed overhead for 2016:
Supervision
Depreciation
Rent
$17,850
20,000
10,000
Actual variable costs for 2016:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$214,000
320,000
2,500
10,000
1,500
Required:
a. Prepare a performance report for all costs showing static budget variances.
b. Prepare a performance report for all costs showing flexible budget variances.
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Chapter 8: Budgeting for Planning and Control
ANSWER:
a.
Actual
Budget for 10,000
Variance
Fixed costs:
Supervision
Depreciation
Rent
$ 17,850
20,000
10,000
$ 18,000
20,000
10,000
Variable costs:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$214,000
320,000
2,500
10,000
1,500
$180,000
250,000
2,000
10,000
1,000
Total costs
$595,850
$491,000
$104,850 U
Fixed costs:
Supervision
Depreciation
Rent
Actual
$ 17,850
20,000
10,000
Budget for 12,000
$ 18,000
20,000
10,000
Variance
$150 F
-0-0-
Variable costs:
Direct materials
Direct labor
Supplies
Indirect labor
Power
$214,000
320,000
2,500
10,000
1,500
$216,000
300,000
2,400
12,000
1,200
$ 2,000
20,000
100
2,000
300
Total costs
$595,850
$579,600
$16,250 U
$150 F
-0-0-
$34,000
70,000
500
-0500
U
U
U
U
b.
F
U
U
F
U
206. Compare and contrast static budgets, flexible budgets, and activity-based budgets.
ANSWER: A static budget is a budget developed for one level of activity. Once a sales number is calculated, the
production, marketing, and administrative budgets are based on that sales number. A static budget does
not take into consideration fluctuations in actual demand and sales for an organization. Since actual
activity rarely equals a budgeted level, static budgets are not usually relevant when performance reports
are needed. They are useful for planning purposes.
A flexible budget can provide cost estimates for a range of activity levels or budgeted costs for an
actual level of activity. Flexible budgets are useful in planning and performance reviews. This is
because a flexible budget can be used to compute what the costs should have been for an actual level
of activity. In order for flexible budgeting to be successful, the cost behavior of each budget item needs
to be determined.
Activity-based budgets begin with the output desired and determine the resources necessary to create
that output. Each department adopts an activity-based approach to budgeting in order to achieve this.
The activity-based budget works backwards from activities and their drivers to the underlying costs.
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Chapter 8: Budgeting for Planning and Control
207. Collibri, Inc., has done a cost analysis for its production of banners. The following activities and cost drivers have
been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Cost Formula
$13,000 + $2 per machine hour
$45,000 + $6 per machine hour
$70,000 + $500 per batch
$2,000 per batch
$80,000 + $150 per purchase order
Following are the actual costs of producing 75,000 banners:
1,000 machine hours; 15 batches; 10 purchase orders
Maintenance
Machining
Inspection
Setups
Purchasing
Required:
$14,000
50,000
70,000
32,000
82,000
Prepare an activity-based performance report.
ANSWER:
Maintenance
Machining
Inspection
Setups
Purchasing
Actual
$ 14,000
50,000
70,000
32,000
82,000
Budget 75,000
$ 15,000
51,000
77,500
30,000
81,500
Variance
$1,000 F
1,000 F
7,500 F
2,000 U
500 U
Total
$248,000
$255,000
$7,000 F
208. Ringwold, Inc., has done a cost analysis for its production of baseball cards. The following activities and cost
drivers have been developed:
Activity
Photography
Printing
Setups
Purchasing
Cost Formula
$50 + $35 per labor hour
$25,000 + $0.01 per machine hour
$25 per batch
$25 + $25 per purchase order
Following are the actual costs of producing 35,000 cards:
60 labor hours; 500 machine hours; 5 batches; 30 purchase orders
Photography
Printing
Setups
Purchasing
?
$25,000
?
$770
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Chapter 8: Budgeting for Planning and Control
The following variances were given in the activity performance report:
Photography
Printing
Setups
Purchasing
$10 F
?
$20 U
?
Required:
Find the missing values.
Prepare an activity-based performance report in good form.
ANSWER:
Photography
Printing
Setups
Purchasing
Actual
$ 2,140
25,000
145
770
Budget
$ 2,150
25,005
125
775
Total costs
$28,055
$28,055
Variance
$10 F
5F
20 U
5F
$-0-
209. Splendor, Inc., has done a cost analysis for its production of motorcycle lights.
The following activities and cost drivers have been developed:
Activity
Maintenance
Machining
Inspection
Setups
Purchasing
Required:
Cost Formula
$5,000 + $8 per machine hour
$25,000 + $4 per machine hour
$90,000 + $1,000 per batch
$5,000 per batch
$100,000 + $100 per purchase order
Prepare an activity-based budget for the following:
•
•
60,000 units:
100,000 units:
10,000 machine hours; 30 batches; 20,000 purchase orders
18,000 machine hours; 40 batches; 30,000 purchase orders
ANSWER:
Maintenance
Machining
Inspection
Setups
Purchasing
Total costs
60,000 Units
$ 85,000
65,000
120,000
150,000
2,100,000
$2,520,000
100,000 Units
$ 149,000
97,000
130,000
200,000
3,100,000
$3,676,000
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Chapter 8: Budgeting for Planning and Control
210. Discuss the features of an ideal budgetary process.
ANSWER: An ideal budgetary system is one that achieves complete goal congruence and simultaneously creates a
drive in managers to achieve the organization’s goals in an ethical manner. While an ideal budgetary
system probably does not exist, companies may put into effect some key features that promote a
reasonable degree of positive behavior. These features include frequent feedback on performance,
which provides managers with timely performance reports and gives them time to correct and change
plans as necessary; monetary and nonmonetary incentives, which can positively encourage managers
to achieve the company’s goals; and participation, or, the giving of responsibility to help managers
feel more in control of the making of the budgetary system.
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