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Question 1 - CMA 691 3-11 - Budget Methodologies
When budgeting, the items to be considered by a manufacturing firm in going from a sales quantity budget to a
production budget would be the
A. Expected change in the quantity of work-in-process inventories.
B. Expected change in the quantity of finished goods and raw material inventories.
C. Expected change in the availability of raw material without regard to inventory levels.
D. Expected change in the quantity of finished goods and work-in-process inventories.
A. The expected change in the level of finished goods inventories should be considered as well in the development
of the production budget.
B. The expected change in the work-in process inventory level, not the raw materials inventories levels should be
considered in determining the production budget.
C. The existing levels of inventories of work-in-process and finished goods are both considered in the determination
of production levels.
D. To decide what quantity should be manufactured during a period given the amount of sales for the
period, the levels of finished goods inventory and work-in-process inventories should also be considered.
Question 2 - CMA 692 3-27 - Budget Methodologies
Esplanade Company, which has the following historical pattern for its credit sales:
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
The sales on open account have been budgeted for the last 6 months of the year as shown below.
July
$60,000
August
70,000
September 80,000
October
90,000
November 100,000
December 85,000
The estimated total cash collections during October from accounts receivable would be
A. $21,400.
B. $84,400.
C. $86,700.
D. $63,000.
A. This amount does not include cash collected in October from October's sales but only the collections from July,
August and September sales collected in October.
B.
Cash collections in October represent cash collections from sales made in October as well as collections
from sales made in previous months according to the cash collection schedule, as follows:
October sales × .70 = $90,000 × .70 = $63,000
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September sales × .15 = $80,000 × .15 = $12,000
August sales × .10 = $70,000 × .10 = $7,000
July sales × .04 = $60,000 × .04 = $2,400
Total collections = $63,000 + $12,000 + $7,000 + $2,400 = $84,400
C. This is amount of total cash collected in December. See the correct answer for a complete explanation.
D. This is amount of cash collected in October from October sales. See the correct answer for a complete
explanation.
Question 3 - IMA 08-P2-46 - Budget Methodologies
Krouse Company is in the process of developing its operating budget for the coming year. Given below are selected
data regarding the company's two products, laminated putter heads and forged putter heads, that are sold through
specialty golf shops.
Putter Heads
Forged
Laminated
Raw materials:
Steel
2 pounds @ $5/pound
1 pound @ $5/pound
Copper
None
1 pound @ $15/pound
Direct labor
1/4 hour @ $20/hour
1 hour @ $22/hour
Expected sales (units)
8,200
2,000
Selling price per unit
$30
$80
Ending inventory target (units)
100
60
Beginning inventory (units)
300
60
Beginning inventory (cost)
$5,250
$3,120
Manufacturing overhead is applied to units produced on the basis of direct labor hours. Variable manufacturing
overhead is projected to be $25,000, and fixed manufacturing overhead is expected to be $15,000.
The estimated cost to produce one unit of the laminated putter head is
A. $52.
B. 42.
C. $46.
D. $62.
A.
We need to (1) determine the overhead application rate to be used, (2) calculate the amount of overhead to
be applied to each unit of laminated putter heads, and then (3) use that along with the other information
given on direct materials and direct labor cost to calculate the total cost for one laminated putter head.
(1) Determine the overhead application rate: We will use a combined overhead application rate (variable and
fixed OH), since the problem does not give enough information to split it out. Since the overhead is to be
applied to both products, we must have production amounts for both products in order to determine the
application rate per hour of direct labor to be used in producing both products.
(1a) Calculate the number of units to be manufactured of each product: The inventory equation is Beginning
Inventory in Units + Manufactured Units Sold Units = Ending Inventory in Units
Forged: 300 + Manufactured Units
8,200 = 100. Manufactured Forged Units = 8,000.
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Laminated: 60 + Manufactured Units
2,000 = 60. Manufactured Laminated Units = 2,000.
(1b) Calculate the number of direct labor hours required for production of both products:
Forged: 8,000 units × 1/4 hour per unit = 2,000 hours.
Laminated: 2,000 units × 1 hour per unit = 2,000 hours.
Total number of direct labor hours: 2,000 + 2,000 = 4,000.
(2) Calculate the amount of overhead to be applied to each unit of Laminated:
Total overhead of $25,000 variable plus $15,000 fixed = $40,000. $40,000 divided by the 4,000 total number of
direct labor hours = $10 per direct labor hour.
Each unit of Laminated requires 1 hour of direct labor. Therefore, the amount of overhead to be applied to
each unit of Laminated will be $10 × 1, or $10.
(3) Calculate the total cost for one Laminated Putter Head:
Raw materials:
1 pound steel @ $5/pound
$ 5
1 pound copper @ $15/pound
15
Direct labor:
1 hour @ $22/hour
22
Overhead:
1 direct labor hour @ $10/DLH
10
Total
$52
B. This is the material and labor cost for a laminated putter, but it does not include any applied overhead.
C. This amount includes applied overhead in the amount of $4 per unit, which is total overhead of $40,000 divided by
the 10,000 total units to be produced. However, the problem indicates that overhead should be based on direct labor
hours used, and the two products do not require the same number of direct labor hours to manufacture. The number
of hours required to produce each unit provides the basis for overhead allocation.
D. This amount includes applied overhead in the amount of $20, which is total overhead of $40,000 divided by the
2,000 total units to be produced of Laminated Putter Heads. This means that all of the overhead is being applied to
the Laminated Putter Heads and none to the Forged Putter Heads. The total overhead needs to be allocated to both
products on the basis of direct labor hours used by each product.
Question 4 - CMA 692 3-15 - Budget Methodologies
An organization that specializes in reviewing and editing technical magazine articles sets the following standards for
evaluating the performance of the professional staff:
Annual budgeted fixed costs for normal capacity level of 10,000 articles reviewed and edited: $600,000
Standard professional hours per 10 articles: 200 hours
Flexible budget of standard labor costs to process 10,000 articles: $10,000,000
The following data apply to the 9,500 articles that were actually reviewed and edited during the current year:
Total hours used by professional staff: 192,000 hours
Flexible costs: $9,120,000
Total cost: 9,738,000
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Using a flexible budget, the total cost planned for the review and editing of 9,500 articles should be
A. $10,570,000.
B. $9,500,000.
C. $10,100,000.
D. $10,070,000.
A. Fixed costs are the same ($600,000) regardless to the level of production. This answer is calculated incorrectly by
adjusting the fixed costs downward for production. Variable labor costs, however, change with the level of production
and need to be $9,500,000 [($10,000,000 ÷ 10,000) × 9,500].
B. This is the variable labor costs only [($10,000,000 / 10,000) × 9,500].
C. The annual budgeted fixed costs for the normal capacity level of 10,000 articles reviewed and edited is
$600,000 and it is the same for any other level of output, as fixed costs do not vary with the production level.
The standard labor costs for the 9,500 articles is $9,500,000 [($10,000,000 ÷ 10,000) × 9,500]. The fixed costs
plus the labor cost equal the total flexible budget cost planned for the review and editing of 9,500 articles:
$600,000 + $9,500,000 = $10,100,000.
D. Fixed costs are the same regardless to the level of production. This answer is calculated incorrectly by adjusting
the fixed costs downward for production.
Question 5 - IMA 08-P2-08 - Budget Methodologies
Which one of the following is not an advantage of a participatory budgeting process?
A. Control of uncertainties.
B. Coordination between departments.
C. Goal congruence.
D. Communication between departments.
A. Under any budgeting process, there will always be uncertainties that cannot be estimated or controlled,
and this will be true with a participatory budgeting process as much as with any other type of budgeting
process.
B. This is an advantage of participatory budgeting.
C. This is an advantage of participatory budgeting.
D. This is an advantage of participatory budgeting.
Question 6 - CMA 1294 3-7 - Budget Methodologies
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement of
Financial Position for the year ended November 30, is as follows:
Super Drive
Statement of Financial Position
November 30
Assets
Cash
Accounts receivable, net.
Inventory
Property, plant and equipment
Total assets
$52,000
150,000
315,000
1,000,000
$1,517,000
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Liabilities and Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders equity
$175,000
900,000
442,000
$1,517,000
Additional information regarding Super Drive's operations include the following:
Sales are budgeted at $520,000 for December and $500,000 for January of the next year.
Collections are expected to be 60% in the month of sale and 40% in the month following the sale.
80% of the disk drive components are purchased in the month prior to the month of sale, and 20% are
purchased in the month of sale. Purchased components are 40% of the cost of goods sold.
Payment for the components is made in the month following the purchase.
Cost of goods sold is 80% of sales.
The budgeted cash collections for the month of December are
A. $462,000
B. $520,000
C. $402,000
D. $208,000
A. Cash collections are equal to 60% of the December sales plus all of the accounts receivable from the
beginning of the period: ($520,000 × 60%) + $150,000 = $462,000.
B. This is the budgeted level of sales for December. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is 40% of the budgeted December sales. See the correct answer for a complete explanation.
Question 7 - IMA 08-P2-36 - Budget Methodologies
Netco's sales budget for the coming year is as follows.
Item Volume in Units Sales Prices Sales Revenue
1
200,000
$50
$10,000,000
2
150,000
$10
1,500,000
3
300,000
$30
9,000,000
Total Sales Revenue: $20,500,000
Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience indicates
that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Netco is considering a 10%
price increase for the coming year for Item 1, which will cause sales of Item 1 to decline by 20%, while
simultaneously causing sales of Item 3 to increase by 5%. If Netco institutes the price increase for Item 1, total sales
revenue will decrease by
A. $850,000
B. $1,050,000
C. $550,000
D. $750,000
A. This answer results from reducing Product 1's quantity by 10% instead of 20% and from not changing the price for
Product 1.
B.
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To solve this, work out a revised budgeted revenue figure, compare it with the original budgeted revenue as
given in the problem, and the difference is the answer, as follows:
Product
Quantity
Price
Revenue
1
(200,000 * .80) ($50 * 1.1) $ 8,800,000
2
(150,000 * .80)
$10
1,200,000
3
(300,000 * 1.05)
$30
9,450,000
$19,450,000
Original Revenue: 20,500,000
Decrease: $ 1,050,000
C. This answer is incorrect. See the correct answer for an explanation.
D. This answer results from not calculating the reduced sales of Product 2. The problem states that Product 2 is a
complement of Product 1, and that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant.
Therefore, if the quantity sold of Product 1 decreases, the quantity sold of Product 2 will decrease by a
proportionately equal amount.
Question 8 - CMA 1294 3-18 - Budget Methodologies
Simpson Inc. is in the process of preparing its annual budget. The following beginning and ending inventory levels (in
units) are planned for the year ending December 31.
Beginning Ending
Inventory Inventory
Raw material*
40,000
50,000
Work-in-process
10,000
10,000
Finished goods
80,000
50,000
*Two units of raw material are needed to produce each unit of finished product.
If 500,000 finished units were to be manufactured for the year by Simpson Inc., the units of raw material that must be
purchased would be
A. 990,000 units.
B. 1,000,000 units.
C. 1,020,000 units.
D. 1,010,000 units.
A. This answer incorporates a decrease in the raw materials inventory during the year instead of an increase. See
the correct answer for a complete explanation.
B. This is the number of units of raw materials needed for production. However, it does not take the materials
inventory level increase into consideration. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. We know that two units of material are needed to produce each unit of finished good. Since 500,000
finished units are to be manufactured, the number of units of raw materials needed for production is
1,000,000. The inventory level of raw materials also is to increase during the year by 10,000, so 1,010,000
units of raw materials will need to be purchased during the year.
Question 9 - CMA 1295 H1 - Budget Methodologies
Which one of the following statements regarding the difference between a flexible budget and a static budget is
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correct?
A. A flexible budget is established by operating management, while a static budget is determined by top
management.
B. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for performance
evaluation.
C. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs.
D. A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs
for one level of activity.
A. There are a number of methods of developing budgets: participative budgeting, bottom-up budgeting, top-down
approach, etc. Any level of management can establish either a flexible budget or a static budget.
B. Both, flexible and static budget are usually prepared for planning and performance evaluation purposes.
C. Both flexible and static budget include variable and fixed costs.
D. The static budget is based on the level of output planned at the start of the budget period. A flexible
budget is developed using budgeted revenues and costs amounts based on the level of actual output
achieved in the budget period. The major difference between a flexible budget and a static budget is the use
of the actual output level in the flexible budget, whereas the static budget uses the output level planned at
the beginning of the budget period.
Question 10 - CMA 1289 4-8 - Budget Methodologies
The foundation of a profit plan is the
A. Capital budget.
B. Sales forecast.
C. Cost and expense budget.
D. Production plan.
A. The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned.
This budget is not directly connected to all of the current period budgets and it is often prepared years in advance so
that the company is able to obtain the necessary financing or accumulate the necessary cash to carry out its capital
expansion plans.
B. The sales forecast is usually the first forecast to be prepared in the budgeting process. After the sales
level has been determined, the production budget and expense budget are prepared. Only after all of these
other budgets are done can profits be estimated.
C. Cost and expense budgets can not be calculated until the sales level is estimated.
D. The production plan can not be calculated until the sales level is estimated.
Question 11 - CMA 1293 H2 - Budget Methodologies
The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a
$200,000 line of credit with its bank at a 12% annual rate of interest on which borrowings for cash deficits must be
made in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal
repayments are to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there
are no outstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash
balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each
month by either borrowing for deficits below the minimum balance or investing any excess cash. Monthly collection
and disbursement patterns are expected to be:
Collections. 50% of the current month's sales budget and 50% of the previous month's sales budget.
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Accounts Payable Disbursements. 75% of the current month's accounts payable budget and 25% of the
previous month's accounts payable budget.
All other disbursements occur in the month in which they are budgeted.
Budget Information
March
April
May
Sales
$40,000 $50,000 $100,000
Accounts payable
30,000 40,000
40,000
Payroll
60,000 70,000
50,000
Other disbursements 25,000 30,000
10,000
In May, Raymar's budget will result in
A. Repay $20,000 principal and pay $1,000 interest.
B. Pay $900 interest.
C. Borrow an additional $20,000 and pay $1,000 interest.
D. Repay $90,000 principal and pay $100 interest.
A. Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus
in May so no principal would be repaid. See the correct answer for a complete explanation.
B. Interest was $1,000, not $900. Additional borrowings are needed as there is a cash deficit in May. See the correct
answer for a complete explanation.
C.
First, we need to determine what the interest is that has to be paid in May because interest is paid monthly.
To do this we need to determine if there were any borrowings made in April.
To determine what the April borrowings were, we need to first determine the cash collections for April: 50%
of April sales and 50% of March sales (or $25,000 + $20,000 = $45,000) will be collected in April. Then, we
need to determine the amount paid for accounts payable in April: 75% of April AP and 25% of March AP (or
$30,000 + $7,500 = $37,500) will be paid in April. Other disbursements are paid in the month they occur, and
for April they are: $70,000 for payroll plus $30,000 for other disbursements, totaling $100,000.
Subtracting the amount of cash outflows from cash inflows we get a $92,500 negative cash flow for the
month. We assume that beginning cash was $100,000 and ending cash also needed to be $100,000.
Therefore, the cash deficit for the month was the same as the cash flow: ($92,500).
Since borrowings for cash deficits must be made in $10,000 increments, the company needed to borrow
$100,000 to cover the $92,500 cash deficit so it could end the month with $100,000 in cash. Thus, we need to
pay $1,000 of interest on May 1 ($100,000 × (12% ÷ 12)). Note that we have a small cash surplus of $7,500 at
the beginning of May since we borrowed more than needed to cover deficit ($100,000 $92,500). The
beginning cash balance is therefore $100,000 + $7,500, or $107,500.
Now we need to determine cash inflows and outflows in May as we did for April. Cash collections in May are
50% of the April and May sales (50% × $50,000 + 50% × $100,000 = $75,000). Accounts payable that will be
paid in May are 75% of May's AP and 25% of April's AP ($40,000 × 75% + $40,000 × 25% = $40,000). Other
disbursements total $61,000 ($50,000 for payroll + $10,000 in other disbursements + $1,000 in interest for
borrowings during April). Subtracting the total disbursements from the collections in May we get a $26,000
negative cash flow ($75,000 $40,000 $61,000). However, adding to this ($25,000) to the cash surplus from
the beginning of the month we will get a deficit of for the month of only $18,500. Since borrowings for cash
deficits must be made in $10,000 increments, the company needs to borrow $20,000 to cover the $18,500
cash deficit of May and end the month with at least $100,000 in cash.
D. Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus
in May so no principal would be repaid. Also the interest is not $100. See the correct answer for a complete
explanation.
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Question 12 - CIA 590 IV-12 - Budget Methodologies
A firm desires a finished goods ending inventory equal to 25% of the following month's budgeted sales. January
sales are budgeted at 10,000 units and February at 12,000 units. Each unit requires 2 pounds of Material X, which
costs $4 per pound. The company has a just-in-time system and materials are delivered daily just prior to use, so no
raw materials inventories are maintained. Materials are paid for in the month following purchase. The January 1
finished goods inventory is 2,500 units. In February, what amount should the company expect to pay as a cash
outflow for raw materials?
A. $21,000
B. $84,000
C. $40,000
D. $42,000
A. This is the number of raw material purchases in January in pounds. See the correct answer for a complete
explanation.
B.
Since no materials inventory is kept on hand, the amount of materials purchased each month is equal to the
production requirements. Thus, the first thing we need to determine is the finished goods production in
January by using formula of physical flow of goods: Beginning Inventory + Units Produced Units Sold =
Ending Inventory.
Plugging the numbers for finished goods into the formula we get: 2,500 + Units Produced 10,000 = (.25 ×
12,000), or 2,500 + Units Produced 10,000 = 3,000. Solving for Units Produced, we get Units Produced =
10,500.
Since the company makes payment the month after the purchase, January raw material purchases will be
paid in February. Now we can determine the cash outlay for raw materials in February: 10,500 units × 2 lb. *
$4.00 = $84,000.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This answer ignores the fact that 2 lb. is necessary to produce one unit of finished product. See the correct
answer for a complete explanation.
Question 13 - CMA 1296 H9 - Budget Methodologies
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding
Karmee's sales for the first 6 months of the coming year are as follows:
Estimated
Type of
Monthly Sales Monthly Sale
January
$600,000
February
650,000
All Months:
March
700,000
Cash sales 20%
April
625,000 Credit sales 80%
May
720,000
June
800,000
Month
Collection Pattern for Credit Sales
Month of sale
One month following sale
30%
40%
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Second month following sale 25%
Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory
equal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month
following the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these
are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is
paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$720,000
Depreciation
420,000
Insurance
180,000
Property taxes 240,000
Salaries
1,080,000
Karmee Company's total cash receipts for the month of April will be
A. $707,400
B. $504,000
C. $653,000
D. $629,000
A. This is the collections in the month of June. See the correct answer for a complete explanation.
B. This answer does not include the cash sales in April. See the correct answer for a complete explanation.
C. This answer includes the bad debts from January sales. See the correct answer for a complete explanation.
D. In April the company receives the amount of April cash sales and the cash remitted for credit sales. We
know that 80% of sales are credit sales. In April the company will receive 30% of April credit sales, 40% of
March credit sales, and 25% of February credit sales. The cash sales in April will be $125,000 (20% ×
$625,000). The cash collections in April from credit sales will be as follows: From April credit sales cash
collections will be $150,000 ($625,000 × 80% × 30%). From March credit sales cash collections will be
$224,000 ($700,000 × 80% × 40%). From February credit sales cash collections will be $130,000 ($650,000 ×
80% × 25%). Adding these amounts together, the total cash collections in April will be $629,000 ($125,000 +
$150,000 + $224,000 + $130,000).
Question 14 - CMA 1296 H10 - Budget Methodologies
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding
Karmee's sales for the first 6 months of the coming year are as follows:
Estimated
Type of
Monthly Sales Monthly Sale
January
$600,000
February
650,000
All Months:
March
700,000
Cash sales 20%
April
625,000 Credit sales 80%
May
720,000
June
800,000
Month
Collection Pattern for Credit Sales
Month of sale
30%
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One month following sale
40%
Second month following sale 25%
Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory
equal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month
following the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these
are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is
paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$720,000
Depreciation
420,000
Insurance
180,000
Property taxes 240,000
Salaries
1,080,000
The amount of cash collected in March for Karmee Company from the sales made during March will be
A. $168,000
B. $140,000
C. $636,000
D. $308,000
A. This is the amount of cash collected in March from credit sales made in March. However, the amount of cash
collected from cash sales made in March must be included as well.
B. This is the amount of cash collected in March from cash sales made in March. However, the amount of cash
collected from credit sales made in March must be included as well.
C. This is the total cash collections in March and it includes collections from previous months' sales as well as from
March sales. However, the question asks for only the amount of cash collected in March from the sales made
during March.
D. In March Karmee Company will collect $140,000 (20% × $700,000) from the cash sales made in March and
$168,000 ($700,000 × 80% × 30%) from the credit sales made in March. The total amount of March sales
collected in March is $308,000.
Question 15 - CMA 1296 H5 - Budget Methodologies
The budgeting process should be one that motivates managers and employees to work toward organizational goals.
Which one of the following is least likely to motivate managers?
A. Participation by subordinates in the budgetary process.
B. Holding subordinates accountable for the items they control.
C. Use of management by exception.
D. Having top management set budget levels.
A. Participation in the budgetary process would motivate managers by giving them a sense of ownership of the
budget.
B. Holding subordinates accountable for the items they control would most likely motivate managers and encourage
a better performance.
C. Management by exception lets managers concentrate their attention on areas where problems are. This will likely
be a motivating item for managers as they will feel that their efforts are being directed where they are needed.
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D. A budget is a very useful tool in a number of areas: planning, control, evaluation, motivation,
communication, identifying future problems. However, when top management sets the budget without any
participation from those who will be responsible for meeting the budgeted goals, employees will not have a
sense of ownership of the plan. This will not be motivating and thus, not very effective.
Question 16 - CMA 691 3-15 - Budget Methodologies
Which one of the following schedules would be the last item to be prepared in the normal budget preparation
process?
A. Cash budget.
B. Direct labor budget.
C. Manufacturing overhead budget.
D. Cost of goods sold budget.
A. The cash budget is the last budget to be prepared because all other budgets are inputs to it.
B. The direct labor budget is part of the production budget, which is part of the operating budget. The production
budget is developed after the sales budget, but it is not the last budget to be prepared.
C. The manufacturing overhead budget is part of the production budget, which is part of the operating budget. The
production budget is developed after the sales budget, but it is not the last budget to be prepared.
D. The cost of goods sold budget is produced after the production budget. It is a part of the operating budget but it is
not the last budget to be prepared.
Question 17 - CMA 1291 3-25 - Budget Methodologies
Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 2
Year 1
Year 1
(Actual) (Budget) (Budget)
Cash sales
$80,000 $100,000 $60,000
Credit sales 240,000 360,000 180,000
Total sales $320,000 $460,000 $240,000
Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are
collected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal to
next month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the
month of purchase, and the remainder are paid in the month following the purchase.
Noskey Corporation's budgeted total cash payments in December Year 1 for inventory purchases are
A. $168,000
B. $405,000
C. $283,500
D. $220,500
A. This is the amount of purchases in December (of which only 25% are actually paid in December). See the correct
answer for a complete explanation.
B. This is purchases valued at the sales price, not the cost of goods sold (70% of purchased price). See the correct
answer for a complete explanation.
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C. In December the cash payments will be for 25% of the purchases made in December and for 75% of the
purchase made in November. December purchases are for the budgeted January sales and are equal to
$168,000 ($240,000 total January sales × 70% COGS). Thus, 25% of the December purchases is $42,000
($168,000 × 25%). November purchases were for the December sales and are equal to $322,000 ($460,000
total December sales × 70% COGS). Thus, 75% of November purchases is $241,500 ($322,000 × 75%). Adding
these two cash payments together, we get a total cash payment in December of $283,500 ($42,000 +
$241,500).
D. This answer is calculated based on credit sales only, and not total sales. See the correct answer for a complete
explanation.
Question 18 - CMA 691 3-12 - Budget Methodologies
Flexible budgets
A. Accommodate changes in the inflation rate.
B. Are used to evaluate capacity use.
C. Accommodate changes in activity levels.
D. Are static budgets that have been revised for changes in prices.
A. The inflation rate may be considered in various types of budgets, for example a fixed or static budget, a project
budget, or a flexible budget.
B. Flexible budgets are prepared for different levels of activity and do not evaluate the usage of capacity.
C. Flexible budgets are prepared for different levels of activity. In other words, a flexible budget is based on
the static budget, but variable revenues and variable expenses are adjusted upward or downward to reflect
the actual activity level. A flexible budget is more useful than a static budgetsas it allows the company to
compare the actual results with the budgeted results that have been adjusted for the actual level of activity.
D. Flexible budgets are prepared for different levels of activity. In other words, a flexible budget is based on the static
budget, but variable revenues and variable expenses are adjusted upward or downward to reflect the actual activity
level. The actual activity level might well change when prices change, but the flexible budget does not incorporate
changes in prices in its budgeted amounts, only changes in volume.
Question 19 - CMA 1296 H7 - Budget Methodologies
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding
Karmee's sales for the first 6 months of the coming year are as follows:
Estimated
Type of
Monthly Sales Monthly Sale
January
$600,000
February
650,000
All Months:
March
700,000
Cash sales 20%
April
625,000 Credit sales 80%
May
720,000
June
800,000
Month
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale 25%
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Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory
equal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month
following the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these
are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is
paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$720,000
Depreciation
420,000
Insurance
180,000
Property taxes 240,000
Salaries
1,080,000
The amount for cost of goods sold that will appear on Karmee Company's budgeted income statement for the
month of February will be
A. $254,000
B. $195,000
C. $260,000
D. $272,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. The sales are estimated to be $650,000 in February and the cost of goods sold averages 40% of the sales
value. Thus, the cost of goods sold in February is $260,000 ($650,000 × 40%).
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 20 - CMA 1291 3-23 - Budget Methodologies
Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 2
Year 1
Year 1
(Actual) (Budget) (Budget)
Cash sales
$80,000 $100,000 $60,000
Credit sales 240,000 360,000 180,000
Total sales $320,000 $460,000 $240,000
Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are
collected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal to
next month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the
month of purchase, and the remainder are paid in the month following the purchase.
Noskey Corporation's budgeted cash collections in December Year 1 from November Year 1 credit sales are
A. $91,200
B. $228,000
C. $136,800
D. $84,000
A. November credit sales are $240,000. However, 5% of this total is not collectible. Therefore, the total
November credit sales that will be collectible are only $228,000 ($240,000 × 95%). Of this amount, 40% of the
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collectible November credit sales will be collected in December. This is $91,200 ($228,000 × 40%).
B. This is the estimated credit sales made in November minus the uncollectible amount of November credit sales.
See the correct answer for a complete explanation.
C. This is the cash collection of November sales in November. See the correct answer for a complete explanation.
D. This represents 35% of the November credit sales. See the correct answer for a complete explanation.
Question 21 - CMA 691 3-4 - Budget Methodologies
DeBerg Company has developed the following sales projections for the calendar year.
May
June
July
August
September
October
$100,000
120,000
140,000
160,000
150,000
130,000
Normal cash collection experience has been that 50% of sales are collected during the month of sale and 45% in
the month following sale. The remaining 5% of sales is never collected. DeBerg's budgeted cash collections for the
third calendar quarter are
A. $422,500
B. $414,000
C. $427,500
D. $450,000
A. This is the budgeted collections for the periods from August through October. See the correct answer for a
complete explanation.
B.
The third calendar quarter is represented by July, August and September. In each of these months DeBerg's
collects 50% of that month's sales plus 45% of the previous month's sales as follows:
July: ($140,000 × 50%) + ($120,00 × 45%) = $124,000
August: ($160,000 × 50%) + ($140,000 × 45%) = $143,000
September: ($150,000 * 50%) + ($160,000 × 45%) = $147,000
In total, collections will be $124,000 + $143,000 + $147,000 = $414,000.
This question can also be solved by assuming that in the third quarter, the company collect 95% of July and
August sales plus 45% of June sales and 50% of September sales.
C. This is the amount of cash collected from sales made in the third calendar quarter.
D. This is the total sales for the third calendar quarter, not the cash collected.
Question 22 - CMA 1291 H2 - Budget Methodologies
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A planning calendar in budgeting is the
A. Schedule of activities for the development and adoption of the budget.
B. Sales forecast by months in the annual budget period.
C. Calendar period covered by the annual budget and the long-range plan.
D. Calendar period covered by the budget.
A. A planning calendar is a document that sets forth all of the deadlines as well as the policies and
procedures for the budgeting process. Therefore, it includes the scheduled activities and deadlines for the
budgeting process.
B. A planning calendar is not the monthly sales forecast. A planning calendar is a document that sets forth all of the
deadlines as well as the policies and procedures for the budgeting process.
C. A planning calendar is not the period covered by the annual budget and long-range plan. A planning calendar is a
document that sets forth all of the deadlines as well as the policies and procedures for the budgeting process.
D. A planning calendar is not the period covered by the budget. A planning calendar is a document that sets forth all
of the deadlines as well as the policies and procedures for the budgeting process.
Question 23 - CMA 1291 3-20 - Budget Methodologies
A continuous profit plan
A. Is a plan that is revised monthly or quarterly.
B. Works best for a company that can reliably forecast events a year or more into the future.
C. Is an annual plan that is part of a 5-year plan.
D. Is a plan devised by a full-time planning staff.
A. A continuous plan is one that is automatically prepared for a certain period of time ahead of the present.
For example, a 1-year continuous plan will be prepared at the end of every month for the next 12 months.
B. A continuous plan works for any company, whether or not they can accurately forecast more than a year into the
future.
C. A continuous plan does not need to be part of a larger 5-year plan.
D. A continuous plan may or may not be produced by a full-time planning staff.
Question 24 - CMA 1291 3-22 - Budget Methodologies
A systemized approach known as zero-base budgeting (ZBB)
A. Classifies budget requests by activity and estimates the benefits arising from each activity.
B. Presents a statement of expectations for a period of time but does not present a firm commitment.
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
D. Divides the activities of individual responsibility centers into a series of packages that are prioritized.
A. Activity-based budgeting, not zero-base budgeting, focuses on the budged cost of activities necessary to produce
and sell products and services.
B. Zero-based budgeting represents a firm commitment to the company just like any other budget.
C. This is a description of a static budget, not a zero-base budget. A static budget is a budget that is prepared for
only one level of activity within the company. A zero-base budget may be a static budget, but it may also be a flexible
budget.
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D.
Zero-based budgeting is the budgeting method in which the current year budget is prepared without any
reference to, or use of, the prior period's budget. This is quite different from a budget that is prepared by
looking at the current year's actual or budgeted amounts and simply adjusting them (usually increasing
them) for expected changes in the coming year.
Though this method is more time consuming and difficult for all of the people involved, there are a number
of advantages to the company as a result of using this method. Because the budget is built up from zero,
each manager must justify all of the expenses in his or her department. Each component is evaluated from a
cost-benefit perspective and priorities are determined. Zero-based budgeting enables the company to
identify expenses that are not value adding or that should be reduced due to some development in
production methods or something similar.
Question 25 - CMA 1295 H2 - Budget Methodologies
Based on past experience, a company has developed the following budget formula for estimating its shipping
expenses. The company's shipments average 12 lbs. per shipment:
Shipping costs = $16,000 + ($0.50 x lbs. shipped)
The planned activity and actual activity regarding orders and shipments for the current month are given in the
following schedule:
Plan
Actual
Sales orders
800
780
Shipments
800
820
Units shipped
8,000
9,000
Sales
$120,000 $144,000
Total pounds shipped
9,600
12,300
The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance
for shipping costs for the purpose of performance evaluation would be
A. $22,150
B. $20,800
C. $20,920
D. $20,680
A. There is a lot of information in this question, but much of it is not needed. We are told what the formula is
and that the actual shipping was 12,300 pounds. Putting this into the formula, we get: $16,000 + ($.50 ×
12,300) = $22,150.
B. This answer uses the planned number of pounds to be shipped. See the correct answer for a complete
explanation.
C. This answer uses the number of shipments instead of the number of pounds shipped. See the correct answer for
a complete explanation.
D. This answer uses the number of orders instead of the number of pounds shipped. See the correct answer for a
complete explanation.
Question 26 - CMA 1283 4-24 - Budget Methodologies
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Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's
operations are as follows:
Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.
Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
Gross margin is 25% of sales.
A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and
20% is purchased in the month of sale. Payment for merchandise is made in the month following the
purchase.
Other expected monthly expenses to be paid in cash are $22,600.
Annual depreciation is $216,000.
Below is Kelly Company's statement of financial position at November 30, year 1.
Assets
Cash
Accounts receivable
(net of $4,000 allowance for uncollectible accounts)
Inventory
Property, plant, and equipment (net of $680,000 accumulated deprecation)
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and stockholders' equity
$
22,000
76,000
132,000
870,000
$1,100,000
$ 162,000
800,000
138,000
$1,100,000
The projected balance in accounts payable on December 31, year 1 is
A. Some amount other than those given.
B. $162,000.
C. $204,000.
D. $153,000.
A. The correct amount is given as one of the other choices.
B. This is AP balance for November. See the correct answer for a complete explanation.
C. This is a level of purchases at sales price. See the correct answer for a complete explanation.
D. The amount of accounts payable in December is equal to the December purchases. This is because
purchases are paid in the month following the purchase. Purchases made in December are made to support
20% of December sales and 80% of January sales. Thus, purchases in December are equal to an amount that
will support $204,000 in sales ($220,000 × 20%) + ($200,000 × 80%). However, that $204,000 is the sales
amount, which is based on the selling price and not on the company's cost for the inventory. The company's
cost for the inventory is equal to 75% of the selling price, since its gross margin is equal to 25% of the
selling price. Therefore, the AP are equal to 75% of estimated sales of $204,000, or $153,000.
Question 27 - CMA 1294 3-9 - Budget Methodologies
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement of
Financial Position for the year ended November 30, is as follows:
Super Drive
Statement of Financial Position
November 30
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Assets
Cash
Accounts receivable, net.
Inventory
Property, plant and equipment
Total assets
Liabilities and Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders equity
$52,000
150,000
315,000
1,000,000
$1,517,000
$175,000
900,000
442,000
$1,517,000
Additional information regarding Super Drive's operations include the following:
Sales are budgeted at $520,000 for December and $500,000 for January of the next year.
Collections are expected to be 60% in the month of sale and 40% in the month following the sale.
80% of the disk drive components are purchased in the month prior to the month of sale, and 20% are
purchased in the month of sale. Purchased components are 40% of the cost of goods sold.
Payment for the components is made in the month following the purchase.
Cost of goods sold is 80% of sales.
The projected gross profit for the month ending December 31 is
A. $416,000
B. $536,000
C. $104,000
D. $134,000
A. This is the cost of goods sold for December. See the correct answer for a complete explanation.
B. Gross profit (gross margin) is equal to sales minus cost of goods sold. Thus, gross profit cannot be greater than
the amount of sales, and sales are budgeted at $520,000 for December. See the correct answer for a complete
explanation.
C. Gross profit (gross margin) is equal to sales minus cost of goods sold. December sales are projected to
be $520,000. Cost of goods sold is 80% of sales. Thus, the projected gross profit is 20% of sales, or $104,000.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 28 - CIA 594 III-69 - Budget Methodologies
A company produces a product that requires 2 pounds of a raw material. The company forecasts that there will be
6,000 pounds of raw material on hand at the end of June. At the end of any given month the company wishes to
have 30% of next month's raw material requirements on hand. The company has budgeted production of the
product for July, August, September, and October to be 10,000, 12,000, 13,000, and 11,000 units, respectively. As
of June 1, the raw material sells for $1.00 per pound.
In the month of September, raw material purchases and ending inventory, respectively, will be (in pounds):
A. 24,800 and 6,600
B. 28,600 and 6,600
C. 32,600 and 6,600
D. 13,000 and 3,900
A.
We need to determine the purchases of raw materials for September by using the formula for the physical
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flow of goods: Beginning inventory + Amount purchased
Production requirements = Ending inventory.
Beginning Inventory in September will be 13,000 × 2 × .30, which equals 7,800 units. Ending Inventory in
September will be 11,000 × 2 × .30, which equals 6,600 units. Materials used during September will be 13,000
× 2, which equals 26,000 units. Therefore, the inventory formula is:
7,800 + Purchases 26,000 = 6,600
Purchases = 24,800, which is half of the answer.
The other half of the answer is the Ending Inventory which we calculated above as 6,600 units.
B. The amount of raw material purchases is incorrect. See the correct answer for a complete explanation.
C. The amount of raw material purchases is incorrect. See the correct answer for a complete explanation.
D. 13,000 is the budgeted production in units. 3,900 is the number of finished units that could be produced from the
September beginning inventory of 7,800 lb. See the correct answer for a complete explanation.
Question 29 - CMA 1294 H4 - Budget Methodologies
A continuous (rolling) budget
A. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.
B. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
C. Drops the current month or quarter and adds a future month or quarter as the current month or quarter is
completed.
D. Presents planned activities for a period but does not present a firm commitment.
A. A continuous budget can be prepared for only one level of activity. The budget that prepared for different levels of
activity is called a flexible budget.
B. A continuous budget can be prepared for different levels of activities. The budget that is prepared for only one
level of activity is a static budget.
C. A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time
ahead of the present. For example, a 1-year continuous budget will be prepared at the end of every month
for the next 12 months.
D. A continuous budget represents the same firm commitment that other types of budgets represent.
Question 30 - CIA 1190 IV-17 - Budget Methodologies
The master budget
A. Shows forecasted and actual results.
B. Reflects controllable costs only.
C. Contains the operating budget.
D. Can be used to determine manufacturing cost variances.
A. The master budget is prepared for one level of output and made before or at the start of the budgeting period.
The master budget represents what revenues and costs are planned to be for the budgeted period. Master budget
do not include actual results.
B. The master budget is prepared for one level of output and made before or at the start of the budgeting period.
The master budget represents what revenues and costs are planned to be for the budgeted period. It includes all
applicable costs including costs that are not controllable by individual managers.
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C. The master budget is the composition of pro forma of balance sheet, cash budget, statement of cash flow
and the capital budget. Income statement which is the last budget of operating budget which is an input for
balance sheet. Thus, the master budget contains operating budget.
D. The master budget is prepared for one level of output and made before or at the start of the budgeting period.
The master budget represents what revenues and costs are planned to be for the budgeted period. To determine
manufacturing cost variances the actual results and flexible budget data have to be used.
Question 31 - CMA 1296 H6 - Budget Methodologies
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding
Karmee's sales for the first 6 months of the coming year are as follows:
Estimated
Type of
Monthly Sales Monthly Sale
January
$600,000
February
650,000
All Months:
March
700,000
Cash sales 20%
April
625,000 Credit sales 80%
May
720,000
June
800,000
Month
Collection Pattern for Credit Sales
Month of sale
30%
One month following sale
40%
Second month following sale 25%
Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target inventory
equal to 30% of the next month's sales in units. Purchases of merchandise for resale are paid for in the month
following the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales and
are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these
are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is
paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October.
Annual Fixed Operating Costs
Advertising
$720,000
Depreciation
420,000
Insurance
180,000
Property taxes 240,000
Salaries
1,080,000
The total cash disbursements that Karmee Company will make for the operating expenses (expenses other than the
cost of goods sold) during the month of April will be
A. $290,000
B. $255,000
C. $385,000
D. $420,000
A. This answer does not include variable expenses or advertising and it includes depreciation. See the correct
answer for a complete explanation.
B. This answer does not include variable expenses or advertising. See the correct answer for a complete explanation.
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C. Operating expenses other that COGS paid in the month of April are: 10% of March's sales, the advertising
monthly payment, monthly salaries, the quarterly insurance payment and the property tax payment made
twice a year. Depreciation is not a cash expense and is therefore not included in calculation. The
disbursements are: $70,000 for variable operating expenses (March sales of $700,000 × 10%), $60,000 for
advertising ($720,000 ÷ 12), $90,000 for salaries ($1,080,000 ÷ 12), $45,000 for insurance ($180,000 ÷ 4), and
$120,000 for property taxes ($240,000 ÷ 2). The total amount of disbursements in April is $385,000.
D. This answer incorrectly includes depreciation. Depreciation is not a cash expenditure. See the correct answer for
a complete explanation.
Question 32 - CMA 1289 4-24 - Budget Methodologies
Birch Corporation has the following historical pattern on its credit sales.
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
The sales on open account have been budgeted for the first 6 months of the year are as follows:
Sales On
Open Account
January
$70,000
February
90,000
March
100,000
April
120,000
May
100,000
June
90,000
Month
The estimated total cash collections during April from accounts receivable would be
A. $118,800
B. $84,000
C. $110,800
D. $108,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This is the cash collected from April sales only. See the correct answer for a complete explanation.
C.
Using the cash collection pattern that refers to the credit sales we can estimate how much cash is collected
from accounts receivable during April:
$120,000 × 70% = $84,000 (from April credit sales)
$100,000 × 15% = $15,000 (from March credit sales)
$90,000 × 10% = $9,000 (from February credit sales)
$70,000 × 4% = $2,800 (from January credit sales)
Adding all these numbers together we will get $110,800 of cash collected in April from credit sales.
D. This answer is incorrect. See the correct answer for a complete explanation.
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Question 33 - IMA 08-P2-26 - Budget Methodologies
Country Ovens is a family restaurant chain. Due to an unexpected road construction project, traffic passing by the
Country Ovens restaurant in Newtown has significantly increased. As a result, restaurant volume has similarly
increased well beyond the level expected. Which type of budget would be most appropriate in helping the restaurant
manager plan for restaurant labor costs?
A. Rolling budget.
B. Flexible budget.
C. Activity-based budget.
D. Zero-based budget.
A. A rolling budget is a continual budget that adds one month as another month is completed. This type of budget is
a static budget, and a static budget does not make allowance for changes in volume that may take place. Therefore,
this would not be the best choice in this situation.
B. This is the most appropriate budget, as it allows the management to measure operating success at any
activity level experienced. This budget can be adjusted upward for increased traffic and, if necessary,
adjusted back down when the construction is completed, providing the owner with accurate budget
variance information under a variety of circumstances.
C. Activity-based budgeting is similar in concept to activity-based costing. Activities that drive the costs are identified,
a budgeted level of activity for each of these drivers is determined based on a budgeted level of production, and
budgeted amounts are developed based on the budgeted level of activity. This is a good basis for developing a
budget, but since it depends upon a budgeted level of activity, the budget developed will be a static budget that will
not make allowance for changes in volume that may take place. Therefore, this would not be the best choice in this
situation.
D. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or use of,
the current period’s budget and the likely operating results for the current period. Although this approach would be
appropriate when the next year's volume is expected to far exceed this year’s sales volume, it is still a static budget.
And a static budget does not make allowance for changes in volume that may take place. Therefore, this would not
be the best choice in this situation.
Question 34 - CMA 1296 H13 - Budget Methodologies
An advantage of incremental budgeting when compared with zero-base budgeting is that incremental budgeting
A. Eliminates functions and duties that have outlived their usefulness.
B. Encourages adopting new projects quickly.
C. Accepts the existing base as being satisfactory.
D. Eliminates the need to review all functions periodically to obtain optimum use of resources.
A. This is an advantage of zero-based budgeting, not incremental budgeting.
B. There is no difference of new project treatment under both of these budget development approaches.
C. Zero-based budgeting is the budgeting method in which the current year's budget is prepared without
any reference to, or use of, the prior period's budget or actual amounts. Incremental budgeting assumes
that the previous period's budgeted or actual results are satisfactory, and the budget is calculated by
adjusting the previous period budgeted or actual amount by a number, for example 1.1, to allow for changes
planned for the new budgeting period. Thus, it is easier to prepare an ncremental budget and less
managerial effort is consumed than when the budget is prepared under the ZBB concept.
D. Periodic review of business functions is required regardless the type of budget development approach used.
(c) HOCK international, page 23
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Question 35 - CMA 691 3-9 - Budget Methodologies
In developing a comprehensive budget for a manufacturing company, which one of the following items should be
done first?
A. Determination of the advertising budget.
B. Determination of manufacturing capacity.
C. Development of a sales plan.
D. Development of the capital budget.
A. The advertising budget is a part of the operating budget. The operating budget is not the first budget to be
developed, because it is derived from other budgets that must be developed first.
B. Determination of manufacturing capacity is a part of the process of developing the sales budget as well as the
production budget. However, determination of manufacturing capacity is not necessarily the first thing to be done in
developing a comprehensive budget for a manufacturing company.
C.
The sales plan/forecast is usually prepared first in the budgeting process. The production budget and all the
other budgets for the company are derived from the sales budget.
D. The capital budget is usually prepared for periods of several years. Any planned projects affecting the next year's
budget need to be included in the budget. The capital budget is not developed along with the next year's budget,
though, because it is outside of the current year's budget. So it would not be the first budget to be developed.
Question 36 - CMA 1291 3-26 - Budget Methodologies
RedRock Company uses flexible budgeting for cost control. RedRock produced 10,800 units of product during
October, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costs
of $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirect
materials costs of
A. $13,000.
B. $13,975.
C. $13,500.
D. $11,700.
A. This is the actual indirect materials cost. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. Indirect materials are variable costs. Therefore, the total cost of indirect materials fluctuates with the level
of production. According to the master budget, the per unit cost of indirect material is $1.25 ($180,000 ÷
144,000). Therefore, given an actual production of 10,800 units, the flexible budget costs for indirect material
in October would be $13,500 ($1.25 × 10,800).
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 37 - CMA 691 1-9 - Budget Methodologies
The most direct way to prepare a cash budget for a manufacturing firm is to include
A. Projected sales, credit terms, and net income.
B. Projected net income, depreciation, and goodwill impairment.
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C. Projected purchases, percentages of purchases paid, and net income.
D. Projected sales and purchases, percentages of collections, and terms of payments.
A. Net income is not included in the cash budget because it includes noncash items like depreciation and the
amortization of bond premium.
B. Projected net income is not included in the cash budget because it includes noncash items like depreciation and
the impairment of goodwill. Depreciation and goodwill impairment are not included because they are noncash items.
C. Net income is not included in the cash budget because it includes noncash items like depreciation and the
amortization of bond premium.
D. All of these items listed are related to cash and would therefore be included in the preparation of a cash
budget.
Question 38 - CMA 1292 H2 - Budget Methodologies
Butteco has the following cost components for 100,000 units of product for the year.
Raw materials
$200,000
Direct labor
100,000
Manufacturing overhead
200,000
Selling/administrative expense 150,000
All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative
expenses. The total costs to produce and sell 110,000 units are
A. $715,000.
B. $695,000.
C. $495,000.
D. $650,000.
A. This answer assumes no fixed costs.
B. In order to solve this problem we need to determine a total fixed cost and the variable cost per unit. The
total fixed costs are $200,000 ($100,000 each of manufacturing and selling costs). The total variable costs in
the 100,000 unit budget are $450,000 ($200,000 raw materials + 100,000 direct labor + $100,000
manufacturing overhead + $50,000 selling/administrative expense). This gives a standard variable cost of
$4.50 per unit. Therefore, to produce 110,000 units the company will incur $495,000 in variable costs ($4.50 ×
110,000 units) plus $200,000 in fixed costs for a total of $695,000.
C. This is the variable cost of production only.
D. This is the cost at a production level of 100,000 units.
Question 39 - CMA 693 3-10 - Budget Methodologies
A firm develops an annual cash budget in order to
A. Support the preparation of its cash flow statement for the annual report.
B. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be
deferred.
C. Determine the opportunity costs of alternative sales and production strategies.
D. Avoid the opportunity costs of non-invested excess cash and minimize the cost of interim financing.
(c) HOCK international, page 25
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A. The cash flow statement in the annual report is based on actual results, not on budgeted figures.
B. The cash budget does not ascertain which capital expenditure projects are feasible or should be deferred. It only
shows the cash available for projects and other activities.
C. The cash budget does not determine the opportunity costs of alternative sales and production strategies.
D. The cash budget (or cash management and working capital budget) is the last budget created. The cash
budget tracks the inflows and outflows of cash on a month-by-month (possibly even week-by-week or
day-by-day) basis. If this budget is accurate it will allow the company to plan for any cash shortfalls that
may occur during the year and also enable it to plan for any excess cash accumulating during the year. One
advantage of predicting cash shortfalls is that it will be easier for the company to obtain a loan if it is aware
of its need before the shortfall arrives and if it is able to present cash inflow and outflow projections to the
bank.
Question 40 - CMA 1291 3-13 - Budget Methodologies
A flexible budget is appropriate for
A. Control of direct materials and direct labor but not selling and administrative expenses.
B. Control of direct labor and direct materials but not fixed factory overhead.
C. Any level of activity.
D. Control of fixed factory overhead but not direct materials and direct labor.
A. A flexible budget is necessary to control direct materials and direct labor as well as variable selling and
administrative expenses if the actual activity level differs from the static budget activity level. To control fixed costs,
the use of static budget is appropriate, not necessarily the use of flexible budget.
B. Fixed costs are the same for any level of activity within the relevant range. Thus, a flexible budget is not
necessary to control fixed factory overhead. In fact, total fixed costs are the same in a flexible budget as
they are in the static budget. However, a flexible budget is necessary to control direct materials and direct
labor if the actual activity level differs from the static budget activity level.
C. While a flexible budget can be prepared for any level of activity, this is not the best answer to the question among
the answer choices given.
D. Fixed costs are the same for any level of activity within the relevant range. Thus, a flexible budget is not necessary
to control fixed factory overhead. A flexible budget is necessary to control direct materials and direct labor if the
actual activity level differs from static budget activity level.
Question 41 - CMA 692 3-8 - Budget Methodologies
The budget that is usually the most difficult to forecast is the
A. Production budget.
B. Expense budget.
C. Manufacturing overhead budget.
D. Sales budget.
A. The production budget is based on the sales budget, and once the sales budget has been prepared and ending
inventory objectives determined, the production budget is relatively easy to prepare.
B. There is no such thing as an "expense budget." General and administrative expenses are budgeted as part of the
operating budget, and they are based upon management's plans for the coming year. Selling expenses are also a
part of the operating budget, and they are based on the sales budget.
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C. The preparation of the manufacturing overhead budget is fairly straight-forward after the production budget has
been prepared, because it is based on the production budget.
D. The sales budget is usually the first budget to be prepared, and it influences all other budgets in the
master budget. The volume of sales and level of sales revenue are difficult to forecast, as many external
factors can influence this budget. The sales budget is based on a number of assumptions about the
changing environment such as competitors' activities, consumer tastes and demand, prices, the general
economy, government regulations, and many other factors that are outside the control of the company.
Therefore, the sales budget is very difficult to develop.
Question 42 - CIA 1192 IV-19 - Budget Methodologies
There are many different budget techniques or processes that business organizations can employ. One of these
techniques or processes is zero-base budgeting, which is
A. Budgeting from the ground up as though the budget process were being initiated for the first time.
B. Developing budgeted costs from clear-cut measured relationships between inputs and outputs.
C. Using the prior year's budget as a base year and adjusting it based on the experiences of the prior year and the
expectations for the coming year.
D. Budgeting for cash inflows and outflows to time investments and borrowings in a way to maintain a bank account
with a minimum balance.
A. Zero-based budgeting is the budgeting method in which the current year budget is prepared without any
reference to, or use of, the prior period's budget. Within zero-based budgeting all of the activities that a
department undertakes are identified and then prioritized. This is the manner in which costs are justified
and supported. Also, because the manager needs to examine every single expenditure and activity within
the department, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing
the same thing.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This refers to incremental budgeting.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 43 - CIA 1190 IV-15 - Budget Methodologies
A company has budgeted sales of 24,000 finished units for the forthcoming 6-month period. It takes 4 pounds of
direct materials to make one finished unit. Given the following:
Finished Units
Beginning inventory
14,000
Target ending inventory
12,000
Direct Materials
(pounds)
44,000
48,000
How many pounds of direct materials should be budgeted for purchase during the 6-month period?
A. 48,000
B. 88,000
C. 96,000
D. 92,000
A. This is the amount of ending inventory of materials. See the correct answer for a complete explanation.
B. This is the amount of materials requirements for the period's production. See the correct answer for a complete
(c) HOCK international, page 27
Part 1 : 07/28/10 08:28:23
explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. First, we need to determine the production requirements for the given period. It is calculated as follows:
Units Sold + Ending Inventory - Beginning Inventory; or 24,000 + 12,000 - 14,000 = 22,000 units to produce.
We know that 4 lb. is necessary to make one unit of finished product. Thus, materials to be purchased
equals the Quantity needed for production + Ending Inventory of materials - Beginning Inventory of
materials; or 22,000 * 4 + 48,000 - 44,000 = 92,000.
Question 44 - CMA 1290 3-17 - Budget Methodologies
The operating budget process usually begins with the
A. Financial budget.
B. Sales budget.
C. Income statement.
D. Balance sheet.
A. The financial budget is neither an operating budget nor a part of the operating budget.
B. The sales budget is a part of operating budget and is usually the first budget to be prepared in the
budgeting process. It is therefore the foundation of the operating budget.
C. The pro forma income statement is a part of the financial budget, not the operating budget.
D. The pro forma balance sheet is a part of the financial budget, not the operating budget.
Question 45 - CMA 1293 3-11 - Budget Methodologies
Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14
requires three purchased components shown below.
Purchase Number Needed
Cost
for each C-14 Unit
A-9
$0.50
1
B-6
0.25
2
D-28
1.00
3
Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at a
production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of
April and uses standard absorption costing for valuing inventory.
Part No.
C-14
A-9
B-6
D-28
Units at Units at
April 1 April 30
12,000 10,000
21,000 9,000
32,000 10,000
14,000 6,000
Assume Superflite plans to manufacture 400,000 units in April. Superflite's April budget for the purchase of A-9
should be
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A. 379,000 units.
B. 388,000 units.
C. 402,000 units.
D. 412,000 units.
A. This number does not take ending inventory level into consideration. See the correct answer for a complete
explanation.
B.
To solve these question we should use the formula for the physical flow of inventory:
Beginning Inventory + Purchases
Units Used in Production = Ending Inventory
Since 1 unit of A-9 is required to produce one unit of finished goods, the number of units of A-9 needed for
production will be the same as the number of units to be produced: 400,000. The number of units in
beginning and ending inventory are given as 21,000 and 9,000, respectively. Therefore, the formula will be:
21,000 + Purchases
400,000 = 9,000
Solving for Purchases, we get Purchases = 388,000 units.
C. This is the number of unit sales of finished product. See the correct answer for a complete explanation.
D. This result is based on an incorrect inventory formula, using the ending inventory as the beginning inventory and
the beginning inventory as ending inventory. See the correct answer for a complete explanation.
Question 46 - CIA 1190 IV-16 - Budget Methodologies
A company is preparing its cash budget for the coming month. All sales are made on account. Given the following:
Beginning Budgeted
Balances Amounts
Cash
$50,000
Accounts receivable
180,000
Sales
$800,000
Cash disbursements
780,000
Depreciation
25,000
Ending accounts receivable balance
210,000
What is the expected cash balance of the company at the end of the coming month?
A. $70,000
B. $45,000
C. $15,000
D. $40,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. In this answer the amount of depreciation is deducted. However, depreciation is a non-cash expense and is not
included in the calculation of expected cash balance. See the correct answer for a complete explanation.
D. The cash balance at the end of the period is equal to the: Beginning Cash balance + Sales - Ending AR +
Beginning AR - Cash Disbursements or $50,000 + $800,000 - $210,000 + $180,000 - $780,000 = $40,000.
Depreciation is non-cash expense and is not included in calculation.
(c) HOCK international, page 29
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Question 47 - CMA 692 H2 - Budget Methodologies
Pardise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels
(in units) are planned for the fiscal year of July 1 through June 30:
July 1
Raw material*
40,000
Work-in-process 10,000
Finished goods 80,000
June 30
50,000
20,000
50,000
*Two units of raw materials are needed to produce each unit of finished product.
If Pardise Company plans to sell 480,000 units during the fiscal year, the number of units it will have to manufacture
during the year is
A. 440,000 units.
B. 450,000 units.
C. 510,000 units.
D. 480,000 units.
A. The change in work-in-process does not need to be included in this calculation.
B. If Paradise will sell 480,000 units and they want to have 50,000 units in ending finished goods inventory,
Paradise will need to have 530,000 units during the period. Since they already have 80,000 of these units in
beginning inventory, they will need to manufacture 450,000 units in order to be able to meet the sales and
ending inventory plans.
C. This answer treats the beginning and ending finished goods inventory backwards.
D. This is the number of units to be sold.
Question 48 - CMA 1293 3-10 - Budget Methodologies
Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14
requires three purchased components shown below.
Purchase Number Needed
Cost
for each C-14 Unit
A-9
$0.50
1
B-6
0.25
2
D-28
1.00
3
Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at a
production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of
April and uses standard absorption costing for valuing inventory.
Part No.
C-14
A-9
B-6
D-28
Units at Units at
April 1 April 30
12,000 10,000
21,000 9,000
32,000 10,000
14,000 6,000
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The C-14 production budget for April should be based on the manufacture of
A. 402,000 units.
B. 424,000 units.
C. 400,000 units.
D. 390,000 units.
A. This is the number of unit sales. It does not take the change in inventory level into consideration. See the correct
answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C.
To solve these question we should use the formula of physical flow of inventory:
Beginning Inventory + Units Produced
Units Sold = Ending Inventory.
Plugging numbers for C-14 into the formula, we get the following:
12,000 + Units Produced
402,000 = 10,000
Solving for Units Produced, we get Units Produced = 400,000 units.
D. This answer ignores the requirements to have some ending inventory on hand. See the correct answer for a
complete explanation.
Question 49 - CMA 1292 H1 - Budget Methodologies
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost
column should be based on the
A. Budgeted amount in the original budget prepared before the beginning of the year.
B. Budget adjusted to the planned level of activity for the period being reported.
C. Budget adjusted to the actual level of activity for the period being reported.
D. Actual amount for the same period in the preceding year.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. The flexible budget is the budget developed for the actual level of output. When preparing a performance
report, the actual results need to be compared to what the expected results were for the actual level of
production. The actual results need to be compared to the flexible budget.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 50 - CIA 589 IV-12 - Budget Methodologies
A company has $10,000 in cash and $150,000 in merchandise inventory on March 31. The desired cash and
merchandise inventory balances on June 30 are $20,000 and $250,000, respectively. Sales for the quarter are
expected to be $300,000, all in cash. Gross margin is 40% of sales. Cash operating expenses are expected to be
$50,000. All merchandise inventory purchases are paid for in cash at the time of purchase. What amount of
financing will the company need during the quarter?
A. $40,000
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B. $30,000
C. $20,000
D. $50,000
A. First, we need to determine the amount of purchases during the quarter. Beginning merchandise
inventory level is $150,000 and ending merchandise inventory is $250,000. The cost of sales expected to be
made during the quarter is $180,000 ($300,000 in sales × 60%). Thus, the purchases are equal to $280,000
($180,000 cost of sales + $250,000 ending inventory $150,000 beginning inventory). Now we can determine
the amount of financing the company will need during the quarter. It is equal to Purchases + Expenses +
Ending cash balance Beginning cash balance Proceeds from sales. We get: $280,000 + $50,000 + $20,000
$10,000 $300,000 = $40,000.
B. This answer does not include the beginning or ending cash balance. See the correct answer for a complete
explanation.
C. This answer does not include the ending cash balance. See the correct answer for a complete explanation.
D. This answer does not include the beginning cash balance. See the correct answer for a complete explanation.
Question 51 - CMA 692 3-26 - Budget Methodologies
Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per
month. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales.
There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct
materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30.
Assume Berol Company plans to produce 600,000 units of finished product in the 3-month period ending September
30, and to have direct materials inventory on hand at the end of the 3-month period equal to 25% of the use in that
period. The estimated cost of direct materials purchases for the 3-month period ending September 30 is
A. $2,640,000.
B. $2,400,000.
C. $2,200,000.
D. $2,880,000.
A.
First, we need to identify the quantity of material that needs to be purchased, then calculate its cost.
The beginning inventory level on July 1 is 800,000 pounds. Since each unit of finished goods requires 4
pounds of direct materials, the amount of direct materials to be used in production is 600,000 × 4, or
2,400,000 pounds.The amount of direct materials inventory on hand at the end of the 3-month period is to be
equal to 25% of the use in that period. Therefore, ending inventory needs to be 600,000 pounds of material
(2,400,000 lb. × 25%).
Now we can determine the quantity to be purchased:
Beginning Inventory + Quantity Purchased
800,000 + Quantity Purchased
Quantity Used in Production = Ending Inventory
2,400,000 = 600,000
Solving for Quantity Purchased,
Quantity Purchased = 2,200,000 pounds.
Given a cost of $1.20 per pound of material, we can determine the cost of materials to be purchased is
$2,640,000 ($1.20 × 2,200,000).
B. This is the number of pounds that will be used. See the correct answer for a complete explanation.
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C. This is the number of pounds that needs to be purchased. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 52 - CMA 1287 4-29 - Budget Methodologies
The Jung Corporation's budget calls for the following production:
Qtr 1 : 45,000 units
Qtr 2 : 38,000 units
Qtr 3 : 34,000 units
Qtr 4 : 48,000 units
Each unit of product requires three pounds of direct material. The company's policy is to begin each quarter with an
inventory of direct materials equal to 30% of that quarter's direct material requirements. Budgeted direct materials
purchases for the third quarter would be
A. 114,600 pounds.
B. 43,200 pounds.
C. 30,600 pounds.
D. 38,200 pounds.
A.
This is a basic question of units needed in a period, but it is about the number of units of the raw materials
that are needed. There are 3 units of raw materials in a finished unit. The amount needed in the third quarter
itself is 102,000 units of raw materials (3 * 34,000 finished units). In addition, the ending inventory is 30% of
the next quarter's needs. This is 43,200 units of raw materials (48,000 finished units * 3 * .3). The beginning
inventory was 30% of the current quarter's needs or 30,600 (102,000 * .3).
Beginning Inventory + Purchases
Amount Used = Ending Inventory
30,600 + Purchases 102,000 = 43,200
Purchases = 114,600
A total of 114,600 units of raw materials need to be purchased this period.
B. This is the ending inventory amount. See the correct answer for a complete explanation.
C. This is the amount of beginning inventory. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 53 - CMA 1295 H3 - Budget Methodologies
All of the following are considered operating budgets except the
A. Materials budget.
B. Production budget.
C. Capital budget.
D. Sales budget.
A. The materials budget is a part of the operating budget.
B. The production budget is a part of the operating budget.
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C. The capital budget is usually prepared separately from the other budgets. The capital budget concerns
capital investments in plant, equipment, real-estate, etc. Management plans these type of investments in
advance to allocate or obtain enough resources to perform them.
D. The sales budget is the first budget developed in the operating budget.
Question 54 - IMA 08-P2-11 - Budget Methodologies
Rock Industries has four divisions. In the quest to develop a more achievable budget for the coming year, the chief
executive officer has elected to develop the company's budget by using a decentralized bottom-up budget approach.
Chip Jones is production manager in one of the divisions. Jones’ involvement in the budget process this year will
probably:
A. Require development of a production budget that is forwarded to the Budget Department.
B. Require development of a production budget based on the prior year’s manufacturing activity.
C. Be negligible.
D. Require development of a production budget after receiving the division’s projected sales forecast.
A. This is incorrect. Jones will develop a production budget that is forwarded to the Budget Department; however,
first he will have to have an idea of how much to produce. This will come from the sales forecast.
B. While prior year activity is one place to start, it does not include the sales forecast for the upcoming year or
adjustments for changes in costs or processes.
C. In a bottom up budget, the department managers will have a significant role in budget development.
D. Jones will develop a budget for his production department after determining how much is expected to be
sold. The production budget will take into account what is to be sold as well as cushions for extra sales and
provisions for ending finished goods.
Question 55 - CMA 692 H7 - Budget Methodologies
Which one of the following may be considered an independent item in the preparation of the master budget?
A. Capital investment budget.
B. Ending inventory budget.
C. Budgeted statement of financial position.
D. Budgeted income statement.
A. The capital budget is the budget in which all capital (property, plant and equipment) expenditures are
planned. This budget is not directly connected to the current period budgets and it is often prepared years
in advance so that the company can plan to obtain the necessary financing or accumulate the necessary
cash to carry out its capital expansion plans. The capital budget is often considered to be independent from
the master budget.
B. The desired level of ending inventory not independent, as it is used in the development of the production budget.
C. The budgeted statement of financial position (balance sheet) is based on a number of elements of the master
budget including the budgeted income statement, so it is not an independent item in the preparation of the master
budget.
D. The budgeted income statement is a critical element of the master budget. It is one of the last budgets created
from the operating budgets. The budgeted income statement is based on the sales budgets, expense budgets and
other elements of the master budget, so it is not an independent item in the preparation of the master budget.
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Question 56 - 3B2 CMA - Budget Methodologies
Flexible budgets
A. Provide for external factors affecting company profitability.
B. Are budgets that project costs based on anticipated future improvements.
C. Accommodate changes in activity levels.
D. Are used to evaluate capacity use.
A. A flexible budget is a budget that is prepared for the actual level of output.
B. Flexible budget are not used to project costs based on future improvements.
C. A flexible budget is a budget prepared for the actual level of output. Thus, flexible budgets
accommodates changes in activity levels because the budget is prepared for whatever the actual level of
production is.
D. Flexible budgets are not developed to evaluate the use of capacity.
Question 57 - CIA 1193 IV-14 - Budget Methodologies
A municipal government requires each department supervisor to submit an annual budget request stating the
specific goals of the department and listing a series of "decision packages" relating to each goal. Each decision
package describes a set of desired activities, the benefits of these activities, and the potential consequences of not
performing the activities. Funds are allocated based on the estimated costs and benefits of each package. This is an
example of
A. Zero-base budgeting.
B. A static budget.
C. An imposed budget.
D. Incremental budgeting.
A. Zero-based budgeting is the budgeting method in which the current year budget is prepared without any
reference to, or use of, the prior period's budget. Within zero-based budgeting all of the activities that a
department undertakes are identified and then prioritized. This is the manner in which costs are justified
and supported. Also, because the manager needs to examine every single expenditure and activity within
the department, he is more likely to develop an alternative and, hopefully cheaper, method of accomplishing
the same thing.
B. A static budget is a budget that is prepared for only one level of activity.
C. An imposed budget is budget that is prepared by top management without the participation of lower level
management.
D. Incremental budgeting is based on the prior period's budget.
Question 58 - CMA 1296 H3 - Budget Methodologies
Which one of the following items is the last schedule to be prepared in the normal budget preparation process?
A. Cash budget.
B. Manufacturing overhead budget.
C. Cost of goods sold budget.
D. Selling expense budget.
(c) HOCK international, page 35
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A.
The budgeting preparation process usually starts with the sales budget and continues through the
preparation of the income statement which is the last budget of the operating budget and ends with
preparation of the financial budget, which includes the budgeted balance sheet and statement of cash
flows, the cash budget and the capital budget.
The cash budget is a part of the financial budget and is one of the last budgets to be prepared. This is
because the cash budget is impacted by all of the other individual budgets.
B. The manufacturing overhead budget is an operating budget and it is completed prior to the cash budget.
C. The cost of goods sold budget is a part of the operating budget and it is completed prior to the cash budget.
D. The selling expense budget is an operating budget and it is completed prior to the cash budget.
Question 59 - CMA 1294 H2 - Budget Methodologies
Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annual
operating income for a company is
A. Internal rate of return.
B. Price-earnings ratio.
C. Earnings per share.
D. Industry average for earnings on sales.
A. The internal rate of return is used to evaluate investment decisions and involves the time value of money.
IRR represents the discount rate at which the net present value of an investment is equal to zero. IRR is not
used to evaluate the adequacy of budgeted operating income.
B. The price-earnings ratio is a financial performance measure and can be used to measure the adequacy of the
budgeted annual operating income.
C. Earning per share represents a financial performance measure and can be used to measure the adequacy of the
budgeted annual operating income.
D. The industry average for earnings on sales is a financial performance measure and can be used to measure the
adequacy of the budgeted annual operating income.
Question 60 - CMA 1293 H3 - Budget Methodologies
The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a
$200,000 line of credit with its bank at a 12% annual rate of interest on which borrowings for cash deficits must be
made in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal
repayments are to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there
are no outstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash
balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each
month by either borrowing for deficits below the minimum balance or investing any excess cash. Monthly collection
and disbursement patterns are expected to be:
Collections. 50% of the current month's sales budget and 50% of the previous month's sales budget.
Accounts Payable Disbursements. 75% of the current month's accounts payable budget and 25% of the
previous month's accounts payable budget.
All other disbursements occur in the month in which they are budgeted.
Budget Information
(c) HOCK international, page 36
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March
April
May
Sales
$40,000 $50,000 $100,000
Accounts payable
30,000 40,000
40,000
Payroll
60,000 70,000
50,000
Other disbursements 25,000 30,000
10,000
In April, Raymar's budget will result in
A. A need to borrow $100,000 on its line of credit for the cash deficit.
B. $45,000 in excess cash.
C. A need to borrow $90,000 on its line of credit for the cash deficit.
D. A need to borrow $50,000 on its line of credit for the cash deficit.
A.
First, we need to determine the cash collections for April: 50% of April sales and 50% of March sales (or
$25,000 + $20,000 = $45,000) will be collected in April. Then, we need to determine the amount paid for
accounts payable in April: 75% of April AP and 25% of March AP (or $30,000 + $7,500 = $37,500) will be paid
in April. Other disbursements are paid in the month they occur, and for April they are: $70,000 for payroll
plus $30,000 of other disbursements, totaling $100,000. Subtracting the amount of cash outflows from cash
inflows we will get a $92,500 cash deficit. Since borrowings for cash deficits must be made in $10,000
increments the company needs to borrow $100,000 to cover the $92,500 cash deficit.
B. This is the amount of cash collections only. See the correct answer for a complete explanation.
C. Borrowings for cash deficits must be made in $10,000 increments the company needs to borrow $100,000 to
cover $92,500 of cash deficit.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 61 - IMA 08-P2-40 - Budget Methodologies
Streeter Company produces plastic microwave turntables. Sales for the next year are expected to be 65,000 units in
the first quarter, 72,000 units in the second quarter, 84,000 units in the third quarter, and 66,000 units in the fourth
quarter. Streeter maintains a finished goods inventory at the end of each quarter equal to one half of the units
expected to be sold in the next quarter. How many units should Streeter produce in the second quarter?
A. 84,000 units
B. 72,000 units
C. 75,000 units
D. 78,000 units
A. This is the total sales budgeted for the third quarter. See correct answer for full calculation.
B. This is the sales for the second quarter. Beginning and ending inventory need to be taken into consideration. See
correct answer for full calculation.
C. This is the number of units Streeter should produce in the third quarter.
D. The second quarter's beginning inventory will be 50% of the 72,000 units to be sold during the second
quarter, or 36,000 units.
The second quarter's ending inventory will be 50% of the 84,000 units to be sold during the third quarter, or
42,000 units.
Units to be sold during the second quarter are given as 72,000.
(c) HOCK international, page 37
Part 1 : 07/28/10 08:28:23
The inventory equation is:
Beginning Inventory + Goods Manufactured – Goods Sold = Ending Inventory
Let X represent Goods Manufactured:
36,000 + X – 72,000 = 42,000
X = 78,000
Question 62 - IMA 08-P2-05 - Budget Methodologies
The following sequence of steps are employed by a company to develop its annual profit plan.
Planning guidelines are disseminated downward by top management after receiving input from all levels of
management.
A sales budget is prepared by individual sales units reflecting the sales targets of the various segments. This
provides the basis for departmental production budgets and other related components by the various
operating units. Communication is primarily lateral with some upward communication possible.
A profit plan is submitted to top management for coordination and review. Top management's
recommendations and revisions are acted upon by middle management. A revised profit plan is resubmitted
for further review to top management.
Top management grants final approval and distributes the formal plan downward to the various operating
units.
This outline of steps best describes which one of the following approaches to budget development?
A. Total justification of all activities by operating units.
B. Bottom-up approach.
C. Imposed budgeting by top management.
D. Top-down approach.
A. This would describe zero based budgeting and is not described by the activities listed above. With zero based
budgeting, every line item is analyzed and justified in a time consuming process. The guidelines developed from
managerial input do not indicate such a thorough analysis.
B. While senior management provides guidelines, the bulk of the budget is developed from input from
individual departments. After submission to top management for review, top management's
recommendations and revisions are made at the individual department level, and the individual department
managers prepare and resubmit revised budget data to top management. This continues until the desired
result is achieved for the consolidated budget.
C. Management did not dictate the budget, just provided guidelines to give each department an idea of where the
company should be headed.
D. Management did not provide the budgeted numbers, just made recommendations for revisions to the budgets
submitted by the various departments.
Question 63 - CIA 585 III-20 - Budget Methodologies
The major feature of zero-based budgeting (ZBB) is that it
A. Focuses on planned capital outlays for property, plant, and equipment.
B. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.
C. Takes the previous year's budgets and adjusts them for inflation.
D. Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated.
(c) HOCK international, page 38
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A. This is usually a major feature of a capital budget.
B. Incremental or traditional budget usually assumes that all activities are legitimate and worthy of receiving budget
increases to cover any increased costs. In ZBB all activities need to be justified each year.
C. Incremental budgeting usually takes the previous period budget and make adjustments to develop a budget for a
following period.
D. Zero-based budgeting is the budgeting method in which the current year budget is prepared for various
levels of service that may be provided without any reference to, or use of, the prior period's budget. Though
this method is more time consuming and difficult for all of the people involved, there are a number of
advantages to the company as a result of using this method. Because the budget is built up from zero, each
manager must justify all of the expenses in his or her department. Each component is evaluated from a
cost-benefit perspective and priorities are made. Zero-based budgeting enables the company to identify
expenses that are not value adding or that should be reduced due to some development in production
methods or something similar.
Question 64 - CMA 1296 H11 - Budget Methodologies
Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next
5 months are as follows:
Month Sales in Units
January
30,000
February
36,000
March
33,000
April
40,000
May
29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are
purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost
is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy's policy
is to manufacture 1.5 times the coming month's projected sales every other month, starting with January (i.e.,
odd-numbered months) for February sales, and to manufacture 0.5 times the coming month's projected sales in
alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to
other products as needed during the even-numbered months.
The dollar production budget for toy rabbits for February is
A. $113,500
B. $390,000
C. $327,000
D. $127,500
A. This is production budget for April. See the correct answer for a complete explanation.
B. This is production budget for January. See the correct answer for a complete explanation.
C. These are the costs based on production of 150% of January sales. See the correct answer for a complete
explanation.
D. In February the production will be equal to 1/2 of March sales. March sales are expected to be 33,000, so
February will see production of 16,500 units. The variable cost per unit is $7 ($3.50 + $1 + $2 + $.50), so total
variable costs will be $115,500 ($7 × 16,500). We need to add to this the $12,000 of fixed costs giving us a
total production cost of $127,500.
(c) HOCK international, page 39
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Question 65 - CMA 1294 H5 - Budget Methodologies
When sales volume is seasonal in nature, certain items in the budget must be coordinated. The three most
significant items to coordinate in budgeting seasonal sales volume are
A. Production volume, finished goods inventory, and sales volume.
B. Direct labor hours, work-in-process inventory, and sales volume.
C. Raw material inventory, work-in-process inventory, and production volume.
D. Raw material inventory, direct labor hours, and manufacturing overhead costs.
A. Budgets usually start with the development of the sales budget, and it is the most difficult budget to
prepare. Production volume and finished goods inventory budgets are the next budgets to be prepared, and
their development is based on the assumptions made in preparing the sales budget. When the business is
seasonal in nature it is even more difficult to predict sales volume and subsequent budgets. Thus, for any
type of business including seasonal it is critical to coordinate production volume, finished goods inventory,
and sales volume first of all.
B. Direct labor hours, work-in-process inventory are elements within the production budget. See the correct answer
for a complete explanation.
C. The sales budget is usually the first thing to determine in the budgeting process of any type of business including
a seasonal business. See the correct answer for a complete explanation.
D. The sales budget is usually the first thing to determine in the budgeting process of any type of business including
a seasonal business. See the correct answer for a complete explanation.
Question 66 - CMA 1283 4-23 - Budget Methodologies
Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's
operations are as follows:
Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.
Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
Gross margin is 25% of sales.
A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and
20% is purchased in the month of sale. Payment for merchandise is made in the month following the
purchase.
Other expected monthly expenses to be paid in cash are $22,600.
Annual depreciation is $216,000.
Below is Kelly Company's statement of financial position at November 30, year 1.
Assets
Cash
$22,000
Accounts receivable
76,000
(net of $4,000 allowance for uncollectible accounts)
Inventory
132,000
Property, plant, and equipment (net of $680,000 accumulated deprecation)
870,000
Total assets
$1,100,000
Liabilities and Stockholders' Equity
Accounts payable
$162,000
Common stock
800,000
Retained earnings
138,000
Total liabilities and stockholders' equity
$1,100,000
(c) HOCK international, page 40
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The budgeted income (loss) before income taxes for December year 1 is
A. $28,000.
B. $32,400.
C. $10,000.
D. Some amount other than those given.
A. This amount does not consider depreciation expenses. See the correct answer for a complete explanation.
B. This amount does not consider bad debt and depreciation expenses. See the correct answer for a complete
explanation.
C. The gross margin is $55,000 ($220,000 × 25%). Subtracting other expenses, bad debt expenses ($220,000
× 2%) and monthly depreciation ($216,000 ÷ 12) from gross margin results in a budgeted net income of
$10,000 ($55,000 $22,600 $4,400 $18,000).
D. The correct amount is given as one of the choices.
Question 67 - CMA 1290 3-19 - Budget Methodologies
The use of the master budget throughout the year as a constant comparison with actual results signifies that the
master budget is also a
A. Zero-base budget.
B. Capital budget.
C. Flexible budget.
D. Static budget.
A. In a zero-base budget the current year's budget is prepared without any reference to, or use of, the prior period's
budget. Not all master budgets are zero-base budgets, and the fact that the master budget is used to make
comparisons with actual results does not mean that it must be a zero-based budget.
B.
The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned. The
capital budget is often prepared for several years in advance. The amounts in it that affect the current year's budget
will be included in the current year's master budget; but the master budget is not also the capital budget.
C. A flexible budget is prepared for the actual level of activity, so it is not constant throughout the year.
D. This is a description of a static budget because the static budget is prepared for only one level of activity
(a certain level of sales).
Question 68 - CMA 1289 4-25 - Budget Methodologies
Birch Corporation has the following historical pattern on its credit sales.
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
The sales on open account have been budgeted for the first 6 months of the year are as follows:
(c) HOCK international, page 41
Part 1 : 07/28/10 08:28:23
Sales On
Open Account
January
$70,000
February
90,000
March
100,000
April
120,000
May
100,000
June
90,000
Month
The estimated total cash collections during the second calendar quarter from sales made on open account during
the second calendar quarter would be
A. $262,000
B. $288,800
C. $306,900
D. $310,000
A.
April, May and June are the months of the second quarter. The projected cash collection in the second
quarter during the second quarter are:
70% of these three months' estimated credit sales,
15% of credit sales made during April and May
10% of credit sales made during May
Mathematically, this looks as follows: 70% × ($120,000 + $100,000 +$90,000) + 15% × ($120,000 + $100,000) +
10% × $120,000. Doing the math, we get $217,000 + $33,000 + $12,000 = $262,000.
This problem can also be solved by calculating each month's cash collection and then adding the results
together.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the amount of projected total sales in the second quarter, not the cash collection.
Question 69 - IMA 08-P2-13 - Budget Methodologies
Budgeting problems where departmental managers are repeatedly achieving easy goals or failing to achieve
demanding goals can be best minimized by establishing:
A. Better communication whereby managers discuss budget matters daily with their superiors.
B. Participative budgeting where managers pursue objectives consistent with those set by top management.
C. Preventive controls.
D. A policy that allows managers to build slack into the budget.
A. Budget discussions on a daily basis are a bit excessive and not an efficient way to conduct business. Generally
there is a budget "season" where the development of the budget is the primary focus, and daily discussions are not
unusual. After budget season; however, the communication between managers and their superiors would likely not
focus solely on budget matters, although it would cover variances from the budget.
B. This is correct. By allowing managers to participate in the budgeting process with the objectives of
senior management in mind, the managers can evaluate the department and find the most optimal, and
realistic, means to achieve the targets.
(c) HOCK international, page 42
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C. Enacting policies that "control" the budget process can result in resentment and ineffective efforts from
departmental management. This is not the best way to generate a realistically challenging budget.
D. Building slack into a budget is not going to be in the organization’s best interest in the long run.
Question 70 - CMA 1294 3-19 - Budget Methodologies
Superior Industries' sales budget shows quarterly sales for the next year as follows:
Quarter
1
2
3
4
Units
10,000
8,000
12,000
14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's
sales. Budgeted production for the second quarter of the next year would be
A. 8,800 units.
B. 8,400 units.
C. 8,000 units.
D. 7,200 units.
A.
To solve these question we use the formula for the physical flow of goods:
Beginning Inventory + Units Produced
Units Sold = Ending Inventory
Beginning inventory for the second quarter is 20% of the second quarter sales, or 1,600 units. The ending
inventory for the second quarter is 20% if the third quarter sales, or 2,400 units. Plugging numbers into the
formula we will get the following:
1,600 + Units Produced
8,000 = 2,400
Solving for Units Produced, we get Units Produced = 8,800.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the sales level of second quarter. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 71 - IMA 08-P2-10 - Budget Methodologies
Which one of the following statements concerning approaches for the budget development process is correct?
A. With the information technology available, the role of budgets as an organizational communication device has
declined.
B. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if
the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year.
C. Since department managers have the most detailed knowledge about organizational operations, they should use
this information as the building blocks of the operating budget.
D. The top-down approach to budgeting will not ensure adherence to strategic organizational goals.
(c) HOCK international, page 43
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A. This statement is not correct. Technology can certainly cut down on the time required for budgeting, but it cannot
replace discussion among and between various departments and levels of management. The budget is a consistent
reminder of the importance of having each department work toward an individual goal in order to meet the overall
corporate objectives.
B. This statement is not correct. Budgets should always have some degree of flexibility. If forecasts are determined
to be incorrect, then the budget committee should explore options to get the budget back on track in total, or to
implement a contingency budget so that departments are still working with a realistically challenging goal in mind.
C. This is correct. It is the department manager who is best aware of day to day operations, local issues that
affect the department, opportunities for efficiencies, and obstacles to success. These factors will assist in
developing a budget that includes challenging and realistic goals that are accepted by the manager and the
employees.
D. This statement is not correct. Under the top down approach the budget will be developed specifically to achieve
strategic organizational goals as that is the primary focus of senior management – overall organizational
performance.
Question 72 - CMA 1291 3-24 - Budget Methodologies
Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 2
Year 1
Year 1
(Actual) (Budget) (Budget)
Cash sales
$80,000 $100,000 $60,000
Credit sales 240,000 360,000 180,000
Total sales $320,000 $460,000 $240,000
Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are collectible, 60% are
collected in the month of sale and the remainder in the month following the sale. Purchases of inventory are equal to
next month's sales and gross profit margin is 30%. All purchases of inventory are on account; 25% are paid in the
month of purchase, and the remainder are paid in the month following the purchase.
Noskey Corporation's budgeted total cash receipts in January Year 2 are
A. $294,000.
B. $239,400.
C. $240,000.
D. $299,400.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This is the total cash collection in January from all credit sales. See the correct answer for a complete explanation.
C. This is the total cash and credit sales in January. See the correct answer for a complete explanation.
D. In January, Noskey will collect January cash sales, 60% of collectible January credit sales and 40% of
collectible December credit sales as follows: $60,000 + $180,000 × 95% × 60% + $360,000 × 95% × 40% =
$299,400.
Question 73 - IMA 08-P2-03 - Budget Methodologies
All of the following are criticisms of the traditional budgeting process except that it:
(c) HOCK international, page 44
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A. Is not used until the end of the budget period to evaluate performance.
B. Overemphasizes a fixed time horizon such as one year.
C. Makes across-the-board cuts when early budget iterations show that planned expenses are too high.
D. Incorporates non-financial measures as well as financial measures into its output.
A. In some organizations, this may occur. Actual performance for a period is measured against budgeted
performance for that period. While it is necessary to wait until the end of a period to measure the budgetary variance
for the whole period, the budget period can be broken into smaller timeframes. A 12 month budget can, and often
will, be divided into monthly amounts to allow for current month and year-to-date budget variance reporting
throughout the year, and operational adjustments can be made as necessary.
B. Most budgets do, in fact, focus on a one year, or 12 month time period. It is a strategic plan that looks farther into
the future.
C. The traditional budgeting process may lead to across-the-board cuts when early budget iterations show that
planned expenses are too high. Budgeting should not necessarily require across the board cuts, even when
expenses are higher than desired. Cost cutting should be based on what is best for the organization. Frequently
those cuts will not be equally distributed.
D. This is not a criticism of the traditional budgeting process, because it is not a feature of any budgeting
process, traditional or non-traditional. A budget is quantitative and would not include non-financial
measures in its output at all.
Question 74 - IMA 08-P2-28 - Budget Methodologies
A budgeting approach that requires a manager to justify the entire budget for each budget period is known as:
A. Incremental budgeting.
B. Zero-base budgeting.
C. Performance budgeting.
D. Program budgeting.
A. Incremental budgeting simply takes historical information and adjusts it for anticipated increases or decreases in
the coming year. This type of budgeting does not involve justifying the entire budget for each budget period.
B. Zero-based budgeting is a budgeting method in which the budget is prepared without any reference to, or
use of, the current period’s budget and the likely operating results for the current period. In zero based
budgeting the manager must start from scratch and justify all incomes and expenses proposed.
C. Performance budgets use statements of missions, goals and objectives to explain why the money is being spent.
It is a way to allocate resources to achieve specific objectives based on program goals and measured results.
Performance budgeting starts with a goal, then determines strategies and activities to accomplish that goal and
justify the expenses. However, that justification is limited to the activities that accomplish a particular goal and does
not extend to the entire budget.
D. Program budgeting is used mainly by non-profit organizations and governmental bodies. It involves planning and
budgeting for a specific program which may have not only expenses but income as well. If the program has income,
the goal is to have the program income not only cover the program expenses but to exceed them. Program
budgeting is limited to the activities that relate to one specific program and does not extend to the entire budget.
Question 75 - CMA 1293 H1 - Budget Methodologies
The use of standard costs in the budgeting process signifies that an organization has most likely implemented a
A. Static budget.
B. Flexible budget.
(c) HOCK international, page 45
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C. Capital budget.
D. Zero-base budget.
A.
A fixed budget, or static budget, is a budget that is prepared for only one level of activity within the company. A static
budget does not require the use of standard costs.
B. A flexible budget is a budget that is prepared for the actual activity level achieved during the period. This
is done using the standard cost per unit. Therefore, if a company is using standard costs it may indicate that
they are also using a flexible budget.
C.
The capital budget is the budget in which all capital (property, plant and equipment) expenditures are planned. This
budget is often prepared years in advance so that the company is able to obtain the necessary financing or
accumulate the necessary cash to carry out its capital expansion plans. Although capital expansion plans that affect
the budget being developed must be incorporated into that budget, there is no reason to say that use of standard
costs in the budgeting process signifies that an organization has implemented a capital budget. To the extent that the
capital budget is incorporated into the budget being developed, a capital budget is a part of any budget, whether it is
a static budget, a flexible budget, or a zero-base budget.
D. Zero-based budgeting is the budgeting method in which the current year budget is prepared without any reference
to, or use of, the prior period's budget. The use of this form of budgeting does not require the use of standard costs.
Question 76 - CMA 692 H4 - Budget Methodologies
The budget that describes the long-term position, goals, and objectives of an entity within its environment is the
A. Operating budget.
B. Capital budget.
C. Cash management budget.
D. Strategic budget.
A. The operating budget is a short-term budget that is related to the operations of the company. It does not describe
the long-term position, goals and objectives of the company within its environment.
B. The capital budget is used to plan all capital expenditures (property, plant and equipment). This budget is often
prepared years in advance, so that the company can plan to obtain the necessary financing or accumulate the
needed cash to carry out its capital expansion plans. However, it does not describe the long-term position, goals and
objectives of an entity within its environment.
C. The cash management budget relates to the cash inflows, outflows and cash balances of the company. It is a
short-term budget that is concerned with liquidity. It does not describe the long-term position, goals and objectives of
the company within its environment.
D. Long-term, or strategic, planning for periods of five years and more which is based on the objectives of
the organization is called the strategic plan.
Question 77 - CMA 1292 H5 - Budget Methodologies
Barnes Corporation expected to sell 150,000 board games during the month of November, and the company's
master budget contained the following data related to the sale and production of these games:
Revenue
Direct materials
$2,400,000
675,000
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Direct labor
300,000
Variable overhead
450,000
Contribution
$ 975,000
Fixed overhead
250,000
Fixed selling/administration
500,000
Operating income
$ 225,000
Actual sales during November were 180,000 games. Using a flexible budget, the company expects the operating
income for the month of November to be
A. $270,000.
B. $510,000.
C. $225,000.
D. $420,000.
A. This is calculated using the static budget operating income per unit of $1.50 ($225,000 ÷ 150,000) and multiplied
by the actual level of sales of 180,000. This gives the operating income of $270,000 ($1.5 × 180,000), but it ignores
the fact that fixed costs do not vary with the level of activity.
B. This answer results from incorrectly treating variable overhead costs as fixed costs. See the correct answer for a
complete explanation.
C. This is the static budget operating income not adjusted for the actual level of output.
D.
The flexible budget is the budget developed for the actual achieved level of activity rather than the master
budget level. To compute the flexible budget we must use the standard costing system, i.e. we need to
determine the budgeted selling price, budgeted variable cost per unit, and budgeted total amount of fixed
costs.
The budgeted selling price minus the budgeted cost per unit equal the contribution per unit, so we can use
the budgeted contribution per unit and need not calculate the first two items. The budgeted contribution per
unit is $6.50 ($975,000 ÷ 150,000). Fixed costs for the flexible budget are the same as for the static budget,
since fixed costs do not fluctuate with the level of output.
The flexible budget contribution margin for sales of 180,000 is $1,170,000 ($6.50 × 180,000). Subtracting the
fixed costs from the expected contribution margin for the actual level of sales, we arrive at a flexible budget
operating income of $420,000 ($1,170,000 $250,000 $500,000 = $420,000).
Question 78 - IMA 08-P2-16 - Budget Methodologies
All of the following are disadvantages of top-down budgeting as opposed to participatory budgeting, except that it:
A. Reduces the time required for budgeting.
B. May result in a budget that is not possible to achieve.
C. Reduces the communication between employees and management.
D. May limit the acceptance of proposed goals and objectives.
A. This is not a disadvantage of top-down budgeting. A top down budget does not require as much
development time, as fewer voices must be heard.
B. This is a disadvantage of top-down budgeting. Senior management may decree a desired outcome that is
unrealistic under current working conditions. Senior management is not generally as familiar with day to day tasks
and constraints as lower level managers and employees would be.
C. This is a disadvantage of top-down budgeting. A participatory budget process provides management at all levels
an opportunity to solicit ideas from employees. Without this approach, communication between employees and
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management is reduced, as employees may not feel as open to voicing opinions.
D. This is a disadvantage of top-down budgeting. When senior management dictates the budget, lower level
managers and their staff may not only not accept the budget, but they may also not accept senior management’s
goals and objectives on which the budget is based. Senior management may very well be unaware of opportunities
and strengths within their divisions. Often these opportunities are introduced by divisional management personnel
who can see from the ground level how an opportunity can be capitalized upon. These leads are often unknown to
senior management.
Question 79 - CMA 1293 3-12 - Budget Methodologies
Superflite expects April sales of its deluxe model airplane, the C-14, to be 402,000 units at $11 each. Each C-14
requires three purchased components shown below.
Purchase Number Needed
Cost
for each C-14 Unit
A-9
$0.50
1
B-6
0.25
2
D-28
1.00
3
Factory direct labor and variable overhead per unit of C-14 totals $3.00. Fixed factory overhead is $1.00 per unit at a
production level of 500,000 units. Superflite plans the following beginning and ending inventories for the month of
April and uses standard absorption costing for valuing inventory.
Part No.
C-14
A-9
B-6
D-28
Units at Units at
April 1 April 30
12,000 10,000
21,000 9,000
32,000 10,000
14,000 6,000
Assume Superflite plans to manufacture 400,000 units in April. The total April budget for all purchased components
should be
A. $1,596,500.
B. $1,608,500.
C. $1,600,000.
D. $1,580,500.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D.
To solve these question we should use the formula for the physical flow of inventory to calculate the
amount to be purchased for each component (A-9, B-6 and D-28), then use the price of each component to
calculate the total amount to be budgeted for April's production.
Beginning Inventory + Units Purchased
Units Used in Production = Ending Inventory
For A-9: one unit of A-9 is necessary for each unit of finished product. Plugging numbers for A-9 into the
formula we will get the following: 21,000 + Units Purchased (400,000 × 1) = 9,000. Solving for Units
Purchased, we get Units Purchased = 388,000. The cost to purchase 388,000 units of A-9 $194,000 ($0.50 ×
388,000).
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For B-6: two units of B-6 are necessary for each unit of finished product. Plugging numbers for B-6 into the
formula we will get the following: 32,000 + Units Purchased (400,000 × 2) = 10,000. Solving for Units
Purchased, we get Units Purchased = 778,000. The cost to purchase 778,000 units of B-6 is $194,500 ($0.25
× 778,000).
For D-28: three units of D-28 are necessary for each unit of finished product. Plugging numbers for D-28 into
the formula we get the following: 14,000 + Units Purchased (400,000 × 3) = 6,000. Solving for Units
Purchased, we get Units Purchased = 1,192,000. The cost to purchase 1,192,000 units of D-28 is $1,192,000
($1.00 × 1,192,000).
Adding the costs to purchase all of the components together, we get $1,580,500 ($194,000 + $194,500 +
$1,192,000).
Question 80 - CIA 593 IV-12 - Budget Methodologies
A company has the following budget data:
Beginning finished goods inventory
Sales
Ending finished goods inventory
Direct materials
Direct labor
Variable factory overhead
Selling costs
Fixed factory overhead
40,000 units
70,000 units
30,000 units
$10 per unit
$20 per unit
$5 per unit
$2 per unit
$80,000
What will be the total budgeted production costs?
A. $2,100,000
B. $2,300,000
C. $2,180,000
D. $2,220,000
A. This is the total variable costs of production.
B. In this answer it incorrectly assumes that selling costs are a variable production cost. However, selling costs are a
period cost.
C.
First, we need to determine the number of units produced in during the period using the formula for the
physical flow of goods: Beginning Inventory + Units Produced Units Sold = Ending Inventory.
40,000 + Units Produced
Units Produced = 60,000
70,000 = 30,000.
We then multiply the unit variable production cost by the number of units produced and add the product to
the fixed overhead cost, since fixed overhead is a production cost also. Period costs such as selling costs
are not production costs and we do not take them into consideration when calculating the budgeted
production costs.
Unit variable production costs are: $10 DM + $20 DL + $5 VOH = $35. Total variable production costs are:
$35 × 60,000 = $2,100,000. Total production costs are: $2,100,000 + $80,000 = $2,180,000
D. In this answer it incorrectly assumes that selling costs are variable production costs, and fixed overhead are not
included in calculation. However, selling costs are a period cost, not a production cost, and fixed overheads are a
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production cost.
Question 81 - CMA 1296 H12 - Budget Methodologies
Daffy Tunes manufactures a toy rabbit with moving parts and a built-in voice box. Projected sales in units for the next
5 months are as follows:
Month Sales in Units
January
30,000
February
36,000
March
33,000
April
40,000
May
29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are
purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit, and variable overhead cost
is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy's policy
is to manufacture 1.5 times the coming month's projected sales every other month, starting with January (i.e.,
odd-numbered months) for February sales, and to manufacture 0.5 times the coming month's projected sales in
alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to
other products as needed during the even-numbered months.
The unit production budget for toy rabbits for January is
A. 45,000 units.
B. 14,500 units.
C. 54,000 units.
D. 16,500 units.
A. The level of production needs to be based on the following month projected sales, not on the current month's
sales.
B. This is the budgeted production for April.
C. This is a very long question, but with only a few important pieces of information. In January, the
production will be equal to 1.5 times the expected sales in February. Expected February sales are 36,000, so
in January the company will produce 54,000 units.
D. This is the budgeted production for February.
Question 82 - CIA 1193 IV-13 - Budget Methodologies
A company has budgeted sales for the upcoming quarter as follows:
January February March
Units 15,000 18,000 16,500
The ending finished goods inventory for each month equals 50% of the next month's budgeted sales. Additionally, 3
pounds of raw materials are required for each finished unit produced. The ending raw materials inventory for each
month equals 200% of the next month's production requirements. If the raw materials cost $4.00 per pound and
must be paid for in the month purchased, the budgeted raw materials purchases (in dollars) for January are
A. $180,000
B. $198,000
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C. $216,000
D. $207,000
A. This is a dollar cost of materials required for January sales ($4.00 * 3 * 15,000).
B. This is a dollar cost of materials required for January production ($4.00 * 3 * 16,500), not for purchases of
materials.
C.
First, we need to determine the production requirements for January and February by using the formula for
the physical flow of finished goods: Beginning Inventory + Units Produced Units Sold = Ending Inventory.
Beginning Inventory for January will be 50% of January's sales, or .50 × 15,000. Ending Inventory for
January will be 50% of February's sales, or .50 × 18,000. Therefore, the formula for January production is:
7,500 + Units Produced 15,000 = 9,000
Units Produced = 16,500
Beginning Inventory for February will be 50% of February's sales, already calculated as 9,000. Ending
Inventory for February will be 50% of March's sales, or .50 × 16,500. The formula for February production is:
9,000 + Units Produced 18,000 = 8,250
Units Produced = 17,250
We know that three pounds of raw materials are needed for each unit, and there were no work-in-process
balances in either month. Now, we can determine the beginning and ending inventory level of raw materials
for January and the usage for January.
Beginning inventory for January is 99,000 lb. (16,500 * 3 * 200%). Ending inventory for January is 103,500 lb.
(17,250 * 3 * 200%). The amount of raw materials used during January is the January production of 16,500 * 3
pounds per unit, or 49,500 pounds.
Plugging these numbers into the formula of the physical flow of goods we will get the following:
99,000 + Purchases 49,500 = 103,500
Purchases = 54,000 pounds of raw material to be purchased in January
Multiplying this quantity by the price per pound of raw material we will get the dollar amount of purchases in
January: $216,000 ($4.00 * 54,000).
D. This is a dollar cost of materials required for February production ($4.00 * 3 * 17,250).
Question 83 - CMA 1292 H4 - Budget Methodologies
A budget manual, which enhances the operation of a budget system, is most likely to include
A. Employee hiring policies.
B. Distribution instructions for budget schedules.
C. A chart of accounts.
D. Documentation of the accounting system software.
A. Employee hiring policies should be included in the personnel manual, and they are not necessary for budget
preparation.
B. A budget manual details the budget process. One of the areas that must be included in the budget manual
is the communication and distribution process. As one budget is completed it must be sent to all the
departments whose budgets are based on that already completed budget.
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C. A chart of accounts is included in the accounting manual, not the budgeting manual.
D. Documentation of the accounting system software is not needed for budget preparation and is not included in the
budget manual.
Question 84 - CIA 598 3-21 - Budget Methodologies
A flexible budget is a quantitative expression of a plan that:
A. Projects costs on the basis of future improvements in existing practices and procedures during a budget period.
B. Is developed for the actual level of output achieved for the budget period.
C. Focuses on the costs of activities necessary to produce and sell products and services for a budget period.
D. Is comprised of the budgeted income statement and its supporting schedules for a budget period.
A. This is the definition of Kaizen budgeting.
B. This is the definition of a flexible budget.
C. This is the definition of activity-based budgeting.
D. This is the definition of an operating budget.
Question 85 - CMA 1294 3-8 - Budget Methodologies
Super Drive, a computer disk storage and back-up company, uses accrual accounting. The company's Statement of
Financial Position for the year ended November 30, is as follows:
Super Drive
Statement of Financial Position
November 30
Assets
Cash
Accounts receivable, net.
Inventory
Property, plant and equipment
Total assets
Liabilities and Equity
Accounts payable
Common stock
Retained earnings
Total liabilities and shareholders equity
$52,000
150,000
315,000
1,000,000
$1,517,000
$175,000
900,000
442,000
$1,517,000
Additional information regarding Super Drive's operations include the following:
Sales are budgeted at $520,000 for December and $500,000 for January of the next year.
Collections are expected to be 60% in the month of sale and 40% in the month following the sale.
80% of the disk drive components are purchased in the month prior to the month of sale, and 20% are
purchased in the month of sale. Purchased components are 40% of the cost of goods sold.
Payment for the components is made in the month following the purchase.
Cost of goods sold is 80% of sales.
The projected balance in accounts payable on December 31 is
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A. $166,400
B. $326,400
C. $416,000
D. $161,280
A. This is the cost of components in the cost of goods sold in December ($416,000 * 40% = $166,400). See the
correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is a cost of goods sold in December. See the correct answer for a complete explanation.
D.
Purchases in December will affect the end of December balance of accounts payable, as all payments are
made in the month following purchase. Purchases made in November will not have an effect on December
A/P, as they will have been fully paid during December. Thus, we need to determine the amount of
purchases in December.
Purchased components are 40% of the cost of goods sold and cost of goods sold is 80% of sales.
Purchases in December are 80% of components for January sales, and 20% for December sales. The cost of
goods sold in January will be $400,000 ($500,000 × 80%). The cost of components in cost of goods sold in
January is $160,000 ($400,000 × 40%). Purchases of components to satisfy January sales made in December
are $128,000 ($160,000 × 80%). The cost of goods sold in December is $416,000 ($520,000 × 80%). The cost
of components in cost of goods sold in December is $166,400 ($416,000 × 40%). Purchases of components
to satisfy December sales made in December are $33,280 ($166,400 × 20%). Adding these two numbers
together we get the amount of Accounts Payable for December of $161,280 ($128,000 + $33,280).
Question 86 - CMA 692 3-25 - Budget Methodologies
Berol Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5% per
month. The desired monthly ending inventory in units of finished product is 80% of the next month's estimated sales.
There are 150,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of direct
materials at a cost of $1.20 per pound. There are 800,000 pounds of direct materials in inventory on June 30.
Berol Company's production requirement in units of finished product for the 3-month period ending September 30 is
A. 712,025 units.
B. 665,720 units.
C. 638,000 units.
D. 630,500 units.
A. This answer is incorrect. See the correct answer for a complete explanation.
B.
This question covers a three month period beginning July 1 and ending September 30. Beginning inventory
in July is 150,000 finished units. The desired monthly ending inventory in units of finished product is 80% of
the next month's estimated sales. According to the expected sales growth rate, the company plans to sell
210,000 units (200,000 × 105%) in August, 220,500 units (210,000 × 105%) in September and 231,525 units
(220,500 × 105%) in October. Thus, ending inventory in September will need to be 185,220 units (231,525 ×
80%). During July, August and September sales are forecasted to be 630,500 units (200,000 + 210,000 +
220,500). Now we can calculate the number of units that need to be produced:
Beginning Inventory + Units Produced
150,000 + Units Produced
Units Sold = Ending Inventory
630,500 = 185,220.
Solving for Units Produced,
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Units Produced = 665,720.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the expected sales for the next three months. See the correct answer for a complete explanation.
Question 87 - CMA 1283 4-25 - Budget Methodologies
Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's
operations are as follows:
Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.
Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
Gross margin is 25% of sales.
A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and
20% is purchased in the month of sale. Payment for merchandise is made in the month following the
purchase.
Other expected monthly expenses to be paid in cash are $22,600.
Annual depreciation is $216,000.
Below is Kelly Company's statement of financial position at November 30, year 1.
Assets
Cash
$22,000
Accounts receivable
76,000
(net of $4,000 allowance for uncollectible accounts)
Inventory
132,000
Property, plant, and equipment (net of $680,000 accumulated deprecation)
870,000
Total assets
$1,100,000
Liabilities and Stockholders' Equity
Accounts payable
$162,000
Common stock
800,000
Retained earnings
138,000
Total liabilities and stockholders' equity
$1,100,000
The projected balance in inventory on December 31, year 1 is
A. $153,000.
B. $120,000.
C. $160,000.
D. $150,000.
A. This is the total purchases to be made during the month of December, but it is not the ending inventory balance.
Ending inventory is equal to beginning inventory + purchases made during the period cost of inventory sold during
the period. See the correct answer for a complete explanation.
B.
Ending inventory is equal to beginning inventory + purchases made during the period
sold during the period.
cost of inventory
Beginning inventory is given as $132,000.
Purchases during December are 80% of the cost of inventory projected to be sold during January and 20%
of the cost of inventory projected to be sold during December. Since the gross margin is 25%, the projected
cost of sales will be 75% of projected sales. Sales are projected at $220,000 for December and $200,000 for
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January. Therefore, total purchases during December will be (January sales of $200,000 × .75 × .80) +
(December sales of $220,000 × .75 × .20), or $120,000 + $33,000, which equals $153,000.
The cost of inventory sold during the period is December sales of $220,000 × .75, which is $165,000.
Therefore, the ending inventory as of December 31 is:
$132,000 + $153,000
$165,000 = $120,000
C. This is the 80% of projected January sales. Ending inventory is equal to beginning inventory + purchases made
during the period cost of inventory sold during the period. See the correct answer for a complete explanation.
D. This is 75% of projected January sales. Ending inventory is equal to beginning inventory + purchases made during
the period cost of inventory sold during the period. See the correct answer for a complete explanation.
Question 88 - CMA 1295 H6 - Budget Methodologies
Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget
schedule that would provide the necessary input data for the direct labor budget would be the
A. Raw materials purchases budget.
B. Sales forecast.
C. Schedule of cash receipts and disbursements.
D. Production budget.
A. The raw materials purchases budget does not provide information for the direct labor budget preparation.
B. Sales forecast will give information to determine the level of production. However, it does not provide direct
information to prepare the direct labor budget.
C. The cash budget is the last budget in the master budget, and the direct labor budget must be prepared before the
cash budget can be prepared.
D. Once the sales budget has been developed, it provides information with which to prepare the production
budget. The production budget determines how muchof the product will be produced. Thus, it provides
information to prepare the direct labor, direct materials and manufacturing overhead budgets.
Question 89 - CMA 1283 4-22 - Budget Methodologies
Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly's
operations are as follows:
Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.
Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
Gross margin is 25% of sales.
A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and
20% is purchased in the month of sale. Payment for merchandise is made in the month following the
purchase.
Other expected monthly expenses to be paid in cash are $22,600.
Annual depreciation is $216,000.
Below is Kelly Company's statement of financial position at November 30, year 1.
Assets
Cash
$22,000
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Accounts receivable
76,000
(net of $4,000 allowance for uncollectible accounts)
Inventory
132,000
Property, plant, and equipment (net of $680,000 accumulated deprecation)
870,000
Total assets
$1,100,000
Liabilities and Stockholders' Equity
Accounts payable
$162,000
Common stock
800,000
Retained earnings
138,000
Total liabilities and stockholders' equity
$1,100,000
The budgeted cash collections for December year 1 are
A. $212,000.
B. $132,000.
C. $208,000.
D. $203,600.
A. This amount include the allowance for bad debt, which should not be considered. See the correct answer for a
complete explanation.
B. This is the amount of cash collected from December sales in December. See the correct answer for a complete
explanation.
C. Cash collection of December sales in December is 60% of the sales level, or $132,000 ($220,000 × 60%).
December cash collections also include some of the proceeds from November sales. Accounts receivable
net of bad debt allowance are $76,000 as of November 30, which are going to be collected in their entirety in
December. Thus, the total budgeted cash collections in December is $208,000 ($132,000 + $76,000).
D. This is the budgeted cash collections for January Year 2. See the correct answer for a complete explanation.
Question 90 - CMA 1295 H4 - Budget Methodologies
When preparing the series of annual operating budgets, management usually starts the process with the
A. Sales budget.
B. Cash budget.
C. Balance sheet.
D. Capital budget.
A. The sales budget is usually the first budget to be prepared.
B. The cash budget is usually the last budget prepared. See the correct answer for a complete explanation.
C. The balance sheet may be prepared only after all of the individual budgets have been prepared. See the correct
answer for a complete explanation.
D. The capital budget is a long-term budget and is prepared outside of the annual budgeting process. See the
correct answer for a complete explanation.
Question 91 - IMA 08-P2-47 - Budget Methodologies
Tidwell Corporation sells a single product for $20 per unit. All sales are on account, with 60% collected in the month
of sale and 40% collected in the following month. A partial schedule of cash collections for January through March
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of the coming year reveals the following receipts for the period.
Cash Receipts
January
February
March
December receivables $32,000
From January sales
54,000
$36,000
From February sales
66,000
$44,000
Other information includes the following:
• Inventories are maintained at 30% of the following month's sales.
• Assume that March sales total $150,000.
The number of units to be purchased in February is
A. 7,750 units.
B. 4,900 units.
C. 6,100 units.
D. 3,850 units.
A. This answer assumes that beginning inventory was zero. Beginning inventory should be 30% of February's sales,
or 1,650 units.
B. This calculation has all of the numbers correct but it reverses the beginning inventory and ending inventory
balances in the inventory equation. The inventory equation is Beginning Inventory + Purchases Sales = Ending
Inventory.
C.
Needed information to be calculated is beginning inventory for February, sales for February and ending
inventory for February. These are needed in units in order to calculate purchases for February. The
inventory equation is Beginning Inventory + Purchases Sales = Ending Inventory. When any three of these
amounts are available or can be calculated, the fourth amount can always be calculated. This equation can
be used with either monetary amounts or number of units. Here we have monetary amounts and will convert
it to number of units using the product price of $20 per unit.
The beginning inventory for February will depend upon February sales. February sales can be calculated
from the cash receipts given as $66,000 + $44,000, or $110,000. $110,000 in sales divided by the $20 price
per unit = 5,500 units sold during February. Beginning inventory for February will be 30% of 5,500, or 1,650
units.
Ending inventory for February will be based on the number of sales in March, which is $150,000 divided by
$20, or 7,500 units. Ending inventory for February will be 30% of 7,500, or 2,250 units.
The number of units to be purchased in February, using the inventory equation, will be:
1,650 + X
5,500 = 2,250
X = 6,100 units
D. This answer assumes that ending inventory is zero. Ending inventory should be 30% of March sales, or 2,250.
Question 92 - CMA 691 3-1 - Budget Methodologies
Wilson Company uses a comprehensive planning and budgeting system. The proper order for Wilson to prepare
certain budget schedules would be
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A. Cost of goods sold, balance sheet, income statement, and statement of cash flows.
B. Statement of cash flows, cost of goods sold, income statement, and balance sheet.
C. Income statement, balance sheet, statement of cash flows, and cost of goods sold.
D. Cost of goods sold, income statement, balance sheet, and statement of cash flows.
A. The income statement is an input to the balance sheet, so the income statement is prepared before the balance
sheet.
B. The statement of cash flows is the last financial statement to be prepared in the budgeting process.
C. The budget for cost of goods sold is prepared before the budgeted income statement and before any of financial
budgets (capital budget, cash budget, budgeted balance sheet, budgeted statement of cash flows).
D. Cost of goods sold is a part of operating budget which culminates in the preparation of the budgeted
income statement. The budgeted income statement is an input to the budgeted balance sheet, and the
budgeted statement of cash flows is the last to be prepared in the budgeting process.
Question 93 - IMA 08-P2-12 - Budget Methodologies
Helen Thomas, Amador Corporation's vice president of planning, has seen and heard it all. She has told the
corporate controller that she is "....very upset with the degree of slack that veteran managers use when preparing
their budgets."
Thomas has considered implementing some of the following activities during the budgeting process.
1. Develop the budgets by top management and issue them to lower-level operating units.
2. Study the actual revenues and expenses of previous periods in detail.
3. Have the budgets developed by operating units and accept them as submitted by a company-wide budget
committee.
4. Share the budgets with all employees as a means to reach company goals and objectives.
5. Use an iterative budgeting process that has several "rounds" of changes initiated by operating units and/or
senior managers.
Which one of these activities should Amador implement in order to best remedy Thomas's concerns, help eliminate
the problems experienced by Amador, and motivate personnel?
A. 2 and 3.
B. 1 only.
C. 2 and 4.
D. 2, 4 and 5.
A. Option 2 is correct, but option 3 won't fix the problem of "slack" that Thomas is concerned about.
B. A budget developed by top management and issued to lower level units is unlikely to motivate employees.
C. Option 2 and option 4 will generate a budget and that has employee buy in, but it may not eliminate slack.
D. Options 2, 4 and 5 are the best way to eliminate slack through the rounds of changes and the review of
historical information. Option 4 will also help generate employee buy in and motivate them to help achieve
the overall corporate targets.
Question 94 - CMA 686 4-23 - Budget Methodologies
Simson Company's master budget shows straight-line depreciation on factory equipment of $258,000. The master
budget was prepared at an annual production volume of 103,200 units of product. This production volume is
expected to occur uniformly throughout the year. During September, Simson produced 8,170 units of product, and
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the accounts reflected actual depreciation on factory machinery of $20,500. Simson controls manufacturing costs
with a flexible budget. The flexible budget amount for depreciation on factory machinery for September would be
A. $19,475.
B. $20,500.
C. $21,500.
D. $20,425.
A. Depreciation is a fixed cost and does not change with the level of production.
B. This is the actual amount of depreciation that was recorded during the month. The question asks for the flexible
budget amount for depreciation, not the actual amount.
C. The flexible budget is a budget that is prepared for the actual level of activity achieved during the period.
Only budgeted variable costs are adjusted in a flexible budget. Fixed costs are the same in the flexible
budget as they are in the static budget, because fixed costs remain the same regardless the level of activity.
Since depreciation is a fixed cost, the amount of depreciation expense for the flexible budget is equal to the
depreciation expense for the static budget, or $21,500 (the total budgeted for the year of $258,000 ÷ 12).
D. Depreciation is a fixed cost and does not change with the level of production.
Question 95 - IMA 08-P2-02 - Budget Methodologies
When compared to static budgets, flexible budgets:
A. Offer managers a more realistic comparison of budget and actual fixed cost items under their control.
B. Encourage managers to use less fixed costs items and more variable cost items that are under their control.
C. Offer managers a more realistic comparison of budget and actual revenue and cost items under their control.
D. Provide a better understanding of the capacity variances during the period being evaluated.
A. A flexible budget takes the variable revenues and costs as they are planned in the master budget and adjusts the
master budget amounts to what they would have been if the actual volume achieved had been used in preparing the
budget. Flexible budgets show how variable costs change at different production levels. Total budgeted fixed costs
are the same in both the static budget and the flexible budget, since fixed costs are not dependent in total upon
capacity usage. Since fixed costs are often determined before the budget is developed, budgeted fixed costs are
generally fairly realistic.
B. Fixed and variable costs are not interchangeable within the organization. Simply using more raw materials will not
eliminate the need to pay rent, for example.
C. A flexible budget takes the variable revenues and costs as they are planned in the master budget and
adjusts the master budget amounts to what they would have been if the actual volume achieved had been
used in preparing the budget. A flexible budget prepared in addition to the master budget that is used
exclusively for reporting on variances other than those due to volume differences allows management to
focus on the variances that may be caused by production or administrative problems that need attention.
D. Variance analysis, and specifically the fixed overhead production-volume variance, measures the variance due to
the actual production level being different from the production capacity level used to calculate the budgeted fixed
overhead cost to be applied to each unit produced. The production-volume variance, not the flexible budget,
provides a better understanding of the result of this difference. Total budgeted fixed costs are the same in both the
static budget and the flexible budget, since fixed costs are not dependent in total upon capacity usage.
Question 96 - CIA 594 III-68 - Budget Methodologies
A company produces a product that requires 2 pounds of a raw material. The company forecasts that there will be
6,000 pounds of raw material on hand at the end of June. At the end of any given month the company wishes to
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have 30% of next month's raw material requirements on hand. The company has budgeted production of the
product for July, August, September, and October to be 10,000, 12,000, 13,000, and 11,000 units, respectively. As
of June 1, the raw material sells for $1.00 per pound.
The cost of inventory is determined using the last-in-first-out (LIFO) method. If the price of raw material increases
10% as of June 30, what will be the effect of this increase on the cost of purchases from July to September?
A. $3,230 increase.
B. $60 increase.
C. $600 increase.
D. $7,060 increase.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D.
We need to determine the beginning raw materials inventory, the ending raw materials inventory and the
amount of raw materials needed for production, so we can determine how much raw material will need to be
purchased for the given production period of July through September.
Beginning inventory of raw materials as of July 1 needs to be 30% of July's production requirements: 10,000
× 2 pounds per unit × 30% = 6,000 lb. The question tells us that the company forecasts that there will be
6,000 pounds of raw material on hand at the end of June, so the beginning inventory for July will be
sufficient (i.e., no additional raw materials will need to be purchased to adjust the beginning inventory).
Ending inventory of raw materials for September needs to be 30% of October's production requirements:
11,000 × 2 pounds per unit × 30% = 6,600 lb.
The number of units to be produced from July through September is 35,000 units (10,000 + 12,000 + 13,000).
The amount of raw materials required for production in these three months is 70,000 lb. (35,000 × 2 pounds
per unit). Now we can calculate the amount of materials that the company will need to purchase during
these three months. The standard calculation for inventory is as follows, and if we know three of the four
numbers, we can always find the fourth one:
Beginning Inventory
6,000
Plus: Purchases
?
Minus: Materials Used
70,000
Equals: Ending Inventory 6,600
We can solve this with an algebraic equation, or we can simply "back into" the missing purchases number:
6,000 + X 70,000 = 6,600
X 64,000 = 6,600
X = 70,600
We know that the difference in the price of materials purchased before June 30th and after June 30th is
$0.10 ($1.10 $1.00). Thus, the effect of price increase for raw materials for the given period is $7,060 ($0.10
× 70,600).
Question 97 - IMA 08-P2-34 - Budget Methodologies
Which one of the following best describes the order in which budgets should be prepared when developing the
annual master operating budget?
A. Production budget, revenue budget, direct material budget.
B. Production budget, direct material budget, revenue budget.
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C. Revenue budget, production budget, direct material budget.
D. Revenue budget, direct material budget, production budget.
A. Until the revenue budget and an estimate of how much will be sold has been prepared, the production budget
cannot be developed.
B. Until the revenue budget and an estimate of how much will be sold has been prepared, the production budget
cannot be developed.
C. The revenue budget includes projected sales, which determines how much should be produced; and the
amount to be produced determines how much direct material will be needed.
D. Until the production budget has been prepared, the direct material budget cannot be prepared.
Question 98 - IMA 08-P2-32 - Budget Methodologies
What would be the correct chronological order of preparation for the following budgets?
I. Cost of goods sold budget.
II. Production budget.
III. Purchases budget.
IV. Administrative budget.
A. IV, II, III, I
B. II, III, I, IV
C. III, II, IV, I
D. I, II, III, IV
A. The administrative budget must come last in this series, as some variable administrative expenses such as
purchasing expenses will be based on the previous budgets.
B. The production budget indicates what needs to be produced and when, so this is information required for
the purchases budget. The COGS budget is based on desired beginning inventory, desired ending
inventory, and expected purchases, so the purchases budget must be prepared before the COGS budget
can be prepared. The administrative budget is last as some variable administrative expenses such as
purchasing expenses will be based on the previous budgets.
C. The purchases budget cannot be completed before the production budget is complete.
D. The COGS budget cannot be completed before the production budget and purchases budgets are complete.
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