Chapter 10 Strategy and the Master Budget Answer Key
Multiple Choice Questions
1.
The master budget for a given accounting period has all the following except:
A. It consists of a series of operating and financial budgets.
B. It is considered the "grand plan of action" for the upcoming period.
C. It culminates in a set of pro forma financial statements.
D. It is considered an important planning document for many organizations.
E. It is based on the actual level of sales activity for the period.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
2.
"Budgetary slack" occurs when:
A. Employees refuse to adhere to budgeted plans and operations.
B. The budget is so difficult to meet that employees slack-off from work.
C. An authoritative, or imposed, budgeting process is used.
D. In order to "meet" budget objectives, employees ask for resources in excess of what they
need.
E. Employees ask for fewer resources than they need, in order to continuously improve.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
3.
A master budget is typically prepared for:
A. A period of one year.
B. Top management only.
C. Strategic planning purposes only.
D. Strategic business units only.
E. Operating activities only.
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
4.
The successful use of a budgeting system generally involves all of the following except which
item?
A. Acceptance and support by key management people.
B. A sense of ownership by those assigned to carry out the budgeting process.
C. The budgets are technically correct and reasonably accurate.
D. The budgets include "budgetary slack."
E. The set of budgets in the master budget articulate with one another.
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
5.
All of the following are ways of setting the budget, except:
A. Negotiation-based budgeting.
B. Two-stage budgeting.
C. Participative budgeting.
D. Authoritative budgeting.
E. All of the above are ways of setting the budget.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
6.
Revision of a completed and approved budget:
A. Should be conducted whenever actual events differ significantly from those envisioned
when the budget was prepared.
B. Reduces employee commitment to achieve budgeted performance.
C. Should be discouraged.
D. May discourage diligence in its initial preparation.
E. Is never needed under Kaizen budgeting.
Difficulty: 2 Medium
Learning Objective: 10-03 Outline the budgeting process
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
7.
The process of planning business actions in the near future and expressing them as formal
plans of action is called:
A. Budgeting.
B. Goal congruence.
C. Budgetary slack.
D. Resource consumption accounting.
E. Financial Accounting.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
8.
A plan of dollar amounts to be spent on long-term projects is called a:
A. Cash budget.
B. Capital budget.
C. Rolling budget.
D. Sales budget.
E. Rolling financial forecast.
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
9.
A plan that shows the cash balance on hand at the beginning of a budget period, expected
cash flow from operations, cash flows from investing activities, cash flows from financing
activities, and an ending cash balance is called a(n):
A. Capital budget.
B. Financial budget.
C. Financial flows budget.
D. Cash budget.
E. Cash receipts budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
10.
A comprehensive or overall formal plan for a business that includes specific plans for expected
sales, the units of product to be produced, the merchandise (or materials) to be purchased,
the manufacturing, selling, administrative, and general expense to be incurred, the long-term
assets to be purchased, and the amounts of cash to be borrowed or loans to be repaid, as well
as a budgeted income statement and balance sheet, is called a:
A. Master budget.
B. Kaizen budget.
C. Capital expenditures budget.
D. Continuous budget.
E. Operating budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
11.
A plan that states the units or costs of merchandise to be purchased by a retailer or
wholesaler during the budget period is called a:
A. Production budget.
B. Merchandise purchases budget.
C. Accounts payable budget.
D. Cash payments budget.
E. Cost of goods sold budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
12.
A plan showing the units of goods expected to be sold and the expected revenue from sales is
called the:
A. Cash budget.
B. Sales receipts budget.
C. Selling expense budget.
D. Cash receipts budget.
E. Sales budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
13.
The practice of maintaining budgets for the same number of future periods, revising those
budgets as each period is completed and adding a new budget each period, is called:
A. Master budgeting.
B. Cyclical budgeting.
C. Zero-based budgeting (ZBB).
D. Rolling budgets (or, rolling financial forecasts).
E. Kaizen (or continuous-improvement) budgeting.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
14.
An accounting statement that presents predicted amounts of the company's assets, liabilities,
and stockholders' equity as of the end of the budget period is called a(n):
A. Master balance sheet.
B. Budgeted income statement.
C. Pro forma balance sheet.
D. Pro forma cash flow statement.
E. Operating balance sheet.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
15.
Which of the following budgets is not a financial budget?
A. Sales budget.
B. Cash receipts budget.
C. Budgeted cash-flow statement.
D. Budgeted balance sheet.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
16.
Which of the following is not a potential benefit of having a sound budgeting process?
A. Improved decision-making.
B. Improved performance-evaluation process.
C. Improved coordination of business activities.
D. Improved motivation for company employees.
E. Lower acceptance rate for capital budgeting projects.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
17.
Which of the following budgets must be completed before preparing a cash budget?
A. Cash receipts budget.
B. Rolling budget.
C. Cash financing budget.
D. Pro forma balance sheet.
E. Pro forma income statement.
Difficulty: 2 Medium
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
18.
Which of the following statements about budgeting is not true?
A. Budgeting is designed to be an aid to planning and control.
B. Budgets create standards for performance evaluation.
C. Budgets help coordinate the activities of the entire organization.
D. Budgeting forces managers to think ahead and formalize long-range objectives.
E. Budgeting eliminates the need for day-to-day monitoring of operations.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
19.
Which of the following factors is least likely to be considered in preparing a sales budget?
A. Plant capacity.
B. General economic and industry conditions.
C. Past sales volume.
D. The cash budget.
E. Proposed selling expenses.
Difficulty: 3 Hard
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
20.
Sales forecasts are the first step in the budgeting process of a merchandising firm because:
A. The revenue data are easiest to generate.
B. Sales information is precise in amount.
C. Sales personnel have the quickest access to data.
D. Sales forecasts are the most objective of all budgeted activities.
E. Almost all activities of a firm emanate from (i.e., are linked to) estimated sales demand.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
21.
Sales forecasting by its nature is:
A. Precise.
B. Deterministic in nature.
C. Objective.
D. Somewhat subjective.
E. Mechanical.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
22.
Budgeting for production (i.e., units to be produced in an upcoming budget period):
A. Is simply an extension of the sales forecast.
B. Is prepared after the materials purchases budget is prepared.
C. Involves the sales budget and both beginning and ending finished goods inventory
amounts.
D. Is not needed under a JIT production philosophy.
E. Is normally the first major step in the master budgeting process.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
23.
Maintaining a constant production level in a firm has the advantage of:
A. Minimizing the amount of inventory held.
B. Allowing a stable employment level.
C. Meeting customers' changing expectations in terms of demand volume.
D. Supporting the organization's move to JIT (just-in-time).
E. Allowing the firm to compete successfully as a differentiator.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
24.
The budgeted income statement and budgeted balance sheet benefit a business primarily in
terms of the ability of the organization to:
A. Meet stockholder requests for planning information from the organization.
B. Narrow the range of budgeted estimates to a manageable subset.
C. Deal with uncertainty inherent in the budgeting process.
D. Summarize the impact of the firm's financial and operating activities for an upcoming
period.
E. Satisfy the disclosure requirements of generally accepted accounting principles (GAAP).
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
25.
The focal point in budgeting for a service organization is likely to be:
A. Capital assets acquisition.
B. Raw material utilization.
C. Human resource (i.e., personnel) planning.
D. Cost minimization.
E. The process of mission development and goal specification.
Difficulty: 2 Medium
Learning Objective: 10-06 Identify unique characteristics of budgeting for service companies
Topic: Service
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
26.
Which of the following is not an alternative approach to traditional budgeting practices?
A. Kaizen budgeting.
B. Zero-based budgeting (ZBB)
C. Activity-based budgeting (ABB)
D. Time-driven activity based budgeting (TDABB)
E. Operations budgeting
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
27.
Zero-base budgeting (ZBB) differs from traditional budgeting in terms of its requirement to:
A. Justify budgeted operations and associated spending.
B. Consider the time-value of money in the budgeting process.
C. Start the budgeting process from the lowest level of the organization, the "zero base."
D. Incorporate continuous-improvement standards in the set of financial and operating
budgets.
E. Maximize the existence of "budgetary slack."
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
28.
A "participative" budget is a(n):
A. Good two-way communication device.
B. Relatively inexpensive and efficient approach to budget preparation.
C. "Top down" approach.
D. "Zero-based" approach.
E. Alternative budgeting approach to traditional budgeting.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
29.
Unless properly controlled, a "bottom-up" budgeting process can lead to:
A. Excessively tight (i.e., difficult-to-achieve) budgets.
B. Easy budget targets.
C. Excessive downward communication.
D. Reduced incentives for participation.
E. Reduced levels of "budgetary slack."
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
30.
Budgeting provides all of the following except:
A. A means to communicate the organization's short-term goals to its employees.
B. Support for management functions of planning and coordinating activities of the
organization.
C. A means to anticipate problems.
D. An ethical framework for decision-making.
E. A basis for motivating employee behavior.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
31.
Financial budgets include the:
A. Pro forma balance sheet.
B. Projected income statement.
C. Budgeted selling and administrative expenses.
D. Sales budget.
E. Budgeted retained earnings statement.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
32.
The effect of increasing the targeted (i.e., desired) ending inventory for a given budget period
has the following effect on the production budget for the period:
A. Increases the required production for the budget period.
B. Has no effect on the required production for the budget period.
C. Has an indeterminate effect (i.e., additional information is required).
D. None of the above.
Difficulty: 1 Easy
Learning Objective: 10-03 Outline the budgeting process
33.
The authorization function of budgets is especially important for government and not-for-profit
(NFP) entities, where budgeted amounts often serve both as approvals of planned activities
(or programs) and as:
A. Measures of quality.
B. Indicators of performance.
C. Certification of actions.
D. Ceilings for expenditures.
E. The basis for contract negotiations.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
34.
Which one of the following is a plan that will allow a manufacturing firm to satisfy its sales
goals and have on hand the desired amount of inventory at the end of the budget period?
A. Direct materials usage budget.
B. Sales budget.
C. Selling and administrative expense budget.
D. Production budget.
E. Sales forecast.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
35.
Which one of the following shows the direct materials required for production and their
budgeted cost?
A. Direct materials usage budget.
B. Budgeted cost of goods sold.
C. Direct materials purchases budget.
D. Production budget.
E. Direct materials cost budget.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
36.
Which of the following is not an advantage of using a "highly achievable target" when
constructing budgets?
A. Increasing managers' commitment to achieving budget targets.
B. Increasing the risk that managers will engage in "earnings management" behavior.
C. Improving predictability of earnings or operating results.
D. Decreasing the cost of achieving organizational control.
E. Enhancing the usefulness of a budget as a planning and coordinating tool.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
37.
A negotiated budgeting process is:
A. Less effective than an authoritative budget.
B. An alternative way to express a "bottom-up" approach to budget preparation.
C. A combination of "top-down" and "bottom-up" approaches to budget preparation.
D. Less costly to implement than an imposed (i.e., authoritative) budget.
E. Is generally completed after one round of negotiation.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
38.
The cash budget does not include:
A. Cash inflows from the collection of receivables.
B. Cash outflows for purchases of direct materials.
C. Cash outflows for acquisition of fixed (long-term) assets.
D. All sales revenues.
E. Interest paid and interest received.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
39.
Which one of the following is a budgeting process that requires managers to prepare budgets
based on in-depth reviews of all budget items?
A. Flexible budgeting.
B. Continuous budgeting.
C. Activity-based budgeting (ABB).
D. Kaizen budgeting.
E. Zero-base budgeting (ZBB).
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
40.
Which one of the following is a budgeting approach that explicitly demands continuous
improvement and that incorporates expected improvements in the resultant budget?
A. Flexible budgeting.
B. Time-driven activity-based budgeting (TDABB).
C. Activity-based budgeting (ABB).
D. Kaizen budgeting.
E. Zero-base budgeting (ZBB).
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
41.
Consistency between goals of the firm and the goals of its employees is referred to as:
A. Goal optimization.
B. Goal conformance.
C. Goal congruence.
D. Goal internalization.
E. Goal compensation.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
42.
A significant advantage of using either an activity-based budgeting (ABB) or a time-driven
activity-based budgeting (TDABB) system is:
A. Reduction in the cost of developing budget amounts.
B. Estimation of the cost of unused capacity, as a by-product of the budgeting process.
C. Increased levels of budgetary slack, which has a positive influence on motivation.
D. Elimination of the need to generate a sales forecast for the upcoming period.
E. The incorporation of continuous-improvement standards within the budgets.
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
43.
Budgets can serve as the standard against which actual performance is measured. When
compensation is based on this comparison, the organization is said to use:
A. Fixed performance contracts.
B. Rolling financial forecasts.
C. Continuous-improvement budgets.
D. Variable compensation contracts.
E. A linear compensation plan.
Difficulty: 3 Hard
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
44.
Critics (e.g., The Beyond Budgeting Roundtable) of traditional budgeting assert that the
budgeting process:
A. Reflects too much of a "bottom-up" process, which is costly and inefficient.
B. Puts too much pressure on individuals to attain the budget, at whatever cost.
C. Makes too much use of so-called linear compensation plans.
D. Unnecessarily incorporates excessive detail.
Difficulty: 3 Hard
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
45.
Zero-base budgeting (ZBB):
A. Involves the review of changes made to an organization's original budget.
B. Does not provide a projection of annual expenditures.
C. Has as the primary objective to reduce budget expenditures to zero.
D. Involves rigorous review of each cost item before inclusion in the budget.
E. Emphasizes zero increase in expenditures.
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
46.
Wild West Fashion expects the total costs of goods sold to be $30,000 in November and
$60,000 in December for one of its young adult suits. Management also wants to have on
hand at the end of each month 10 percent of the expected total cost of sales for the following
month. What dollar amount of suits should be purchased in November?
A. $26,000.
B. $27,000.
C. $33,000.
D. $36,000.
E. $60,000.
1. Required Purchases = Budgeted Sales + Desired Ending Inventory - Beginning Inventory
2. Therefore, Required Purchases = $30,000 + ($60,000 × 0.1) - ($30,000 × 0.1) = $33,000
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
47.
ACEM Hardware purchased 5,000 gallons of paint in March. The store had 1,500 gallons on
hand at the beginning of March, and expects to have 1,000 gallons on hand at the end of
March. What is the budgeted number of gallons to be sold during March?
A. 3,500.
B. 4,500.
C. 5,000.
D. 5,500.
E. 7,500.
Budgeted sales (units) = Beginning inventory (units) + Purchases during the month (units) Expected ending inventory (units) = 1,500 units + 5,000 units - 1,000 units = 5,500 units
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
48.
Joe's Mart policy is to have 20% of the next month's sales on hand at the end of the current
month. Projected sales for August, September, and October are 25,000 units, 20,000 units,
and 30,000 units, respectively. How many units must be purchased in September?
A. 16,000.
B. 17,000.
C. 22,000.
D. 26,000.
E. 28,000.
Required purchases (units) = Budgeted sales (units) + desired ending inventory (units) beginning inventory (units) = 20,000 + (30,000 × 0.2) - (20,000 × 0.2) = 20,000 units + 6,000
units - 4,000 units = 22,000 units
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
49.
Cripe Corporation maintains ending inventory for each month at 5% of the following month's
sales. It predicted the following sales (in units) for the first four months of the coming year:
How many units should be produced in March?
A. 2,810.
B. 2,850.
C. 2,970.
D. 2,990.
E. 4,250.
Required production = Estimated sales + Desired ending inventory - Beginning inventory =
3,000 + (2,800 × 0.05) - (3,000 × 0.05) = 3,000 + 140 units - 150 units = 2,990 units
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
50.
LeMinton Company expects the following credit sales for the first five months of the year:
January, $25,000; February, $40,000; March, $30,000; April, $36,000, May $40,000.
Experience has shown that payment for the credit sales is received as follows: 60% in the
month of sale, 25% in the first month after sale, 12% in the second month after sale, and the
remainder is uncollectible. How much cash can LeMinton Company expect to collect in March
as a result of credit sales?
A. $18,000.
B. $28,600.
C. $30,000.
D. $31,000.
E. $32,040.
Estimated collections in March = Estimated collections from credit sales in March + Estimated
collections from credit sales made in February + Estimated collections from credit sales made
in January = ($30,000 × 0.6) + ($40,000 × 0.25) + (25,000 × 0.12) = $18,000 + $10,000 +
$3,000 = $31,000.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
51.
The Johann's Professional Service Company expects 70% of sales for cash and 30% on
credit. The company collects 80% of its credit sales in the month following sale, 15% in the
second month following sale, and 5% are not collected. Expected sales for June, July, and
August are $48,000, $54,000, and $44,000, respectively. What are the company's expected
total cash receipts in August?
A. $45,920.
B. $61,400.
C. $87,600.
D. $50,400
E. $15,120
Total budgeted cash receipts in August = Cash sales in August + Collection of credit sales
from July + Collection of credit sales from June = ($44,000 × 0.7) + ($54,000 × 0.3 × 0.8) +
($48,000 × 0.3 × 0.15) = $30,800 + $12,960 + $2,160 = $45,920.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
Topic: Service
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
52.
Blake Company has $15,000 cash at the beginning of June and anticipates $50,000 in cash
receipts and $34,500 in cash disbursements. The company requires a minimum cash balance
of $20,000. Any excess cash over the minimum desired balance is used to pay down debts.
Blake has an agreement with its bank to borrow as needed or to repay loans as funds become
available. As of May 31, the company owes $15,000 to the bank. The balance of the loan on
June 30 will be:
A. $4,500.
B. $9,500.
C. $15,000.
D. $19,500.
E. $25,500.
1. Cash balance before loan payoff = Beginning cash balance + cash receipts - cash
disbursements = $15,000 + $50,000 - $34,500 = $30,500.
2. Projected excess cash = Available cash balance - minimum cash balance requirement =
$30,500 - $20,000 = $10,500.
3. New balance of loan = Existing balance - loan pay-off amount = $15,000 - $10,500 =
$4,500.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Gorberchev Food Processing expects to have 20,000 units of finished goods inventory on
hand on March 31 and reports the following expected sales (in units) for the first four months:
At the end of each month the company desires its finished goods ending inventory to be 20%
of the next month's projected sales (in units).
53.
The budgeted production (in units) for Gorberchev Food Processing for April should be:
A. 112,000.
B. 120,000.
C. 127,200.
D. 128,000.
E. 142,000.
Budgeted production (units) = Estimated sales (units) + Desired ending inventory (units) Beginning inventory (units) = 120,000 units + (140,000 × 0.2) units - 20,000 units = 128,000
units.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
54.
The budgeted production (in units) for Gorberchev Food Processing for May should be:
A. 112,000.
B. 134,000.
C. 140,000.
D. 142,000.
E. 146,000.
Budgeted production (units) = Estimated sales (units) + Desired ending inventory (units) Beginning inventory (units) = 140,000 + (150,000 × 0.2) - (140,000 × 0.2) = 142,000.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
Doanne Food Processing expects to have 36,000 pounds of raw materials inventory on hand
on March 31, the end of the current year. The company budgets the following production (in
units) for the first four months of the coming year:
At the end of each month the firm desires its ending raw material inventory to be 10% of the
next month's production needs. A finished unit requires three pounds of raw materials.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
55.
Doanne's budgeted purchases for raw materials (in pounds) during April should be:
A. 224,000.
B. 360,000.
C. 363,000.
D. 399,000.
E. 435,000.
1. Budgeted materials (lbs.) for April's production = (120,000 units × 3 pounds/unit) = 360,000
pounds
2. Desired April ending inventory of raw materials = 10% of May's production needs = (10% ×
130,000 units × 3 pounds/unit) = 39,000 pounds.
3. Budgeted purchases of raw materials in April = Budgeted materials usage in April + Desired
end-of-month raw materials inventory - Beginning-of-month inventory of raw materials =
360,000 pounds + 39,000 pounds - 36,000 pounds (given) = 363,000 pounds.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
56.
Doanne's budgeted purchases (in pounds) for raw materials during June should be:
A. 414,000.
B. 420,000.
C. 426,000.
D. 456,000.
E. 498,000.
1. Budgeted pounds raw material on hand on May 31 = (10% × 140,000 units) × 3 pounds/unit
= 42,000 pounds
2. Desired June ending inventory of raw materials = (10% × 120,000 units) × 3 pounds/unit =
36,000 pounds
3. Budgeted raw materials pounds needed for June production = (140,000 units × 3
pounds/unit) = 420,000 pounds
4. Budgeted purchases of raw materials during June, in pounds = Budgeted raw materials to
meet June's production + Desired June ending inventory of raw materials - Beginning-of-June
inventory of raw materials = 420,000 pounds + 36,000 pounds - 42,000 pounds = 414,000
pounds.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
57.
Oracle Supply Co. supply forecasts purchases of 15,000 widgets in June. It sells the widget at
$12.00 per unit. The company has 1,000 units on hand on June 1. The desired ending
inventory of widgets on June 30 is to be 20% lower than the beginning inventory. Total June
sales for widgets are anticipated to be (in dollars):
A. $177,600.
B. $180,000.
C. $182,400.
D. $189,600.
E. $192,000.
1. Desired June 30 ending inventory of widgets = [(1 - 0.2) × 1,000 units] = 800 units
2. Budgeted sales (in units), June = Beginning-of-month inventory + Budgeted purchases,
June - Desired end-of month inventory = 1,000 units + 15,000 units - 800 units = 15,200 units
3. Budgeted sales (in dollars), June = Budgeted sales (in units) × Budgeted selling price per
unit = 15,200 units × $12.00/unit = $182,400.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
58.
Salich Manufacturing Corporation has provided the following sales budget information:
Cash sales are normally 40% of total sales and the credit sales are expected to be collected in
their entirety in the month following the month of sale. The amount of cash expected to be
received from customers in September is:
A. $24.000.
B. $55,000.
C. $57,000.
D. $58,000.
E. $60,000.
1. August credit sales = [$55,000 × (1 - 0.4)] = $33,000
2. September cash sales = ($60,000 × 0.4) = $24,000
3. Total cash expected to be received from customers in September = Collection of August
credit sales + September cash sales = $33,000 + $24,000 = $57,000
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
59.
Worton Distributing expects its September sales to be 25% higher than its August sales of
$150,000.Purchases were $100,000 in August and are expected to be $120,000 in
September. All sales are on credit and are expected to be collected as follows: 30% in the
month of the sale and 70% in the following month. Purchases are paid 25% in the month of
purchase and 75% in the following month. The beginning cash balance on September 1 is
$10,000. The ending cash balance on September 30 would be:
A. $56,250.
B. $56,500.
C. $65,250.
D. $66,250.
E. $76,250.
1. Beginning cash balance (given) = $10,000
2. Cash receipts from credit sales made in August ($150,000 × 0.70) = $105,000
3. Cash receipts from credit sales made in September ([$150,000 × 1.25] × 0.30) = $56,250
4. Cash disbursements from purchases made in August ($100,000 × 0.75) = $75,000
5. Cash disbursements from purchases made in September ($120,000 × 0.25) = $30,000
6. Ending cash balance = Beginning cash balance + Cash receipts from credit sales made in
August + Cash receipts from credit sales made in September - Cash disbursements from
purchases made in August - Cash disbursements for purchases made in September =
$10,000 + $105,000 + $56,250 - $75,000 - $30,000 = $66,250
Difficulty: 3 Hard
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
60.
Tony's Fashions forecasts sales of $300,000 for the quarter ended December 31.Its gross
profit rate is 20% of sales, and its September 30 inventory is $100,000.If the December 31
inventory is targeted at $40,000, budgeted purchases for the quarter should be:
A. $140,000.
B. $160,000.
C. $180,000.
D. $200,000.
E. $240,000.
1. Beginning inventory (given) = $100,000
2. Gross Profit on this period's estimated sales = $300,000 × 20% = $60,000
3. Estimated cost of goods sold during the quarter = Estimated sales - estimated gross profit =
$300,000 - $60,000 = $240,000
4. Desired ending inventory = $40,000 (given)
5. Required inventory purchases to meet desired ending inventory = Estimated cost of goods
sold during the period + desired ending inventory (at cost) - beginning inventory (at cost) =
$240,000 + $40,000 - $100,000 = $180,000
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
Boone Co.'s sales, based on past experience, are 20% cash sales and 80% credit sales.
Credit sales are typically collected as follows: 40% in the month of sale, 50% in the month
after the sale, and 10% in the second month. On December 31, the accounts receivable
balance is $54,000, of which $12,000 is from November sales. Total sales for January and
February are budgeted to be $100,000 and $120,000, respectively.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
61.
What are Boone Co.'s budgeted cash receipts for January?
A. $74,200.
B. $85,000.
C. $87,000.
D. $94,200.
E. $99,000.
1. January budgeted cash receipts from November credit sales = $12,000 (given)
2. December 31 accounts receivable balance from December sales = ($54,000 - $12,000) =
$42,000
3. Total December credit sales = (42,000 ÷ 0.6) = $70,000
4. Portion of December credit sales expected to be received in January = $42,000 - $7,000 =
$35,000
6. January cash sales = (100,000 × 20%) = $20,000
7. January credit sales = $100,000 - $20,000 = $80,000
8. January cash receipts from January credit sales = ($80,000 × 40%) = $32,000
9. Total budgeted January cash receipts = Cash receipts from November credit sales +
December credit sales collected in January + January cash sales + Cash receipts from
collection of January credit sales = $12,000 + $35,000 + $20,000 + $32,000 = $99,000
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
62.
What are Boone Co.'s budgeted cash receipts for February?
A. $85,400.
B. $95,000.
C. $106,600.
D. $109,400.
E. $112,900.
1. Cash sales in February = $120,000 × 0.20 = $24,000
2. Collection in February of a portion of February's credit sales = ($120,000 × 0.80) × 0.40 =
$38,400
3. Collection in February of a portion of January's credit sales = ($100,000 × 0.80) × 0.50 =
$40,000
4. Determination of Total December credit sales: (a) December 31 Gross Accounts Receivable
= $54,000. (b) Portion of December's Gross Accounts Receivable attributable to November's
credit sales = $12,000 (given). (c) Therefore, December 31st gross accounts receivable
attributable to December sales = $54,000 - $12,000 = $42,000 (which is 60% of total
December sales). (d) Therefore, total credit sales in December = ($42,000 ÷ 0.6) = $70,000.
4. Portion of December credit sales budgeted to be received in February = ($70,000 × 10%) =
$7,000
5. Budgeted cash receipts for February = Cash sales in February + Collection in February of a
portion of February's credit sales + Collection in February of a portion of January's credit sales
+ Collection in February of a portion of December's credit sales = $24,000 + $38,400 +
$40,000 + $7,000 = $109,400
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Ardel Co. budgeted to sell 200,000 units of Zbox in September. Production of one unit of Zbox
required two pounds of aluminum and five pounds of steel powder. The beginning inventory
and the desired ending inventory in units are:
63.
How many units of Zbox are to be manufactured by Adel Co. during September?
A. 150,000.
B. 189,000.
C. 200,000.
D. 201,000.
E. 202,000.
Units to be produced = Estimated sales (units) + Desired ending inventory (units) - Beginning
Inventory (units) = 200,000 units + 13,000 units - 24,000 units = 189,000 units.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
64.
How many pounds of aluminum powder does Ardel Co. need to purchase during September if
Ardel plans to manufacture 150,000 units of Zbox in September?
A. 143,000 pounds.
B. 157,000 pounds.
C. 286,000 pounds.
D. 293,000 pounds.
E. 300,000 pounds.
1. 1 unit of output (Zbox) = 2 lbs. aluminum
2. Aluminum requirements for planned production = 150,000 units × 2 lbs/unit = 300,000 lbs.
3. Beginning inventory, aluminum = 30,000 lbs. (given)
4. Desired ending aluminum inventory = 23,000 lbs. (given)
5. Required purchases, aluminum = Production requirement + Desired ending inventory Beginning inventory = 300,000 lbs. + 23,000 lbs. - 30,000 lbs. = 293,000 lbs.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
65.
How many pounds of steel powder does Ardel Co. need to purchase during September if
Ardel plans to manufacture 150,000 units of Zbox in September?
A. 725,000 pounds.
B. 745,000 pounds.
C. 750,000 pounds.
D. 755,000 pounds.
E. 775,000 pounds.
1. 1 unit of output (Zbox) = 5 lbs. steel powder
2. Steel powder requirements for planned production =150,000 units × 5 lbs/unit = 750,000
lbs.
3. Beginning inventory, steel powder = 26,000 lbs. (given)
4. Desired ending inventory, steel powder = 31,000 lbs. (given)
5. Required purchases, steel powder = Production requirement + Desired ending inventory Beginning inventory = 750,000 lbs. + 31,000 lbs. - 26,000 lbs. = 755,000 lbs.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Information pertaining to Yekstop Corp.'s sales revenue is presented below.
Management estimates that 4% of credit sales are eventually uncollectible. Of the collectible
credit sales, 65% are likely to be collected in the month of sale and the remainder in the month
following the sale. The company desires to begin each month with an inventory equal to 75%
of the sales projected for the month. All purchases of inventory are on open account; 30% will
be paid in the month of purchase, and the remainder paid in the month following the month of
purchase. The purchase costs are approximately 60% of the selling prices.
66.
Total budgeted cash collections for Yekstop Corp. in December are:
A. $556,512.
B. $375,216.
C. $495,080.
D. $502,568.
E. $506,780.
1. December cash sales = $125,000
2. December credit sales collected in December = ($450,000 × 0.96) × 0.65 = $280,800
3. November credit sales collected in December = ($288,000 × 0.96) × 0.35 = $96,768
4. Total budgeted cash collections in December = December cash sales + December credit
sales collected in December + November credit sales collected in December = $125,000 +
$280,800 + $96,768 = $502,568
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
67.
Total budgeted cash collections in January by Yekstop Corp. are:
A. $556,512.
B. $375,216.
C. $421,728.
D. $464,006.
E. $502,568.
1. January cash sales = $78,000
2. January credit sales collected in January = ($234,000 × 0.96) × 0.65 = $146,016
3. December credit sales collected in January = ($450,000 × 0.96) × 0.35 = $151,200
4. Total budgeted cash collections in January = January cash sales + January credit sales
collected in January + December credit sales collected in January = $78,000 + $146,016 +
$151,200 = $375,216
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
68.
Total budgeted inventory purchases in November by Yekstop Corp. are:
A. $258,750.
B. $316,350.
C. $384,000.
D. $489,150.
E. $527,250.
1. November sales, at cost = ($384,000 × 60%) = $230,400
2. Desired November Beginning Inventory, at selling prices = (75% × $384,000) = $288,000
3. Desired November Beginning Inventory, at cost = $288,000 × 60% = $172,800
4. Desired November Ending Inventory, at selling prices = (75% × $575,000) = $431,250
5. Desired November Beginning Inventory, at cost = $431,250 × 60% = $258,750
6. Total budgeted inventory purchases in November = November sales, at cost + Desired
ending inventory (at cost) - Beginning inventory (at cost) = $230,400 + $258,750 - $172,800 =
$316,350
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
69.
Total budgeted inventory purchases in December by Yekstop Corp. are:
A. $86,250.
B. $140,400.
C. $226,650.
D. $258,750.
E. $345,000.
1. December sales, at cost = ($575,000 × 60%) =$345,000
2. Desired Beginning Inventory, December—at selling prices = (75% × $575,000) = $431,250
3. Desired Beginning Inventory, December—at cost = $431,250 × 60% = $258,750
4. Desired Ending Inventory, December—at selling prices = (75% × $312,000) = $234,000
5. Desired Ending inventory, December—at cost = $234,000 × 60% = $140,400
6. Total budgeted inventory purchases in December = December sales (at cost) + December
ending inventory (at cost) - December beginning inventory (at cost) = $345,000 + $140,400 $258,750 = $226,650
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
70.
Budgeted December cash payments by Yekstop Corp. for December inventory purchases
are:
A. $67,995.
B. $103,500.
C. $158,655.
D. $241,500.
E. $289,440.
1. December sales, at cost = ($575,000 × 60%) =$345,000
2. Desired Beginning Inventory, December—at selling prices = (75% × $575,000) = $431,250
3. Desired Beginning Inventory, December—at cost = $431,250 × 60% = $258,750
4. Desired Ending Inventory, December—at selling prices = (75% × $312,000) = $234,000
5. Desired Ending inventory, December—at cost = $234,000 × 60% = $140,400
6. Total budgeted inventory purchases in December = December sales (at cost) + December
ending inventory (at cost) - December beginning inventory (at cost) = $345,000 + $140,400 $258,750 = $226,650
7. $226,650 × 30% = $67,995
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
71.
Budgeted cash payments in November for November inventory purchases by Yekstop Corp.
are:
A. $76,625.
B. $94,905.
C. $115,200.
D. $161,280.
E. $221,445.
1. November sales, at cost = ($384,000 × 60%) = $230,400
2. Desired November Beginning Inventory, at selling prices = (75% × $384,000) = $288,000
3. Desired November Beginning Inventory, at cost = $288,000 × 60% = $172,800
4. Desired November Ending Inventory, at selling prices = (75% × $575,000) = $431,250
5. Desired November Beginning Inventory, at cost = $431,250 × 60% = $258,750
6. Total budgeted inventory purchases in November = November sales, at cost + Desired
ending inventory (at cost) - Beginning inventory (at cost) = $230,400 + $258,750 - $172,800 =
$316,350
7. Budgeted cash payments in November for November's inventory purchases = $316,350 ×
30% = $94,905
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
72.
Budgeted cash payments in December for November inventory purchases by Yekstop Corp.
are:
A. $76,625.
B. $94,905.
C. $115,200.
D. $161,280.
E. $221,445.
1. November sales, at cost = ($384,000 × 60%) =$230,400
2. Desired November Beginning Inventory, at selling prices = (75% × $384,000) = $288,000
3. Desired November Beginning Inventory, at cost = $288,000 × 60% = $172,800
4. Desired November Ending Inventory, at selling prices = (75% × $575,000) = $431,250
5. Desired November Beginning Inventory, at cost = $431,250 × 60% = $258,750
6. Total budgeted inventory purchases in November = November sales, at cost + Desired
ending inventory (at cost) - Beginning inventory (at cost) = $230,400 + $258,750 - $172,800 =
$316,350
7. Budgeted cash payments in December for November's inventory purchase = $316,350 ×
70% = $221,445
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
73.
Budgeted January cash payments for December inventory purchases by Yekstop Corp. are:
A. $67,995.
B. $103,500.
C. $158,655.
D. $241,500.
E. $289,440.
1. December sales, at cost = ($575,000 × 60%) =$345,000
2. Desired Beginning Inventory, December—at selling prices = (75% × $575,000) = $431,250
3. Desired Beginning Inventory, December—at cost = $431,250 × 60% = $258,750
4. Desired Ending Inventory, December—at selling prices = (75% × $312,000) = $234,000
5. Desired Ending inventory, December—at cost = $234,000 × 60% = $140,400
6. Total budgeted inventory purchases in December = December sales (at cost) + December
ending inventory (at cost) - December beginning inventory (at cost) = $345,000 + $140,400 $258,750 = $226,650
7. Budgeted January cash payments for December's inventory purchases = $226,650 × 70% =
$158,655
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Fresplanade Co. had the following historical pattern for its credit sales:
75% collected in the month of sale
12% collected in the first month after sale
8% collected in the second month after sale
3% collected in the third month after sale
2% uncollectible
The sales on open account (credit sales) have been budgeted for the last six months of the
year as shown below:
July $72,000
August $84,000
September $96,000
October $108,000
November $120,000
December $102,000
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
74.
The estimated total cash collections by Fresplanade Co. during December from accounts
receivable is:
A. $113,160.
B. $101,400.
C. $143,640.
D. $125,640.
E. $102,420.
Estimated cash collections during December from A/R = Portion of December's credit sales
collected in December + Portion of November's credit sales collected in December + Portion of
October's credit sales collected in December + Portion of September's credit sales collected in
December = [$102,000 × 0.75] + [$120,000 × 0.12] + [$108,000 × 0.08] + [$96,000 × 0.03] =
$102,420
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
75.
The estimated total cash collections by Fresplanade Co. during November from collection of
accounts receivable is:
A. $113,160.
B. $101,400.
C. $143,640.
D. $125,640.
E. $102,420.
Estimated total cash collections during November from collection of A/R = Portion of
November's credit sales collected in November + Portion of October's credit sales collected in
November + Portion of September's credit sales collected in November + Portion of August's
credit sales collected in November = [$120,000 × 0.75] + [$108,000 × 0.12] + [$96,000 × 0.08]
+ [$84,000 × 0.03] = $113,160
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
76.
The estimated total cash collections by Fresplanade Co. during October from accounts
receivable is:
A. $113,160.
B. $101,400.
C. $143,640.
D. $125,640.
E. $102,420.
Estimated cash collections during October from accounts receivable = Portion of October's
credit sales collected in October + Portion of September's credit sales collected in October +
Portion of August's credit sales collected in October + Portion of July's credit sales collected in
October = [$108,000 × 0.75] + [$96,000 × 0.12] + [$84,000 × 0.08] + [$72,000 × 0.03] =
$101,400
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
77.
The estimated cash collection by Fresplanade Co. during September from credit sales in July,
August, and September is:
A. $83,160.
B. $79,380.
C. $87,840.
D. $54,000.
E. $71,640.
Estimated cash collection during September for credit sales from July, August, and September
= Portion of September's credit sales collected in September + Portion of August's credit sales
collected in September + Portion of July's credit sales collected in September = [$96,000 ×
0.75] + [$84,000 × 0.12] + [$72,000 × 0.08] = $87,840
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
78.
The estimated cash collection by Fresplanade Co. during August from July and August credit
sales is:
A. $83,160.
B. $79,380.
C. $87,840.
D. $54,000.
E. $71,640.
Estimated cash collections during August from credit sales made in July and August = Portion
of credit sales from August collected in August + Portion of credit sales from July collected in
August = [$84,000 × 0.75] + [$72,000 × 0.12] = $71,640
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
79.
The estimated cash collections during July from credit sales made in July by Fresplanade Co.
is:
A. $83,160.
B. $79,380.
C. $87,840.
D. $54,000.
E. $71,640.
Estimated collection of accounts receivable in July from credit sales made in July = $72,000 ×
0.75 = $54,000
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Brownsville Novelty Store prepared the following budget information for the month of May:
• Sales are budgeted at $360,000. All sales are on account and a provision for bad debts is
made
monthly at three percent of sales.
• Inventory was $84,000 on April 30 and an increase of $12,000 is planned for May 31.
• All inventory is marked to sell at cost plus fifty percent.
• Estimated cash disbursements for selling and administrative expenses for the month are
$48,000.
• Depreciation for May is projected at $6,000.
80.
Brownsville's budgeted cost of goods sold (CGS) in May is:
A. $120,000.
B. $180,000.
C. $198,000.
D. $252,000.
E. $240,000.
1. Budgeted sales (May) = $360,000 (given)
2. Sales = 1.5 Inventory cost (i.e., CGS)
3. Therefore, Budgeted cost of goods sold (May) = Sales ÷ 1.5 = $360,000 ÷ 1.5 = $240,000
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
81.
Brownsville's budgeted cost of inventory purchased in May is:
A. $120,000.
B. $180,000.
C. $198,000.
D. $252,000.
E. $240,000.
1. Inventory increase during May (at cost) = $12,000 (given)
2. Budgeted cost of inventory purchased during May = Budgeted cost of goods sold, May +
Budgeted increase in inventory during May (at cost) = ($360,000 ÷ 1.5) + $12,000 = $240,000
+ $12,000 = $252,000
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
82.
Brownsville's budgeted gross profit in May is:
A. $120,000.
B. $180,000.
C. $198,000.
D. $252,000.
E. $240,000.
1. Budgeted sales (May) = $360,000 (given)
2. Sales = 1.5 Inventory cost (i.e., CGS)
3. Therefore, Budgeted cost of goods sold (May) = Sales ÷ 1.5 = $360,000 ÷ 1.5 = $240,000
4. Budgeted gross profit = Budgeted sales - Budgeted cost of goods sold = $360,000 (given) $240,000 = $120,000
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
83.
Brownsville's budgeted bad debts expense for May is:
A. $7,200.
B. $10,800.
C. $7,560.
D. $5,400.
E. $14,400.
Budgeted bad debts expense = Budgeted Sales × Estimated bad debts % = $360,000 (given)
× 3% (given) = $10,800
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
84.
Brownsville's budgeted operating income for May is:
A. $72,000.
B. $66,000.
C. $55,200.
D. $61,200.
E. $43,200.
Budgeted operating income = Sales - CGS - Estimated selling & administrative expenses Depreciation expense - Estimated bad debts expense = $360,000 - ($360,000 ÷ 1.50) $48,000 - $6,000 - $10,800 = $55,200
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
Graham Corporation's budgeted production schedule for the coming year is as follows:
Quarter 1 = 22,500 units
Quarter 2 = 19,000 units
Quarter 3 = 17,000 units
Quarter 4 = 24,000 units
Each unit of product requires three pounds of direct material. The company's policy is to begin
each quarter with 30% of that quarter's direct materials production requirements.
Graham expects to have 50,000 pounds of direct materials on hand at the beginning of
Quarter 1.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
85.
What would be Graham's budgeted direct materials purchases in the first quarter?
A. 17,500 pounds.
B. 34,600 pounds.
C. 37,750 pounds.
D. 67,100 pounds.
E. 84,600 pounds.
1. Desired ending inventory, Quarter 1 = [(19,000 units × 3 lbs/unit) × 0.30] = 17,100 lbs.
2. Lbs. of direct materials needed for Quarter 1 production = 22,500 units × 3 lbs/unit = 67,500
lbs.
3. Required purchases (pounds) = Materials required for production + Desired ending
inventory - Beginning inventory = 67,500 lbs. + 17,100 lbs. - 50,000 lbs. = 34,600 lbs.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
86.
What would be Graham's budgeted direct materials purchases in the second quarter?
A. 53,850 pounds.
B. 55,200 pounds.
C. 57,000 pounds.
D. 58,800 pounds.
E. 72,300 pounds.
1. Lbs. of direct materials at beginning of Quarter 2 = [(19,000 units × 3 lbs/unit) × 0.30] =
17,100 lbs.
2. Desired ending inventory of materials, Quarter 2 = [(17,000 units × 3 lbs/unit) × 0.30] =
15,300 lbs.
3. Lbs. of direct materials needed for Quarter 2 production = 19,000 units × 3 lbs/unit = 57,000
lbs.
4. Required direct material purchases, Quarter 2 = Production requirements + Desired ending
inventory - Beginning inventory = 57,000 lbs. + 15,300 lbs. - 17, 100 lbs. = 55,200 lbs.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
87.
What would be Graham's budgeted direct materials purchases in the third quarter?
A. 19,100 pounds.
B. 44,700 pounds.
C. 51,000 pounds.
D. 57,300 pounds.
E. 72,600 pounds.
1. Estimated beginning inventory of direct materials, Quarter 3 = 17,000 units × 3 lbs/unit ×
0.30 = 15,300
2. Desired ending inventory of direct materials, Quarter 3 = [(24,000 units × 3 lbs/unit) × 0.30]
= 21,600 lbs.
3. Lbs. of direct materials needed for Quarter 3 production = 17,000 units × 3 lbs/unit = 51,000
lbs.
4. Required purchases of direct materials, Quarter 3 = Production requirements + Desired
ending inventory - Beginning inventory = 51,000 lbs. + 21,600 lbs. - 15,300 lbs. = 57,300 lbs.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on
June 30, the end of the current year. The company has budgeted the following production for
the first four months of the coming year:
For the budgeting period, the firm desires each month's ending raw materials inventory to be
20% of the next month's production needs. A finished unit requires two pounds of raw
materials.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
88.
General Manufacturing's budgeted purchases of raw materials during July (in lbs.) should be:
A. 48,000 lbs.
B. 200,000 lbs.
C. 208,000 lbs.
D. 248,000 lbs.
E. 296,000 lbs.
1. Targeted ending inventory of raw materials, July = (0.20 × 120,000 units × 2 lbs/unit) =
48,000 lbs.
2. Raw materials needed for July's production = (2 lbs/unit × 100,000 units) = 200,000 lbs.
3. Beginning inventory of raw materials, July = 40,000 lbs. (given)
4. Required purchases of raw materials, July = Production requirements (July) + Desired
ending inventory of raw materials - Beginning inventory of raw materials = 200,000 lbs. +
48,000 lbs. - 40,000 lbs. = 208,000 lbs.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
89.
General Manufacturing's budgeted purchases of materials during September should be:
A. 60,000 lbs.
B. 228,000 lbs.
C. 248,000 lbs.
D. 284,000 lbs.
E. 300,000 lbs.
1. Targeted ending inventory of raw materials, September = (0.20 × 110,000 units × 2 lbs/unit)
= 44,000 lbs.
2. Raw materials needed for September's production = (2 lbs/unit × 150,000 units) = 300,000
lbs.
3. Beginning inventory of raw materials, September = (0.20 × 150,000 units × 2 lbs/unit) =
60,000 lbs.
4. Required purchases of raw materials, September = Production requirements (September) +
Desired ending inventory of raw materials - Beginning inventory of raw materials = 300,000
lbs. + 44,000 lbs. - 60,000 lbs. = 284,000 lbs.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
90.
Which of the following best describes the process of sales forecasting?
A. Multiple sales forecasting tools are available.
B. Trend analysis cannot be used for sales forecasting.
C. Econometric models cannot be used for sales forecasting because of their inherent
complexity.
D. Sales forecasting works best with a simple visual plotting of past data on a graph.
E. Generally speaking, the level of unfilled back order and credit policies of the company in
question can be ignored since these represent competitive responses.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
91.
_________ is a process of varying key estimates to identify those variables that are most
critical to a decision (or a model, such as a budget):
A. A demand forecast
B. Sensitivity analysis
C. Regression analysis
D. Pareto analysis
E. Linear optimization analysis
Difficulty: 2 Medium
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
92.
Assume only the specified parameters change in a sensitivity analysis. If the contribution
margin increases by $2 per unit, then operating profits will:
A. Also increase by $2 per unit.
B. Increase by less than $2 per unit.
C. Decrease by $2 per unit.
D. Increases, but by an indeterminate amount.
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
93.
Assume that only the specified parameters change in a sensitivity analysis. The contribution
margin ratio increases when:
A. Total short-term fixed costs increase.
B. Total short-term fixed costs decrease.
C. Variable cost per unit increases.
D. Variable cost per unit decreases.
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
94.
The process of examining how a change in a single item in a budget (e.g., sales volume)
affects one or more items in the budget (e.g., budgeted sales revenue and budgeted operating
income) is generally referred to as:
A. Flexible budgeting.
B. Linear programming.
C. Uncertainty programming.
D. What-if analysis.
E. Activity-based budgeting (ABB).
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
95.
Which of the following are alternatives to traditional budgeting approaches?
A. Volume-based budgeting and zero-base budgeting (ZBB).
B. Activity-based budgeting (ABB) and volume-based budgeting.
C. Kaizen budgeting and volume-based budgeting.
D. Activity-based budgeting (ABB), kaizen budgeting, and zero-base budgeting (ZBB).
E. Activity-based budgeting (ABB), kaizen budgeting, and volume-based budgeting.
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per unit
equal $3.20. The company expected total short-term fixed costs to be $7,200 for the coming
month, at the projected sales level of 20,000 units. Management is considering several
alternative actions designed to improve operating results. In conjunction with this, they have
created a profit-planning model, which can be used to evaluate different scenarios.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
96.
What is Capital One's current break-even point in terms of number of units for the month?
A. 1,500 units.
B. 2,250 units.
C. 3,330 units.
D. 4,000 units.
1. Fixed cost per month = $7,200
2. Contribution margin per unit = Selling price per unit - variable cost per unit = $8.00/unit $3.20/unit = $4.80/unit.
3. Therefore, break-even point = $7,200 ÷ $4.80/unit = 1,500 units per month
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
97.
Suppose that Capital One's management believes that a $1,600 increase in the monthly
promotion costs will provide a boost to sales. By what amount must sales increase during the
month to justify the contemplated expenditure? Round answer up to the nearest whole
number.
A. 200 units.
B. 334 units.
C. 400 units.
D. 668 units.
E. None of the above.
1. Contribution margin per unit = Selling price per unit - variable cost per unit = $8.00/unit $3.20/unit = $4.80/unit
2. Incremental fixed cost per month = $1,600
3. Therefore, incremental sales volume needed to cover incremental fixed cost per month =
$1,600 ÷ $4.80/unit = 334 units.
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
98.
Capital One's management believes that a 10% reduction in the selling price will increase
sales volume by 10%. If this plan is implemented, then:
A. Profit should increase by approximately $8,000 per month.
B. Profit should remain approximately the same.
C. Profit should decrease by approximately $8,000 per month.
D. Profit should decrease by approximately $16,000 per month.
E. Profit should increase by approximately $16,000 per month.
1. New selling price per unit = $8.00 × 0.90 = $7.20
2. New level of sales volume = 20,000 × 1.10 = 22,000 units
3. New level of operating income = 22,000 units × ($7.20 - $3.20)/unit = $88,000
4. Original level of operating income = 20,000 units × ($8.00 - $3.20)/unit = $96,000
5. Therefore, change in monthly operating income = $88,000 - $96,000 = ($8,000)
Difficulty: 2 Medium
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
99.
A budgeting system that has, in effect, a budget for a set number of periods (i.e., a constant
planning horizon) at all times is called a(n):
A. Financial budget
B. Operating budget
C. Rolling financial forecast
D. Capital budget
E. Master budget
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
100.
All of the following represent alternative approaches to the traditional budget-preparation
process except which one?
A. Master budgeting.
B. Kaizen budgeting.
C. Continuous-improvement budgeting.
D. Activity-based budgeting (ABB)
E. Time-driven activity based budgeting (TDABB)
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
101.
Which one of the following is not a way to deal with uncertainty in the budget-preparation
process?
A. Linear programming.
B. What-if analysis.
C. Monte Carlo Simulation (MCS).
D. Scenario analysis.
E. Sensitivity analysis.
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
102.
The proper treatment of the cost of unused capacity, as identified through the use of an
activity-based budgeting (ABB) system, is:
A. To charge the amount to customers whose uneven orders caused the unused capacity.
B. To charge the amount to a "deferred asset" account on the balance sheet.
C. To change the amount to a "deferred credit" account on the balance sheet.
D. To charge the amount to all products produced during the area (via overhead application
rates).
E. To charge the amount to the product line, department, or a given manager within the
organization where the decision to acquire the capacity was made.
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
103.
The type of compensation plan that focuses on the difference between actual performance
(sales, operating income, etc.) and budgeted performance is refers to:
A. The use of flexible budgets for performance evaluation.
B. The use of the master budget for performance evaluation.
C. The use of "rolling financial forecasts."
D. The use of a fixed-performance contract.
E. The use of a Kaizen forecast.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
104.
The act of encouraging non-value-adding actions on the part of management in order to
improve indicated performance is referred to as:
A. Goal congruency.
B. Gaming the performance indicator.
C. The use of fixed-performance contract.
D. Linear optimization analysis.
E. The use of a relative-performance contract.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
105.
The practice of managers knowingly including a higher amount of expenditures (or lower
amount of revenue) in the budget than they actually believe will occur is called:
A. Goal congruency.
B. Resource capacity planning.
C. Participative budgeting.
D. Budgetary slack.
E. Kaizen budgeting.
Difficulty: 1 Easy
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
106.
Which of the following is NOT true regarding the use of linear compensation plans?
A. Such plans encourage "gaming" behavior on the part of managers.
B. Such plans strongly link managerial compensation to the agreed-upon budget.
C. Under such plans, managerial reward is independent of budgetary targets.
D. Under such plans, managerial reward is based principally on actual performance.
E. Under such plans, managerial reward is based on what managers actually do, not what
they do relative to what they say they can do.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
107.
Which of the following is NOT a characteristic of Kaizen Budgeting?
A. These budgets reflect continuous-improvement standards.
B. These budgets adjust required resource demands based on targeted efficiency and
productivity gains.
C. This approach to budgeting can be used in conjunction with both traditional and activitybased budgeting.
D. The approach can be used internally, but not for external purposes (e.g., in budgeting
supplier costs).
E. Cost decreases in the budget are the result of performing the activities more efficiently and
with higher quality.
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
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Essay Questions
108.
Explain benefits of implementing a master budgeting system.
Answer may vary
Feedback: The benefits that can be derived from implementing a master budgeting system
include:
1. The preparation of budgets forces management to plan ahead and to establish goals and
objectives.
2. Budgeting compels each department or division to make plans that are in congruence with
the plans of other departments or divisions as well as the objectives of the entire firm.
3. Budgeting assists resource allocation.
4. The budgeting process promotes internal communication and coordination.
5. Budgets provide guidelines for day-to-day operations, clarify duties to be performed, assign
responsibility for these duties and gauges for controlling operations.
6. Budgets provide framework for measuring performance.
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the role of budgets in the overall management process
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
109.
Contrast operating budgets and financial budgets. How do these budgets relate to the master
budget for a period? What is the culmination of the master budgeting process?
Answer may vary
Feedback: Operating budgets deal with uses of resources in operating activities and with the
acquisition of these resources, while financial budgets identify sources and uses of funds for
the budgeted operations and the expected operating results for the period. The combination of
operating budgets and financial budgets for a period constitutes the master budget for a
period. The culmination of the master budgeting process is a set of pro forma financial
statements (e.g., budgeted income statement and budgeted balance sheet).
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
110.
In both activity-based and time-driven activity-based systems we calculate cost-driver rates for
support activities (e.g., the cost to ship an item or the cost to process a customer order) and it
is asserted that these rates are best determined by dividing budgeted resource costs (for a
given cost pool) by the practical capacity of resources supplied.
Required:
1. What is the primary advantage of using practical capacity as the volume level for
determining cost allocation rates in an ABC or TDABC system?
2. What is the appropriate accounting treatment for unused capacity costs for a given
accounting period?
Answer may vary
Feedback: 1. Beyond logical consistency (the numerator and the denominator of the costallocation rates are both consistent—the numerator represents the cost of resources supplied
while the denominator represents the capacity of resources supplied), the use of practical
capacity facilitates resource capacity planning. How? By allowing us at the end of each period
to estimate the cost of unused capacity for each activity or process. This estimate is defined
as the difference between the total cost of resources supplied (i.e., the numerator used when
the cost-allocation rates under ABC/TDABC were developed) and the cost of resources
actually used during the period, where the latter amount is equal to the product of each
activity-cost rate (based on practical capacity) and the actual activity units used during the
period. Such information allows for a better management of the supply of and demand for
capacity-related costs.
2. Unused capacity costs should NOT be assigned to products produced or customers served
during the period. To do so would overestimate the resource demands of these cost objects.
Rather, these costs should be assigned to the level (product line, department, or a given
manager) within the organization where the decision was made to acquire the capacity in
question.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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111.
Uncertainty and the Budgeting Process: As indicated in the text, the validity of pro-forma
financial statements that are produced as part of the master budgeting process is affected by
the accuracy of the forecasted data going into the component budgets. Such data are subject
to various levels of uncertainty. For this reason, accountants need to understand ways of
dealing with uncertainty in the budgeting process.
Required: Define and distinguish among the following ways of handling uncertainty in the
budgeting process:
1. What-if analysis (give at least one concrete example)
2. Sensitivity analysis
3. Scenario analysis.
Answer may vary
Feedback: 1. What-if analysis: this is probably the simplest way to address uncertainty in the
budget-preparation process. Essentially, we examine how a change in one or more budgetary
items (e.g., forecasted sales, in units) affects another variable or budget of interest (e.g., the
production budget). Other questions such as the following could be addressed through What-if
analyses: (a) what would be the impact on operating income of a 7% increase in direct
material costs for an upcoming period? (b) What would be the impact on operating income of a
7% increase in direct material costs accompanied by a commensurate percentage increase in
selling price per unit? (c) What would be the impact on the production budget for a given
period if the targeted ending inventory decreased from, say, 30% to 20% of the following
month's projected sales? (d) What would be the effect on budgeted operating income (or cash
flow from operations) of a reduction in targeted ending inventories (e.g., from 30% to 20% of
the following month's projected sales)?
2. Sensitivity analysis: this refers to the process of determining the sensitivity of a given output
(e.g., sales budget, in dollars) to changes in one or more underlying components of the model
(e.g., selling price per unit). Alternatively, we could examine the sensitivity of a set of pro
forma financial statements to various assumptions made in preparing the component or
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constituent budgets. Ultimately, our goal would be to determine the extent to which a change
in the forecasted value of one or more budgetary inputs (e.g., estimated sales forecast, in
units) affects individual budgets (e.g., sales budget) and the set of pro forma financial
statements ultimately produced by the master budgeting process. The example in the text
(Exhibit 10.17) shows estimated operating income at three different levels of estimated sales
demand (in units) and three different levels of selling price per unit, when all other budgetary
inputs are held constant. The goal of the analysis is to assess whether and to what extent
budgeted operating income changes in response to changes in the two sales-related
budgetary inputs.
3. Scenario analysis: this approach looks at a small number of realistic scenarios (i.e.,
combinations of planning-model inputs) and the resulting impact of each scenario on a budget
of interest (e.g., operating income or cash flow from operations). One commonly
recommended approach is to prepare a set of budgets based on a "best case scenario"
(regarding budget-model inputs), a "worst-case scenario," and a "most-likely scenario." The
best-case scenario would reflect the optimistic (but realistic) values for sales volume, selling
price per unit, etc., while the worst-case scenario would reflect just the opposite, that is, the
most pessimistic (but realistic) combination of budgeting-model inputs. The range of outcomes
for the scenarios examined gives us an idea of how bad or good things might be; the range of
possible outcomes (e.g., budgeted operating income) provides a rough measure of risk.
Extensions to basic scenario analysis can be accomplished by assigning (subjective)
probabilities to each of the various scenarios, or through the use of Monte Carlo Simulation
(MCS).
Difficulty: 2 Medium
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
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forwarded, distributed, or posted on a website, in whole or part.
112.
List factors that should be considered in developing a sales forecast for an upcoming budget
period.
Answer may vary
Feedback: Factors that should be considered in sales forecasting include:
1) Current sales levels and trends of sales in the past few years
2) General economic and industry conditions
3) Competitor actions and operating plans
4) Pricing policies
5) Credit policies
6) Advertising and promotional activities
7) Unfilled backorders.
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
113.
What is zero-base budgeting (ZBB) and how does this approach to budgeting compare to
what can be considered "traditional budgeting"? How is ZBB implemented in practice?
Answer may vary
Feedback: Zero-base budgeting (ZBB) is a budgeting process that requires managers to
prepare budgets from "ground zero" and as such can be compared to a "traditional budgeting"
process that is incremental in nature; the primary focus of a traditional budget is on changes to
the current operating budget. By contrast, a ZBB process allows no activities or functions to be
included in the budget unless managers can justify the need for having them. Zero-base
budgeting requires managers or budgeting teams to perform in-depth reviews and analyses of
all budget items. A ZBB process encourages managers to be aware of activities or functions
that have outlived their usefulness or that have become a waste of resources.
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
114.
What is the focus of activity-based budgeting (ABB)? What is the principal advantage of ABB?
Answer may vary
Feedback: Activity-based budgeting (ABB) is budgeting process that focuses on costs of
activities or cost drivers necessary for production and sales. Proponents of ABB maintain that
this budgeting process results in more accurate resource planning: sales/output volume is
forecasted, then activity requirements are determined, then spending for resources (activities)
is estimated. In this model, planners are better able to budget resource requirements for a
given level of output.
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
115.
Contrast the budgeting unit (or focus) under a traditional budgeting system and under an
activity-based budgeting (ABB) system.
Answer may vary
Feedback: 1. The budgeting unit for traditional budgeting is expressed as the cost of functional
areas/departments or spending categories (e.g., salaries, depreciation, utilities).
2. The budgeting unit for activity-based budgeting (ABB) is expressed as the cost of
performing activities (e.g., executing a purchase order, shipping an order, inspection of a lot,
scheduling a production run).
Difficulty: 1 Easy
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
116.
Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers.
Management also wants to have $500 in inventory at the end of the month to prepare for the
fall season. Beginning inventory in August was $400. What dollar amount of plastic flowers
should be purchased to meet the above objectives?
Answer may vary
Feedback: Budgeted purchases = Budgeted cost of goods sold (CGS) + Desired ending
inventory - Beginning inventory = $1,000 + $500 - $400 = $1,100
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
117.
Lighting Inc.'s sales budget showed the following projections for the coming year:
Inventory on December 31 of the current year is expected to be 20,000 units. The quantity of
finished goods inventory at the end of each quarter was to equal seven percent of the next
quarter's budgeted units to be sold.
Required: Calculate the units to be produced during the third quarter.
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
118.
Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars.
Management also wants to have $300 in inventory at the end of the month to prepare for the
summer season. Beginning inventory in May was $200.
Required: What dollar amount of flea collars should be purchased to meet the above
objectives?
Answer may vary
Feedback: Required purchases = Estimated sales (at cost) + Desired ending inventory Beginning inventory = $6,000 + $300 - $200 = $6,100
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
119.
Allmakes Software budgeted August purchases of new software at $140,000.The store had
software costing $6,000 on hand at the beginning of August, and to cover part of anticipated
back-to-school sales in September they expect to have $15,000 of software on hand at the
end of August.
Required: What was the budgeted cost of goods sold for August?
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
120.
Helen Auger has seen the Centicle Group, a not-for-profit, in-home health care organization,
grow during the past ten years to a $500 million revenue, multi-state organization. Helen was
promoted to her controller position six months ago, after serving capably in several financial
accounting positions at the Centicle Group.
At a Budget Review Committee meeting last Friday, several committee members expressed
frustration with the pace of the budget development. They described the newly introduced
"bottom up" system of participative budgeting as "unwieldy," "slow-paced," and "repetitive."
Helen's objective in introducing the participative approach was to involve to a much greater
extent lower level supervisors and employees. Helen is meeting with the Budget Review
Committee again tomorrow when she plans to explain the advantages of "bottom up" versus
"top down" approaches to the budgeting process.
Required: Helen has asked you to help her prepare for tomorrow's meeting by preparing the
following:
1. A 40 -50 word description of participative budgeting, including some basic advantages of
this approach to budgeting.
2. A brief, one-paragraph explanation of the concept of "budget ownership," one of the values
that participative ("bottom up") budgeting is said to have.
Answer may vary
Feedback: 1. Participative ("bottom up") budgeting is an approach to the budgeting process
that requires an upward flow of information, goal setting and justification. The primary
objective is to get employees to "buy into" the final budget because they are truly involved in
its preparation. Advantages of participative budgeting include:
1. Better data comes from the person who creates the data.
2. People involved in a process feel included.
3. People who help set their own goals are likely to be more motivated to achieve those goals.
4. Better communication links are created through the participative budgeting process.
5. More realistic levels of "slack" are created.
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6. A sense of "ownership" develops for those involved in the budgeting process.
2. "Budget ownership" develops from a sense that "I helped create this." This sense of owning
leads to a better attitude, more effective budget preparation, more realistic budget data, and a
heightened understanding of the budget and evaluation processes. Although the participative
approach requires more initial employee time, the rewards (more realistic budgets, higher
employee motivation, and the general sense of really being involved) can more than offset the
higher cost and slower pace in budget development.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
Topic: Service
121.
A business develops a budget for many reasons beyond wanting to know what future profits
will be. Comment on the role of a firm's strategic goals in both the master budget and the
capital budget.
Answer may vary
Feedback: Strategic goals can be either short-term or long-term. If short-term, the master
budget should reflect those stated strategic goals in terms of revenue creation or resource
allocation. Capital budgets normally reflect long-term strategic goals, for example, expansion
of physical facilities or addition of a product line. The master budget should serve as the
device that shows how strategic goals can be realized.
AACSB: Analytic
Difficulty: 1 Easy
Learning Objective: 10-02 Discuss the importance of strategy and its role in the master budgeting process
Topic: Strategy
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122.
Kurt Helfter graduated with a B.S. degree in Mechanical Engineering and joined Andrew
Consulting, a firm specializing in HVAC (heating, ventilation, and air conditioning) for small to
medium-size business structures. Kurt is knowledgeable in the use of CAD (computer-assisted
design) and was pleased during his initial employment to find Andrew Consulting a leader in
the use of CAD software.
During Kurt's third year at Andrew, he felt a sense of unease with the firm's slow pace in
updating computer hardware and software. Although not directly involved in budgeting for the
firm, Kurt has been satisfied with the resources that Andrew provided for his use. Kurt felt the
need to detail his concerns in a memo to his superior, in which he requested significant
investment in computer resources to "allow us to respond to clients' needs, both in quantity
and quality." Kurt was surprised and hurt when he received his superior's response, which
suggested that resource allocation in the firm is decided at a higher administrative level. "But
all I wanted to do was help keep our firm competitive," Kurt responded to his boss when
visiting him about the rejection memo. "Sorry, Kurt," his boss said, "That's how things get done
in this firm." Kurt now feels lost, wondering if it's time to look for another job.
Does this situation suggest what type of budgeting process the company is using? Is there a
problem with individual and company goal congruence in Andrew Consulting? If so, how might
Kurt's supervisor have prevented the problem?
Answer may vary
Feedback: Kurt believed the company would maintain its competitive edge by updating
computer hardware and software. His personal goal is now in conflict with what he sees as the
company's failure to achieve one of its goals, whether stated or not.
Communication seems poor in this situation, and the failure of Andrew Consulting
management to include all employees in the budgeting process has made this particular
situation worse. One significant advantage of participative (bottom up) budgeting is the high
level of communication it requires between administrative levels. Kurt's boss has obviously
adjusted to the existing budgeting process, which appears to be a "top down" traditional
system. He should have let Kurt know how the existing budgeting system operated, and then
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
have served as a conduit for Kurt's suggestions.
Difficulty: 2 Medium
Learning Objective: 10-01 Describe the role of budgets in the overall management process
Topic: Strategy
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forwarded, distributed, or posted on a website, in whole or part.
123.
Discuss the components of each of the following manufacturing cost budgets:
1. Production budget
2. Direct materials purchases budget
3. Direct labor budget
4. Factory overhead budget
5. Cost of goods manufactured budget
6. Cost of goods sold budget.
Answer may vary
Feedback: 1. A production budget—this schedule shows the number of units to be produced
for an upcoming period, as a function of: the units of finished goods on hand at the beginning
of the period, the estimated sales (in units) for the period, the desired (or targeted) finished
goods inventory, and shows the number of units to be produced.
2. A direct materials purchases budget—this schedule shows, in both physical units and in
dollars, the amount of materials, parts, and components to be purchased for an upcoming
period, as a function of: the amount of direct materials needed to meet planned production; the
desired (i.e., targeted) ending inventory of direct materials, and the amount of direct materials
on hand at the beginning of the budget period.
3. A direct labor budget shows, by labor class (e.g., semiskilled vs. skilled), the labor hours
and associated labor cost (based on budgeted wage rates) needed to meet planned
production for an upcoming period.
4. A factory overhead budget. This schedule uses the overhead base (or driver) to determine
the total budgeted factory overhead (broken down into fixed and variable subcategories) for an
upcoming period. Typically, line items for individual overhead cost components are included
on this schedule.
5. The Cost of Goods Manufactured Budget shows the budgeted manufacturing cost, broken
down in three cost elements (direct materials, direct labor, and manufacturing overhead), for
planned production.
6. The Cost of Goods Sold Budget shows the budgeted total manufacturing cost associated
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forwarded, distributed, or posted on a website, in whole or part.
with forecasted sales volume. It is equal to: Cost of Goods Manufactured + Desired (Targeted)
Ending Inventory of Finished Goods - Beginning Inventory of Finished Goods.
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
124.
Ardan Company's sales budget showed the following projections for the coming year:
Inventory on December 31 of the current year is expected to be 3,000 units. The quantity of
finished goods inventory at the end of each quarter was to equal five percent of the next
quarter's budgeted units to be sold.
Required: Calculate the units to be produced during the second quarter.
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
125.
Information pertaining to Yeks Company's budgeted sales revenue for the first quarter of the
year is presented below.
Management estimated that four percent of credit sales would be uncollectible. Of the
collectible credit sales, 60% would be collected in the month of sale and the remainder in the
month following the sale.
Required: Calculate total budgeted cash collections in February.
Answer may vary
Feedback:
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
126.
The budget committee for Amacom Company, with the help of the district sales manager,
projects sales of 80,000 units of its primary product next year. The budget committee and key
executives have decided that finished goods inventory should be decreased from the 10,000
units expected at the end of the current year, to 7,000 units at the end of next year. Each unit
of finished product requires three units of material MPS15 and six units of material NAV23. At
the end of the current year, the inventory of material MPS15 is expected to be 10,000 units
and material NAV23 is expected to be 20,000 units. The budget committee believes that these
material inventories can be reduced by 80% during the coming year because of the newly
installed supply chain system.
Required
1. Calculate the number of units Amacom expects to produce during the next year.
2. Compute the number of units that should be purchased of each of the raw materials in order
to produce the budgeted units and comply with inventory policy.
Answer may vary
Feedback:
1.
2.
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Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
127.
Willard Company anticipates that its fixed manufacturing overhead costs will be $50,000
during the next period. Its variable manufacturing overhead is expected to be $8 per unit
produced.
Required
1. What amount of overhead should be budgeted if the production budget shows that 40,000
units are to be produced?
2. What amount of overhead should be budgeted if the production budget shows that 50,000
units are to be produced?
3. Compute the total overhead cost per unit for requirements 1 and 2.
Answer may vary
Feedback: 1. Budgeted overhead if 40,000 units are produced = Budgeted Fixed Overhead +
Budgeted Variable Overhead = $50,000 + ($8/unit × 40,000 units) = $370,000
2. Budgeted overhead if 50,000 units are produced = Budgeted Fixed Overhead + Budgeted
Variable Overhead = $50,000 + ($8 x 50,000) = $450,000
3. Overhead cost per unit when 40,000 units are produced: $370,000 ÷ 40,000 units = $9.25
per unit; Overhead cost per unit when 50,000 units are produced: $450,000 ÷ 50,000 units =
$9 per unit. In other words, the cost per unit has decreased because spreading the fixed costs
($50,000) over a greater number of units in (2) relative to (1).
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
128.
Uecker Enterprise expects sales of 20,000 units of T1 in September. T1is its most popular
high performance desktop model. The sales manager is confident that, between October and
December, the total sales will have a 50% growth rate each month from the month before.
Each unit requires 40 sets of the Alpha-5 chip. The firm has a policy to maintain inventory at
the end of each month equal to 1% of the following month's estimated sales. The same policy
applies also to the chips and components required to assemble the finished product.
1. What is the budgeted production (in units) for each of the months September, October, and
November?
2. How many sets of Alpha-5 does the company plan to purchase in September and in
October?
Answer may vary
Feedback:
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
129.
Enterprise Tax Services (ETS) provides tax planning. The company billed 5,000 hours at $100
per hour for the year just completed. ETS, in planning next year's operations, is focusing on
increasing the company's share of the market. It proposes to do that by hiring more tax
specialists and by lowering its billing rate by 20% for work done by these new specialists. ETS
estimates that revenues generated from existing staff would increase in total by 40% as a
result of the new billing policy and that the additional specialists will provide additional billings
of 3,000 hours (at the reduced rate) during the coming year.
Required: Compute the budgeted revenue amount for next year based on ETS's plans and
projections.
Answer may vary
Feedback: 1. Budgeted revenue from existing staff = 1.40 × (5,000 × $100) = $700,000
2. Budgeted revenue from new staff = (3,000 hours × [80% × $100/hour]) = $240,000
3. Total budgeted revenue = $700,000 + $240,000 = $940,000
Difficulty: 1 Easy
Learning Objective: 10-06 Identify unique characteristics of budgeting for service companies
Topic: Service
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130.
Transcript Company is preparing a cash budget for February. The company has $150,000
cash at the beginning of February and anticipates total sales of $800,000, consisting of 25%
cash sales and 75% credit card sales. The bank charges 3 percent for credit card
transactions. The company sets its selling price at 160 percent of the cost of purchases and
pays for each month's purchases at the end of the month. Other cash disbursements are
$20,000 per month plus 4% of total sales. In addition, a $600,000 note will be due in February
for equipment purchased last August. Transcript Company has an agreement with its bank to
maintain a cash balance of $100,000.
Required: What amount, if any, must the company borrow during February?
Answer may vary
Feedback:
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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forwarded, distributed, or posted on a website, in whole or part.
131.
West Company budgeted the following credit sales during the current year: September,
$75,000; October, $108,000; November, $90,000; December, $96,000. Experience has shown
that cash from the credit sales is received as follows: 10% in the month of sale, 50% in the first
month after sale, 35% in the second month after sale, and 5% is uncollectible. All collections in
the month of sale are subject to 2 percent cash discount.
Required: How much total cash can West Company expect to collect in November?
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
132.
In preparing a budget for the first three months of the year starting in October, Dubya
Company is planning the number of units of merchandise to order each month. The company's
policy is to have 40% of the next month's sales on hand at the end of the current month.
Projected sales for October, November, and December are 40,000 units, 50,000 units, and
100,000 units, respectively.
Required: How many units must be ordered in November?
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
133.
The Shoecraft Company's budgeted sales for January, February, and March of $80,000,
$60,000, and $50,000, respectively. Seventy percent of sales are on credit. The company
collects 60% of its credit sales in the month following sale, 35% in the second month following
sale, and 5% is not collected. Shoecraft mailed all statements to credit customers at the end of
the month with a term of 1/30, n/60. What are Shoecraft's expected cash receipts for March?
Answer may vary
Feedback:
Difficulty: 1 Easy
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
134.
Papa Joe, Inc., is preparing its budget for the second quarter of the calendar year. The
following unit sales data have been forecasted:
Desired ending inventory each month: 30% of next month's estimated sales (in units)
Required:
1. How many units should be budgeted for production in June?
2. How many units should be budgeted for production in the second quarter?
Answer may vary
Feedback:
Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
135.
Dockille, Inc., is preparing its budget for the second quarter of the calendar year. The following
sales data (in units) have been forecasted:
Additional information:
Desired ending inventory each month--Finished goods: 30% of next month's sales
Desired ending inventory each month--Raw materials: 25% of next month's production needs
Number of raw material units required per finished unit: 4
Required: How many units of raw materials should be purchased in the 2 ndquarter?
Answer may vary
Feedback:
Difficulty: 3 Hard
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
136.
Olde Corporation is preparing a cash budget for the first two months of the coming year. The
following data have been forecasted:
Additional data:
(1) Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The collection
pattern for credit sales is 80% in the month following the month of sale (of which 75% are
collected within 10 days), and 20% in the month thereafter. Total sales in December of the
prior year were $1,000,000.
(2) Purchases are all on credit, with 40% paid in the month of purchase and the balance the
following month.
(3) Operating expenses are paid in the month incurred.
(4) The firm desires to maintain its cash balance at $150,000 at the end of each month.
(5) Loans are used to maintain the minimum cash balance. At the end of each month, interest
of 1% per month is paid on the outstanding loan balance as of the beginning of the month.
Repayments are made (at the end of the month) whenever the cash balance exceeds
$150,000.
Required: Prepare the cash budget, in the form of a statement of cash flow, for February.
What is the amount of the loan balance at the end of the month (after loan repayments, if
any)?
Answer may vary
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Feedback:
Difficulty: 3 Hard
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
137.
Grey Company is considering replacing its existing cutting machine with a new machine that,
according to the manufacturer, is more efficient in terms of energy consumption—a variable
cost of production. In this regard, it would like to do some financial planning, including "what-if"
analysis. Budgeted information regarding the two machines is as follows:
Required:
1. Determine the sales volume at which the costs are the same for both machines.
2. What amount of sales, in dollars, for the new machine would produce a 10% profit margin
(i.e. ratio of operating profit to sales = 10%)?
Answer may vary
Feedback: 1. Total cost equation (per month), existing machine: TC = $32,000 + $44X, where
X = outputTotal cost equation (per month), new machine: TC = $40,000 + $40X, where X =
output
Setting the two equations equal, we have:
$32,000 + $44X = $40,000 + $40X
4X = $8,000
X = $8,000 ÷ 4 = 2,000 units per month (the so-called break-even volume)
2. Required sales level, in dollars, to generate a target pre-tax profit of 10% on sales, under
the new machine:
Let X = required sales level (in dollars) to earn targeted profit
Let Q = required sales volume in units to earn targeted profit
Then, given a sales price of $55 per unit, we have: X = $55Q
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The basic profit equation is:
CM - FC = pre-tax (operating) profit
[($55 - $40)/unit × Q] - $40,000 = (10%) × $55Q
$15Q - $5.5Q = $40,000
Q = [$40,000 ÷ $9.50/unit] = 4,211 units
R = $55Q = $55/unit × 4,211 units = $231,605
Difficulty: 3 Hard
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
138.
As indicated in the text, sensitivity analysis is an important tool for dealing with uncertainty in
the budget preparation process. Which estimates, out of all that management has to deal with,
do you think are the most critical in terms of developing the master budget for the typical profitseeking organization?
Answer may vary
Feedback: The most critical estimates are the estimates related to sales demand. These
estimates provide the basis upon which all, or at least most of, the other plans in the master
budget are based. In this sense, it is the "cornerstone" of the master budgeting process.
Other critical estimates are those relating to the consumption of each factor of production
(such as raw materials, labor, and machine capacities) by each unit of production since these
estimates will play an important role in estimating total resource requirements and estimating
costs.
Difficulty: 1 Easy
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
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forwarded, distributed, or posted on a website, in whole or part.
139.
One of the behavioral considerations in implementing a budgeting system has to do with the
issue of budgetary slack. What are the positive and negative aspects of building slack into
budgets from top management's point of view, and the employee's point of view (i.e., the
individual responsible for building slack into the budget)?
Answer may vary
Feedback: Employee's Perspective:
From the employee's perspective, there are probably two benefits from building slack into the
budget. First, the employee may be able to obtain excess resources to achieve desired goals.
Consequently, this may reduce pressure on the employee and reduce job anxiety. Second,
senior management may lower their work expectations of the employee. This may also lead to
lower pressure on the employee to perform. Either way, the end result is a reduction in jobrelated stress for the employee. However, if incentives are graduated in such a way that
achieving higher and higher goals provides the employee with more and more compensation
in the form of bonuses, then the employee may lose income by selecting lower goals.
Top Management's Point of View:
From top management's point of view, employees who build in slack are either using
unnecessary resources to achieve a goal that should have been achievable with fewer
resources, or they are understating their performance capabilities (e.g., intentionally
underestimating sales demand or overstating the cost of planned production). Thus, the
organization is either not running as efficiently as it can, or is losing potential productivity from
employees who are not working as hard as they can. In some cases, senior management may
believe that employees build in slack to relieve job pressure. If burnout of employees has been
occurring in the organization then perhaps senior management may be more forgiving and
view some slack building as necessary to keep their employees from quitting.
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
Topic: Strategy
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140.
Omni, Inc. manages a medical-expense reimbursement program for colleges and universities
throughout the United States. University employees submit claims for reimbursement of
medical expenses from reimbursement accounts established each year by the employees.
Omni then processes reimbursement requests, verifies the legitimacy of each request,
computes the deductible and co-payment required, determines whether the employee's
expense reimbursement account has adequate funds available, and, if applicable, issues a
reimbursement check to the eligible employee.
Omni employs three different types of clerks who manage these reimbursement accounts:
managers, clerical staff-1, and clerical staff-2. The managers are each paid $50,000 per year,
clerical staff-1 employees are paid $40,000 per year, while clerical staff-2 employees are paid
$35,000 per year. Based on prior experience, for every 150,000 claims processed per year,
Omni needs to budget for one manager's position, two clerical staff-1 positions, and six clerical
staff-2 positions.
Last year, Omni processed 2 million reimbursement claims, and employed 14 managers, 30
clerical staff-1 employees, and 83 clerical staff-2 employees.
Required
1. Based on the data provided, calculate the cost savings or excess staffing costs for Omni
during the most recent year. (Assume that the policy of the company is to hire only full-time
employees.)
2. What managerial insights are suggested on the basis of your analysis? If you were
attempting to judge the processing efficiency of Omni's staff, what additional information might
you want to have?
Answer may vary
Feedback: 1. With 2,000,000 medical claims, Omni should employ the following staff (at
budgeted processing capabilities):
a) Managers: 13.33 = ((2,000,000 ÷ 150,000) × 1)
b) Clerical Staff-1: 26.67 = ((2,000,000 ÷ 150,000) × 2)
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c) Clerical Staff-2: 80.00 = ((2,000,000 ÷ 150,000) × 6)
Under the assumption that Omni hires only full-time people, it must round up to a full
employee. Thus, the budgeted number of people for last year's actual volume of claims
processed is: 14 managers, 27 clerical staff-1, and 80 clerical staff-2. The total cost of this
group would be $4,580,000 = (14 × $50,000) + (27 × $40,000) + (80 × $35,000).
The actual cost to this group was $4,805,000 = (14 × $50,000) + (30 × $40,000) + (83 ×
$35,000). Therefore, during the past year there was an excess labor-related claims-processing
cost of $225,000 (= $4,805,000 - $4,580,000) created by having 3 more senior clerks than
budgeted and 3 more junior clerks than budgeted.
2. The issue is why the clerical group is employing more people than it should for the workload
it faces. There are various reasons for this result, including training inefficiencies, continued
growth requiring more people, an inappropriate standard, overestimating requirements when
hiring took place, and processing inefficiencies. The report from the manager of this unit
should identify the amount of the excess spending, its cause, and what will be done to correct
the variance.
Note, however, that processing cost is but one important performance dimension. In assessing
employee performance, quality, processing speed, accuracy, and other nonfinancial
performance indicators might be monitored as part of the on-going control process.
Difficulty: 2 Medium
Learning Objective: 10-06 Identify unique characteristics of budgeting for service companies
Topic: Service
Topic: Strategy
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141.
The Bambola Doll Company produces a single product: an inexpensive plastic toy doll. This
item sells for $4.00 per unit, and has variable costs (manufacturing plus marketing) of $2.50
per unit. Monthly fixed costs amount to approximately $60,000. Last month, sales reached
100,000 units. Management would like to do some financial planning, the end result of which
would—it is hoped—be even better future financial performance. As a management
accountant you have been asked to construct a planning model and to conduct "what-if"
analyses with the model you develop.
Management has told you to consider the following options, all of which have the potential to
increase the profitability of the company:
A) Increase monthly promotional and advertising costs.
B) Increase raw material quality and increase the product selling price.
C) Increase the product selling price, with no increase in the raw material costs.
Required:
1. The sales manager of the company is fairly confident that a well-done marketing campaign
could increase sales volume substantially, perhaps as much as doubling sales from the
current position. The president of the company would like to increase operating profits by 50%
over those of the most recent month. You are asked to determine how much the company
could afford to spend on an intensive marketing campaign, in order to achieve the projected
doubling of sales volume?
2. As an alternative to 1 above, assume that the company increases the quality of its raw
materials going into the manufacturing of its product. This increase would result in a new
variable cost per unit of $3.00. What is the required increase in selling price per unit that would
be needed to maintain the same break-even volume as currently exists?
3. As a final alternative, assume that the company has decided to increase the selling price of
its product by $1 per unit, with no accompanying marketing and promotion campaign. What is
the unit sales volume needed, with the new selling price, for the company to make the same
amount of profit as it did last month?
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Answer may vary
Feedback: 1. Target profit level (coming month) = 150% × existing operating profit per month
Existing profit level = CM - FC = [($4.00 - $2.50)/unit × 100,000 units] - $60,000
= $150,000 - $60,000 = $90,000
Next month's profit target = $90,000 × 1.50 = $135,000
Let X = the maximum amount that can be spent on advertising. If sales volume doubles, then
new volume = 2 × 100,000 units = 200,000 units per month. Then,
[($4.00 - $2.50)/unit × 200,000 units)] - $(60,000 + X) = $135,000 and, X = $105,000
2. Let X = required units to break-even. In the current situation, we have:
[($4.00 - $2.50)/unit × X] - $60,000 = $0
X = 40,000 units per month
Now, let sp = the required selling price per unit. Thus,
[(sp - $3.00)/unit × 40,000 units] - $60,000 = $0\ sp = $4.50 per doll (i.e., an increase of $0.50
per unit)
In other words, if everything else is held constant, the company must increase its selling price
by the same dollar increase as the increase in its variable cost per unit if it wants to maintain
the same profit level (including a profit level of $0, the break-even point).
3. Again, let X = required sales volume (to earn the same profit as the company earned last
year, assuming only an increase in the selling price per unit)
Existing operating profit per month (part 1 above) = $90,000
Therefore: [(($5.00 - $2.50)/unit) × X] - $60,000/month = $90,000/month, and, X = 60,000 units
Difficulty: 3 Hard
Learning Objective: 10-05 Deal with uncertainty in the budgeting process
Topic: Strategy
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142.
Over the years, alternative approaches to traditional budgeting practices have been proposed
to facilitate budget preparation and usefulness. First, define what is meant by the term
"traditional budgeting." Next, compare and contrast the following alternative budgeting
approaches to a traditional budgeting process: Zero Base Budgeting (ZBB); Activity-Based
Budgeting (ABB); Time-Driven ABB; and, kaizen budgeting.
Answer may vary
Feedback: 1. Traditional budgeting:a traditional budgeting process is incremental in nature,
i.e., starts with the information from the most recent budget. Such budgetary amounts are then
adjusted (upwards or downwards), usually by some percentage amount. This process
inherently assumes that most, if not all, current activities and functions will continue into the
budget period. As such, the primary focus in a typical budgeting process is on changes to the
current operating budget.
2. Zero-base budgeting (ZBB):as implied by its name, ZBB requires budgeting each period
from a zero starting point, i.e., from a zero base (hence the name ZBB). This practice can be
compared to traditional budgets that in many cases are "incremental in nature" (e.g., "last
year's amount, plus 5%"). ZBB specifies that no activities or functions can be included in the
budget unless specifically justified. ZBB requires budgeting teams to perform in-depth reviews
of all budget items.
3. Activity-based budgeting (ABB): ABB is based on cost information generated by a traditional
activity-based cost (ABC) system, that is, a system that relies on a framework of cost drivers
classified as unit-level, batch-level, customer-sustaining, and product-sustaining level. ABB
essentially works backwards from planned sales (volume and mix) forecasts for an upcoming
period to determine budgeted support activities needed to support those plans. Finally, the
cost of resources needed to perform this expected set of activities is budgeted. In short, ABB
focuses on the activities and associated support resources (costs) needed to satisfy the
projected level of customer demand for an upcoming period.
4. Time-driven activity-based budgeting (TDABB): as indicated in Chapter 5, TDABC is a
modern extension (actually, a simplification) of traditional ABC. TDABC allocates most support
(indirect) costs not on the basis of unit-level, batch-level, and product-level cost drivers by on
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the basis of time-based equations. That is, resource consumption for each indirect/support
cost pool is viewed as a function of time. As with activity-based budgeting (ABB), TDABB
works backwards from forecasted sales volume and sales mix to estimate resource spending
needed to support production and sales plans. That is, the organization estimates resource
requirements in each process/department that would occur IF the production and sales
forecasts for the upcoming period were realized. Advocates of TDABC posit that TDABB
streamlines, potentially in a significant way, the budget-preparation process.
5. Kaizen budgeting: under this approach, the budget incorporates continuous-improvement
expectations. That is, successive budgets adjust resource demands and resource
consumption based on targeted efficiency and productivity gains. Note that such budgets can
be used both internally as well as externally (e.g., in conjunction with suppliers).
Difficulty: 3 Hard
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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143.
Compare and contrast traditional budgeting and activity-based budgeting (ABB) along the
following dimensions: budgeting unit; primary focus; time orientation; roles of suppliers and
customers; and, control objective.
Answer may vary
Feedback:
Difficulty: 2 Medium
Learning Objective: 10-07 Understand alternative approaches to budgeting (zero-base budgeting; activity-based budgeting;
time-driven activity-based budgeting; and kaizen budgeting)
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forwarded, distributed, or posted on a website, in whole or part.
144.
As indicated in the text, one of the behavioral issues associated with budgeting deals with the
linkage of employee compensation to budgeted performance. In this regard,
distinguishbetween so-called fixed performance contracts (i.e., a traditional approach) and the
following two recommended alternatives: (1) linear compensation plans, and (2) the use of
relative performance (relative improvement) contracts along with "rolling financial forecasts."
With respect to the use of fixed performance contracts, define what is meant by the term
"gaming the performance indicator." With respect to the use of relative performance contracts,
define what is meant by the term "rolling financial forecasts."
Answer may vary
Feedback: Under a "traditional model" employee reward/compensation is linked to budgetary
performance, that is, comparison of actual results to budgeted results (where budgeted results
are determined along the lines discussed in Chapter 10). This type of compensation/reward
plan is sometimes referred to as a "fixed performance contract" because actual performance
(ales, operating income, net income, return on sales, return on investment, etc.) is compared
to a fixed (budgeted) target. Experience shows that such an incentive model can have
undesirable consequences (e.g., it may encourage managers to submit biased information in
their budgets, that is, excessive amounts of ‘budgetary slack"). Another dysfunctional
consequence of using fixed performance contracts is that such contracts may encourage
managers to game the performance indicator, that is, to take actions that make the
performance indicator look better but that do not increase the value of the firm.
Given criticisms of so-called "fixed performance contracts," at least two alternative plans have
been introduced:
(a) Linear Compensation Plans—the idea here is essentially to sever the relationship between
budgets and managerial compensation. In such a situation, managerial reward is a linear
function of actual performance, and not a function of actual performance relative to budgets:
the greater the actual performance, the greater the managerial reward. Put another way, such
a plan rewards individuals for what they actually do, not what they do relative to what they say
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they can do.
(b) Relative Performance (Relative Improvement) Contracts—under this plan managers would
be rewarded for how their respective business units perform relative to some appropriate
benchmark performance, not relative to a fixed budget target. To complement the use of
relative performance contracts, some recommend the use of "rolling financial forecasts" rather
than a traditional master annual master budget (as described in the text). Such forecasts
provide a constant planning horizon but more important are disassociated from performance
evaluation and control. The overall intent is to motivate and allow employees to adapt to
changing environments (including newly identified competitive threats)
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
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145.
One of the behavioral considerations associated with the budgeting process relates to the
difficulty level embodied in the budget (i.e., how difficult or easy it is to achieve budgeted
results).
1. Explain the negative consequences of budgetary targets that are too easy or too difficult to
achieve.
2. What is meant by the term "highly achievable (budget) target"?
3. What are the primary advantages of using "highly achievable targets" in terms of budgetary
expectations?
Answer may vary
Feedback: 1. The issue of the "difficulty level" of the budget target relates to the
motivational/incentive effects of the budget. An overly easy ("loose") budget may fail to
encourage employees to give their best efforts. On the other hand, a budget target that is very
difficult to achieve (i.e., one that is overly "tight") may discourage managers from even trying to
attain it. Man would agree, therefore, that budget targets should be somewhere near these two
extremes, i.e., challenging yet attainable.
2. The notion of a "highly achievable" is an attempt to specify or operationalize what is meant
by a "challenging yet attainable" budget target. One set of researchers has indicated that such
budgets are those that are achievable by most managers 80%-90% of the time.
3. Based on the research by Merchant and Manzoni (1989) and Merchant (1990), the following
behavioral benefits are associated with the use of "highly achievable budgetary targets,"
particularly when accompanied by extra rewards for performances exceeding the target.
• Increasing managers' commitment to achieving the budget target
• Maintaining managers' confidence in the budget
• Decreasing the cost of organizational control
• Reducing the risk that managers will engage in harmful "earnings management" practices
or violate corporate ethical standards
• Allowing effective and efficient managers greater operating flexibility
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• Improving the predictability of earnings or operating results
• Enhancing the usefulness of a budget as a planning and coordinating tool
Difficulty: 2 Medium
Learning Objective: 10-08 Discuss various behavioral considerations in budgeting
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146.
Transcript Company is preparing a cash budget for February.
• The company has $150,000 cash at the beginning of February and anticipates total sales of
$800,000, consisting of 25% cash sales and 75% bank credit-card sales.
• The bank charges 3 percent for credit-card deposits.
• The firm sets its selling price at 160 percent of the cost of purchases and pays the cost of
each month's sales at the end of the month.
• Operating expenses are $45,000 per month, of which $25,000 is depreciation expense.
Selling expenses (commissions) amount to 4 percent of total sales dollars.
• In addition, a $600,000 note will be due in February for equipment purchased last August. In
addition to the principal amount, interest for one month (at 12% per annum) will be paid in
February.
• Transcript Company has an agreement with its bank to maintain a minimum cash balance of
$100,000.
Required: Prepare in good form a cash budget that shows the amount, if any, that the
company must borrow during February. Separate your budget, at a minimum, into the
following categories:
Beginning Cash Balance
Operating Cash Flows (Both Inflows and Outflows)
Cash Balance before Financing Effects
Financing Activity
Ending Cash Balance
Answer may vary
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Difficulty: 2 Medium
Learning Objective: 10-04 Prepare a master budget and explain the interrelationships among its supporting schedules
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.