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Question 1 - CMA 1293 3-10 - Budgeting
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
The C-14 production budget for April should be based on the manufacture of
A. 390,000 units.
B. 424,000 units.
C. 400,000 units.
D. 402,000 units.
A. This answer ignores the requirements of ending inventory. 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 goods: Beginning Inventory + Units
Produced = Units Sold + Ending Inventory. Plugging numbers for C-14 into the formula we will get the
following: Units Produced = 402,000 + 10,000 - 12,000. Solving further, the number of units produced is
400,000.
D. 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.
Question 2 - CIA 1187 IV-10 - Budgeting
Management has prepared a graph showing the total costs of operating branch warehouses throughout the country.
The cost line crosses the vertical axis at $200,000. The total cost of operating one branch is $350,000. The total cost
of operating ten branches is $1,700,000. For purposes of preparing a flexible budget based on the number of branch
warehouses in operation, what formula should be used to determine budgeted costs at various levels of activity?
A. Y = $350,000 + $150,000X
B. Y = $200,000 + $170,000X
C. Y = $200,000 + $150,000X
D. Y = $350,000 + $200,000X
A. The calculation of the fixed costs in this answer is incorrect. See the correct answer for a complete explanation.
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B. The calculation of the variable costs in this answer is incorrect. See the correct answer for a complete explanation.
C. In the formula, the constant amount represents the fixed costs. In this situation, since the total cost line
intersects the vertical axis at $200,000, that is the fixed cost of operations. This leaves the company with
$1,500,000 of variable costs when operating 10 branches. This gives a per branch variable cost of $150,000.
Therefore, the number of branches needs to be multiplied by $150,000 and added to the fixed cost to calculate
the total cost.
D. The calculation of fixed and variable costs is incorrect in this answer. See the correct answer for a complete
explanation.
Question 3 - CMA 1292 H1 - Budgeting
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column
should be based on the
A. Actual amount for the same period in the preceding year.
B. Budget adjusted to the planned level of activity for the period being reported.
C. Budgeted amount in the original budget prepared before the beginning of the year.
D. Budget adjusted to the actual level of activity for the period being reported.
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. 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.
Question 4 - CMA 1295 H7 - Budgeting
When budgets are used to evaluate performance and to set limits on spending, the process will often result in
departments adding something "extra" to ensure the budgets will be met. This "extra" is
A. Strategic planning.
B. Continuous budgeting.
C. Management by objectives.
D. Budgetary slack.
A. Long-term (or Strategic) planning is for periods greater than one year and is based on the objectives of the
organization. Some plans may extend up to 20 years. Strategic planning is directional, rather than operational. This
means it focuses on where we want to go instead of specifically how we are going to get there.
B. A continuous budget, also called a rolling budget, is one that is automatically 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.
C. Management by objectives is a management approach that increases the amount of self-direction that employees
have. In order for MBO to be successful there must be a lot of communication about the goals of the company and the
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responsibility of individuals within the company. In MBO, a manager and his or her workers are responsible for
agreeing upon their objectives and the methods used to obtain them.
D. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists,
either revenues are understated or expenses are overstated and this slack makes it difficult to properly
evaluate performance.
Question 5 - CMA 1293 H1 - Budgeting
The use of standard costs in the budgeting process signifies that an organization has most likely implemented a
A. Static budget.
B. Capital budget.
C. Flexible budget.
D. Zero-base budget.
A. A fixed budget, or static budget, is a budget that is prepared for only one level of activity (a certain level of sales)
within the company. A static budget does not require the use of standard costs.
B. 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. There is no need to worry about standard costs in the capital budget.
C. A flexible budget a budget that is prepared for different levels of output. This is done using the standard
cost per unit. Therefore, if a company is using standard costs it may indicate that they have implemented a
flexible 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 6 - CMA 697 3-18 - Budgeting
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have
accounted for 10% of total sales, and payments for credit sales have been received as follows:
40% of credit sales in the month of the sale
30% of credit sales in the first subsequent month
25% of credit sales in the second subsequent month
5% of credit sales in the third subsequent month
The forecast for both cash and credit sales is as follows:
Month
January
February
March
April
May
Sales
$95,000
65,000
70,000
80,000
85,000
What is the forecasted cash inflow for Pine Hill Wood Products for May?
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A. $83,650
B. $79,375
C. $70,875
D. $76,500
A. This answer includes 5% of the January sales. See the correct answer for a complete explanation.
B. In May Pine Hill Wood Products will receive cash from both cash and credit sales as follows: May cash
sales $8,500 ($85,000*10%), 40% of May credit sales $30,600 ($85,000 * 90% * 40%), 30% of April credit sales
$21,600 ($80,000 * 90% * 30%), 25% of March credit sales $15,750 ($70,000 * 90% * 25%), and 5% of credit sales
made in February $2,925 ($65,000 * 90% * 5%). Adding these figures together, the total forecasted cash inflow
for May is $79,375.
C. This answer ignores May cash sales. See the correct answer for a complete explanation.
D. This is the amount of May credit sales. See the correct answer for a complete explanation.
Question 7 - CMA 1296 H3 - Budgeting
Which one of the following items is the last schedule to be prepared in the normal budget preparation process?
A. Selling expense budget.
B. Cash budget.
C. Cost of goods sold budget.
D. Manufacturing overhead budget.
A. The selling expense budget is an operating budget and it is completed prior to the cash budget.
B. The budgeting preparation process usually starts with sales budget and continues through the preparation
of income statement which is the last budget of operating budget and ends with preparation of financial
budget which include the pro forma balance sheet and statement of cash flows, the cash budget and the
capital budget. Cash budget belongs to the financial budget and is one of the last budgets to be prepare. This
is because the cash budget is impacted by all of the other individual budgets.
C. The cost of goods sold budget is an operating budget and it is completed prior to the cash budget.
D. The manufacturing overhead budget is an operating budget and it is completed prior to the cash budget.
Question 8 - CMA 693 H3 - Budgeting
National Telephone has been forced by competition to drastically cut operating costs which has resulted in a change
from static budgeting to flexible budgeting. Which one of the following steps will not help National Telephone gain
maximum acceptance of the proposed budgeting system?
A. Ensuring that variances highlight good performances as well as pinpoint weaknesses.
B. Demonstrating top management support for the change.
C. Focusing departmental reports only on items that are under managers' control.
D. Implementing the change quickly.
A. Ensuring that variances highlight good performances as well as pinpoint weaknesses assists in acceptance of the
change by employees.
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B. Top management support for the change assists in the acceptance of the change by employees.
C. The flexible budget allow to focus departmental reports only on items that are under managers' control and is better
than under static budget.
D. Any organizational change, including change in budgeting system, should not be made quickly. It should
be properly communicated to all affected employees, explaining the reasons for the changes, how these
changes influence their performance evaluation, etc. to reduce the fear of social, economic and personal
adjustments. The participation of employees in the implementation of the changes should be encouraged to
gain the maximum understanding and support of organizational change among employees. Hence,
implementing the change quickly is not recommended.
Question 9 - CMA 694 3-10 - Budgeting
The financial budget process includes
A. The budgeted statement of cash flows.
B. The capital budget.
C. The cash budget.
D. All of the answers are correct.
A. The financial budget process includes the preparation of the capital budget, cash budget, pro-forma balance sheet
and pro-forma statement of cash flows. Therefore, all of the answers listed are correct.
B. The financial budget process includes the preparation of the capital budget, cash budget, pro-forma balance sheet
and pro-forma statement of cash flows. Therefore, all of the answers listed are correct.
C. The financial budget process includes the preparation of the capital budget, cash budget, pro-forma balance sheet
and pro-forma statement of cash flows. Therefore, all of the answers listed are correct.
D. The financial budget process includes the preparation of the capital budget, cash budget, pro-forma
balance sheet and pro-forma statement of cash flows. Therefore, all of the answers listed are correct.
Question 10 - CMA 692 - Budgeting
The budget that describes the long-term position, goals, and objectives of an entity within its environment is the
A. Cash management budget.
B. Capital budget.
C. Operating budget.
D. Strategic budget.
A. The cash management budget is a short-term budget concerned about liquidity.
B. 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.
C. The operating budget consists of all budgets that are used to prepare the pro forma income statement.
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D. Long-term (or strategic) planning for periods greater than one year and based on the objectives of the
organization expressed in quantitative terms is called the strategic budget.
Question 11 - CMA 691 3-3 - Budgeting
Adams Manufacturing, Inc. produces farm tractors. The details of its budgeted cost of goods manufactured schedule
should come from which of the following schedules?
A. Purchases, direct labor, manufacturing overhead, finished goods, and work-in-process.
B. Purchases, raw material, work-in-process, and finished goods.
C. Direct materials used, direct labor, manufacturing overhead, and the change in work-in-process.
D. Cost of goods sold plus or minus the change planned in finished goods.
A. Purchases are usually the components of the raw materials budget. Finished goods is a component of cost of
goods sold budget.
B. Purchases are usually the components of raw materials budget.
C. Cost of goods manufactured budget consists of the direct materials and labor budgets, manufacturing
overhead incurred during the period, and also the change of work-in-process.
D. According to physical flow of goods the cost of goods manufactured is calculated as follows: COGM = COGS +
Ending FG Inventory - Beginning FG Inventory. However, this only gives us a total amount of cost of goods
manufactured, not the details of the COGM budget.
Question 12 - CMA 697 3-19 - Budgeting
Historically, Pine Hill Wood Products has had no significant bad debt experience with its customers. Cash sales have
accounted for 10% of total sales, and payments for credit sales have been received as follows:
40% of credit sales in the month of the sale
30% of credit sales in the first subsequent month
25% of credit sales in the second subsequent month
5% of credit sales in the third subsequent month
The forecast for both cash and credit sales is as follows:
Month
January
February
March
April
May
Sales
$95,000
65,000
70,000
80,000
85,000
Due to deteriorating economic conditions, Pine Hill Wood Products has now decided that its cash forecast should
include a bad debt adjustment of 2% of credit sales, beginning with sales for the month of April. Because of this policy
change, the total expected cash inflow related to sales made in April will
A. Be unchanged.
B. Decrease by $1,260.00.
C. Decrease by $1,440.00.
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D. Decrease by $1,530.00.
A. The new policy is effective for the month of April. Therefore, sales made in April will be affected.
B. This is 2% of March sales. See the correct answer for a complete explanation.
C. New policy is effective form the month of April. Therefore, sales made in April are affected. April credit
sales are $72,000 ($80,000 * 90%). The bad debt for April is estimated to be 2% of the credit sales, or $1,440
($72,000 * 2%).
D. This is 2% of May sales. See the correct answer for a complete explanation.
Question 13 - CMA 692 3-13 - Budgeting
Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division's
A. Net revenue minus controllable division costs.
B. Gross profit.
C. Net income minus the division's fixed costs.
D. Contribution margin.
A. A manager's performance valuation should be based on the factors controllable by the manager. The
contribution income statement can be used to isolate controllable costs of a business unit from its
non-controllable costs such as depreciation or allocated central costs. According to the contribution income
statement approach to evaluation, a division manager usually controls division's revenues, variable costs and
a portion of fixed costs.
B. A manager's performance valuation should be based on the factors controllable by the manager. Gross profit is
equal to sales revenue minus COGS. Cost of goods sold includes part of the fixed manufacturing overheads.
However, fixed manufacturing overheads usually include items that are not controlled by a division manager, such as
depreciation. Thus, gross profit should not be used as division manager performance evaluation tool.
C. A manager's performance valuation should be based on the factors controllable by the manager. Contribution
margin does not include fixed costs and some of the fixed costs may be controllable by the division manager.
D. A manager's performance valuation should be based on the factors controllable by the manager. Contribution
margin does not include fixed costs and some of the fixed costs may be controllable by the division manager.
Question 14 - CIA 1192 IV-19 - Budgeting
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. 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.
B. Budgeting from the ground up as though the budget process were being initiated for the first time.
C. Developing budgeted costs from clear-cut measured relationships between inputs and outputs.
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. This refers to incremental budgeting.
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B. 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.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 15 - CMA 1289 4-24 - Budgeting
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. $84,000
B. $118,800
C. $108,000
D. $110,800
A. This is the cash collected from April sales only. 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. 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 (April credit sales) $100,000 * 15% =
$15,000 (March credit sales) $90,000 * 10% = $9,000 (February credit sales) $70,000 * 4% = $2,800 (January
credit sales) Adding all these numbers together we will get $110,800 of cash collected in April from credit
sales.
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Question 16 - CMA 692 3-9 - Budgeting
The preparation of a comprehensive master budget culminates with the preparation of the
A. Cash management and working capital budget.
B. Capital investment budget.
C. Production budget.
D. Strategic budget.
A. The cash management and working capital budgets are the financial statement budgets. They are prepared
last because all of the other budgets contribute to the cash budget and working capital budgets.
B. Capital investment budget is one of the financial statement budgets but not the last budget in master budget.
C. Production budget is a part of operating budget. Master budget is a comprehensive expression of management's
operating and financial plans for a future time period (usually a year) that is summarized in a set of budgeted financial
statements. It embraces the impact of both operating and financing decisions.
D. Long-term (or Strategic) planning for periods greater than one year and based on the objectives of the organization
expressed in quantitative terms is called the strategic budget.
Question 17 - CIA 1193 IV-21 - Budgeting
A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of
units produced is equal to the number of units sold. Following is financial information relating to the two divisions.
Division
A
B
Sales
$150,000 $400,000
Other revenue
10,000 15,000
Direct materials
30,000 65,000
Direct labor
20,000 40,000
Variable factory overhead
5,000 15,000
Fixed factory overhead
25,000 55,000
Variable selling and administrative expense 15,000 30,000
Fixed selling and administrative expense
35,000 60,000
Central corporate expenses (allocated)
12,000 20,000
What is the contribution margin of Division B?
A. $265,000
B. $150,000
C. $205,000
D. $235,000
A. The contribution margin of Department B is equal to the total revenues of Department B less total variable
costs of Department B. It is calculated as follows: $400,000 + $15,000 - $65,000 - $40,000 - $15,000 - 30,000 =
$265,000.
B. This answer assumes that fixed costs are also deductible. However, contribution margin is calculated as total
revenues minus total variable costs.
C. The contribution margin of Department B is equal to the total revenues of Department B minus the total variable
costs of Department B. See the correct answer for a complete explanation.
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D. The contribution margin of Department B is equal to the total revenues of Department B less total variable costs of
Department B. See the correct answer for a complete explanation.
Question 18 - CMA 693 H1 - Planning
A firm's statement of broad objectives or mission statement should accomplish all of the following except
A. Defining the purpose of the company.
B. Providing an overall guide to those in high-level, decision-making positions.
C. Outlining strategies for technological development, market expansion, and product differentiation.
D. Stating the moral and ethical principles that guide the actions of the firm.
A. A mission statement should define the purpose of the company.
B. The objectives and the mission statement should provide a guide to decision makers.
C. The broad objectives or mission statement of a company will not provide strategies for any of these items.
The objectives of a company are where the company will go and a mission statement is a formal declaration
of the main values of the company. These items listed are not part of either the objectives or the mission
statement of a company, but are rather specific plans and analysis.
D. The mission statement usually states the moral and ethical principles that the company believes in and that should
guide behavior within the company.
Question 19 - CMA 1293 H3 - Budgeting
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
Sales
Accounts payable
Payroll
Other disbursements
March
$40,000
30,000
60,000
25,000
April
May
$50,000 $100,000
40,000 40,000
70,000 50,000
30,000 10,000
In April, Raymar's budget will result in
A. A need to borrow $90,000 on its line of credit for the cash deficit.
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B. A need to borrow $50,000 on its line of credit for the cash deficit.
C. $45,000 in excess cash.
D. A need to borrow $100,000 on its line of credit for the cash deficit.
A. 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.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the amount of cash collections only. See the correct answer for a complete explanation.
D. 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, for April they are: $70,000 of 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.
Question 20 - CMA 1292 H7 - Budgeting
The information contained in a cost of goods manufactured budget most directly relates to the
A. Materials used, direct labor, overhead applied, and finished goods inventories budgets.
B. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets.
C. Materials used, direct labor, overhead applied, and work-in-process inventories budgets.
D. Materials used, direct labor, overhead applied, and ending work-in-process budgets.
A. Work-in-progress balances should be included instead of the finished goods inventories.
B. Finished goods would not be included in the cost of goods manufactured budget.
C. The cost of goods manufactured is calculated using the following formula: Direct Materials Used +Direct
Labor Used +Manufacturing Overhead Applied +Beginning Work-in-process -Ending Work-in-process =Cost
of Goods Manufactured
D. Beginning work-in-process would be included in the cost of goods manufactured budget as well.
Question 21 - CMA 691 3-2 - Budgeting
Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a
significant reason for planning?
A. Checking progress toward the objectives of the organization.
B. Ensuring profitable operations.
C. Providing a basis for controlling operations.
D. Forcing managers to consider expected future trends and conditions.
A. Checking progress toward the objectives of the organization is a reason for developing plans and budgets.
B. The budget is a realistic plan expressed in quantitative terms. A budget serves as a number of tools:
planning, control, motivation and communication tool. However, the budget by itself is not able to ensure
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profitable operations.
C. Providing a basis for controlling operations is a reason of developing plans and budgets.
D. Forcing managers to consider expected future trends and conditions is a reason of developing plans and budgets.
Question 22 - CMA 696 H5 - Budgeting
Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and $198,000 for
September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale,
36% will be collected the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that
should be budgeted for September would be
A. $147,960
B. $169,800
C. $194,760
D. $197,880
A. 60% of August sales and 36% of July sales were collected in September, not vice versa. See the correct answer for
a complete explanation.
B. First, we should determine which months sales will be collected in September: 60% of the prior month's
(August) sales and 36% of the sales in the month before last month (July). There will be $126,600 ($211,000 *
60%) of August sales and $43,200 ($120,000 * 36%) of July sales collected in September, or $169,800 in total.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 23 - CMA 691 3-28 - Budgeting
The basic purpose of a responsibility accounting system is
A. Authority.
B. Variance analysis.
C. Motivation.
D. Budgeting.
A. Authority is an element of responsibility accounting. However, it is not the main purpose.
B. Variance analysis is an element of responsibility accounting. However, it is not the main purpose.
C. Motivation is the basic purpose of a responsibility accounting. According to responsibility accounting,
managers are responsible for those factors that they can control. Their performance is evaluated on how well
they manage the areas over which they exercise influence, whether they are costs, revenues or both.
D. Budgeting is an element of responsibility accounting. However, it is not the main purpose.
Question 24 - CMA 694 H4 - Budgeting
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Zohar Company's budget contains the following information:
Units
Beginning finished goods inventory
85
Beginning work-in-process in equivalent units
10
Desired ending finished goods inventory
100
Desired ending work-in-process in equivalent units
40
Projected sales
1,800
How many equivalent units should Zohar plan to produce?
A. 1,845
B. 1,565
C. 1,815
D. 1,800
A. To determine how many units to produce we should use the following formula: Beginning Inventory + Units
Produced = Units Sold + Ending Inventory Plugging the given numbers for finished goods into the formula we
will get: 85 + Units Produced = 1,800 + 100. Solving further, units produced = 1,800 + 100 - 85 and the number
of units to produce is equal to 1,815. To determine how many equivalent units need to be produced we also
need to consider work-in-process units. Since the EUP of work-in-process increased by 30 units during the
period, there will need to be 30 EUP produced that is not connected to finished goods. This brings the total
EUP to 1,845.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the number of finished units to produce to satisfy level of projected sales. However, this number does not
take into consideration the work-in-process units. See the correct answer for a complete explanation.
D. This is the number of units of projected sales. See the correct answer for a complete explanation.
Question 25 - CMA 1291 3-22 - Budgeting
A systemized approach known as zero-base budgeting (ZBB)
A. Divides the activities of individual responsibility centers into a series of packages that are prioritized.
B. Presents a statement of expectations for a period of time but does not present a firm commitment.
C. Classifies budget requests by activity and estimates the benefits arising from each activity.
D. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
A. 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.
B. Zero-based budgeting represents a firm commitment to the company just like any other budget.
C. Activity-based budget focuses on the budged cost of activities necessary to produce and sell products and services.
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D. A fixed budget, or static budget, is a budget that is prepared for only one level of activity (a certain level of sales)
within the company.
Question 26 - CMA 1295 H3 - Budgeting
All of the following are considered operating budgets except the
A. Materials budget.
B. Sales budget.
C. Capital budget.
D. Production budget.
A. The material budget is a part of the operating budget.
B. The sales budget is the first budget in operating budget.
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 it.
D. The production budget is a part of the operating budget.
Question 27 - CMA 1294 H2 - Budgeting
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. Price-earnings ratio.
B. Industry average for earnings on sales.
C. Earnings per share.
D. Internal rate of return.
A. The price-earnings ratio is a financial performance measure and can be used to measure the adequacy of the
budgeted annual operating income.
B. 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.
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 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 the investments equal to zero. IRR is not
used to evaluate the budgeted performance.
Question 28 - CMA 692 H6 - Budgeting
The preparation of a comprehensive master budget culminates with the preparation of the
(c) HOCK international, page 14
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A. Cash management and working capital budget.
B. Capital investment budget.
C. Strategic budget.
D. Production budget.
A. The cash budget (and similarly the working capital budget since it is based on cash) is the last budget
prepared. This is because the cash budget is dependent upon all of the other budgets since the production
budget, advertising budget, overhead budget, and so on, all have a cash component that will go into the cash
budget.
B. The capital investment budget is a long-term budget that is outside of the normal, annual budgeting process.
However, the current period expenditures for capital assets will need to be taken into account before the preparation
of the cash budget.
C. The strategic budget is a long-term budget that will have been prepared separately from, but before, the annual
budget.
D. The production budget is not the final budget prepared.
Question 29 - CMA 691 3-1 - Budgeting
Wilson Company uses a comprehensive planning and budgeting system. The proper order for Wilson to prepare
certain budget schedules would be
A. Cost of goods sold, income statement, balance sheet, and statement of cash flows.
B. Cost of goods sold, balance sheet, income statement, and statement of cash flows.
C. Income statement, balance sheet, statement of cash flows, and cost of goods sold.
D. Statement of cash flows, cost of goods sold, income statement, and balance sheet.
A. Cost of goods sold is a part of operating budget which is culminated by in the pro-forma income statement.
The pro-forma income statement is an input to the pro-forma balance sheet, and the pro-forma of statement of
cash flows is the last to be prepared in the budgeting process.
B. The income statement is an input to the balance sheet, so income statement is prepared before the balance sheet.
C. The budget of cost of goods sold is prepared before any of financial budget (capital budget, cash balance,
pro-forma balance sheet, pro-forma statement of cash flows) and before the pro-forma income statement.
D. The statement of cash flows is the last financial statement to be prepared in the budgeting process.
Question 30 - CMA 696 H7 - Budgeting
For the month of December, Crystal Clear Bottling expects to sell 12,500 cases of Cranberry Sparkling Water at
$24.80 per case and 33,100 cases of Lemon Dream Cola at $32.00 per case. Sales personnel receive 6%
commission on each case of Cranberry Sparkling Water and 8% commission on each case of Lemon Dream Cola. In
order to receive a commission on a product, the sales personnel team must meet the individual product revenue
quota. The sales quota for Cranberry Sparkling Water is $500,000, and the sales quota for Lemon Dream Cola is
$1,000,000. The sales commission that should be budgeted for December is
A. $84,736
B. $103,336
C. $4,736
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D. $82,152
A. First, we should determine whether sales personnel meets the product revenue quota to receive sales
commissions. It is expected to receive revenue of $310,000 ($24.80 * 12,500) selling Cranberry Sparkling
Water, and $1,059,200 ($32 * 33,100) selling Lemon Dream Cola. The revenue from expected sales of
Cranberry Sparkling Water does not meet the product revenue quota, the expected sales revenue from Lemon
Dream Cola does exceed the quota of $1,000,000. Thus, the commissions are only applicable to the sales of
Lemon Dream Cola which is 8% on each case. Since 33,100 cases $32 each of Lemon Dream Cola are
expected to be sold the expected commissions are expected to be $84,736 ($1,059,200*8%).
B. This answer assumes that commissions budgeted for sales of both Cranberry Sparkling Water and Lemon Dream
Cola. However, the Cranberry Sparkling Water expected revenue does not meet the product revenue quota of
$500,000, as the budgeted sales revenue is only $310,000 ($24.80*12,500). Therefore, no commission will be paid for
the sales of the Cranberry Sparkling Water.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is simply 6% of all sales. The Lemon Dream Cola has an 8% commission.
Question 31 - CIA 594 III-69 - Budgeting
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. 28,600 and 6,600
B. 13,000 and 3,900
C. 32,600 and 6,600
D. 24,800 and 6,600
A. Amount of raw materials purchased is equal to 24,800 lb. See the correct answer for a complete explanation.
B. 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.
C. Amount of raw materials purchased is equal to 24,800 lb. See the correct answer for a complete explanation.
D. We need to determine the purchases of raw materials for September by using the formula of physical flow
of goods: Beginning inventory + Amount purchased = Production requirements + Ending inventory 13,000 * 2
* 30% + Amount purchased = 13,000 * 2 + 11,000 * 2 * 30% Amount purchased = 26,000 + 6,600 - 7,800; or
Amount purchased = 24,800 lb. Ending inventory is 6,600 (11,000 * 2 * .3).
Question 32 - CMA 695 H3 - Budgeting
There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one
of the following best describes the production budget?
A. It includes required material purchases.
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B. It summarizes all discretionary costs.
C. It includes required direct labor hours.
D. It is calculated from the desired ending inventory and the sales forecast.
A. Material purchases are planned after the production budget is developed. The production budget determines how
many units of finished product must be produced during the period and then it is determine how much material is
needed to produce the product.
B. Discretionary costs are the costs that may or may not be spent, at the decision of a manager. In the short term,
discretionary costs will not cause an adverse effect on the business if they are not incurred, but in the long run they do
need to be spent. These are cost decisions that are made periodically and are not closely related to input or output
decisions. Advertising and research and development (R&D) are usually given as examples of discretionary costs.
C. Direct labor hours budget is prepared after the production budget is developed. The production budget determines
how many units of finished product must be produced during the period and then it is determined how many direct
labor hours are needed to make the product.
D. After the sales budget is determined, the production budget matches the company's sales budget with its
capacity and inventory objectives. The final determination of how many units must be produced is done in the
production budget.
Question 33 - CMA 696 H6 - Budgeting
The cash budget must be prepared before completing the
A. Forecasted balance sheet.
B. Production budget.
C. Capital expenditure budget.
D. Sales budget.
A. Since the cash balance represents a current asset it is a part of balance sheet. Thus, the cash budget has
to be completed before the pro forma balance sheet may be completed.
B. Production budget is the part of operating budget which is completed before the cash budget is started.
C. Cash budget uses capital expenditure budget data as an input.
D. Sales budget is usually the first budget prepared.
Question 34 - CMA 687 4-18 - Budgeting
Baxter Corporation's master budget calls for the production of 5,000 units of product monthly. The master budget
includes indirect labor of $144,000 annually; Baxter considers indirect labor to be a variable cost. During the month of
April, 4,500 units of product were produced, and indirect labor costs of $10,100 were incurred. A performance report
utilizing flexible budgeting would report a budget variance for indirect labor of
A. $1,900 unfavorable.
B. $700 unfavorable.
C. $1,900 favorable.
D. $700 favorable.
A. The variance is favorable as the actual amount of indirect labor is less than the flexible budget amount.
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B. The variance is favorable as the actual amount of indirect labor is less than flexible budget amount.
C. This is calculated using the budgeted amount of units of production (5,000) instead of the actual units production
(4,500).
D. Since indirect labor is treated as variable costs, the unit labor cost is $2.40 ($144,000 / (5,000 * 12)). The
flexible budget amount of variable overhead (indirect labor) therefore equals $10,800 ($2.40 * 4,500). The
flexible budget variance is equal to the flexible budget amount of variable overhead minus the actual amount
of variable overhead. This gives us a favorable variance of $700 ($10,800 - $10,100).
Question 35 - CMA 694 H1 - Planning
Which one of the following management considerations is usually addressed first in strategic planning?
A. Overall objectives of the firm.
B. Outsourcing.
C. Organizational structure.
D. Recent annual budgets.
A. The overall objectives of the firm will be the basis of the strategic plan for the company. This is because
the strategic plan looks at how the company will achieve its long-term goals and objectives. Therefore, in
order to be able to do a strategic plan, management needs to know what the goals and objectives of the
company are that are trying to be met.
B. Any decisions in respect to outsourcing are a shorter-term decision and would not be part of strategic planning.
C. The organizational structure of a firm will be based largely on the objectives of the firm. As such, the objectives of
the company need to be established before the organizational structure.
D. Recent annual budgets would be used more in short-term planning than in strategic planning.
Question 36 - CMA 692 3-27 - Budgeting
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
August
September
October
November
December
$60,000
70,000
80,000
90,000
100,000
85,000
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The estimated total cash collections during October from accounts receivable would be
A. $86,700.
B. $63,000.
C. $21,400.
D. $84,400.
A. This is amount of total cash collected in December. See the correct answer for a complete explanation.
B. This is amount of cash collected in October from October sales. See the correct answer for a complete explanation.
C. This amount does not include October cash collection, only part of July, August and September collected in
October.
D. Cash collections in October represent cash collection of sales made in October as well as sales made in
previous months according to cash collection schedule. Thus, we can design the following table of cash
collection in October: MonthSales% Collected in OctoberCash Collected in October
October$90,00070%$63,000 September80,00015%12,000 August70,00010%7,000 July60,0004%2,400
Total$84,400
Question 37 - CMA 695 H6 - Budgeting
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table
tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly
Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to
assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month's sales
are in the finished goods inventory. Rokat also purchases sufficient raw materials to ensure that raw materials
inventory is 60% of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as
follows:
July
2,300
August
2,500
September 2,100
Rokat's ending inventories in units for June 30 are
Finished goods
1,900
Raw materials (legs) 4,000
Assume the required production for August and September is 1,600 and 1,800 units, respectively, and the July 31 raw
materials inventory is 4,200 units. The number of table legs to be purchased in August is
A. 6,400 legs.
B. 6,520 legs.
C. 2,200 legs.
D. 9,400 legs.
A. This is the amount needed for production in August. See the correct answer for a complete explanation.
B.
The basic equation for materials inventory is: Beginning Inventory + Units Purchased − Units Used = Ending
Inventory. Inventory at the end of each month (and thus the beginning of the next month) needs to be at least
60% of the next month's planned usage. We already know the beginning inventory on August 1, because the
(c) HOCK international, page 19
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July 31 ending inventory is given in the problem as 4,200 units. The ending inventory for August needs to be
60% of September's planned usage of 1,800 tables × 4 legs, which is 4,320. The number of units to be used
during the month of August will be the planned production of 1,600 × 4, or 6,400.
Therefore, the equation to solve is: 4,200 + P − 6,400 = 4,320.
Solving for P, we get P = 4,320 − 4,200 + 6,400 and P = 6,520.
C. This answer does not include the units needed for ending inventory. See the correct answer for a complete
explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 38 - CIA 593 IV-12 - Budgeting
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. $2,180,000
B. $2,220,000
C. $2,100,000
D. $2,300,000
A. First, we need to determine the number of units produced in during the period using the formula of
physical flow of goods: Beginning Inventory + Units produced = Units Sold + Ending Inventory 40,000 + Units
produced = 70,000 + 30,000; or Units produced = 60,000 We then multiply the unit variable production cost by
the number of units produced. Fixed overhead is a production cost - we add the total amount of fixed costs to
the total variable product costs. 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
B. 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
production cost.
C. This is the total variable costs of production.
D. In this answer it incorrectly assumes that selling costs are a variable production cost. However, selling costs are a
period cost.
(c) HOCK international, page 20
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Question 39 - CIA 1188 IV-51 - Budgeting
Budgets are a necessary component of financial decision making because they help provide a(n)
A. Automatic corrective mechanism for errors.
B. Means to use all the firm's resources.
C. Efficient allocation of resources.
D. Means to check managerial discretion.
A. Budgets do not provide an automatic corrective mechanism for errors.
B. Budgets help to provide effective and efficient use of recourses, not just the basic usage use of all resources.
C. Budget is a realistic plan for the future expressed in quantitative terms. Budget serves as planning, control,
evaluation tool. As such, the use of budget helps to allocate resources efficiently.
D. Budgets are not used check managerial discretion.
Question 40 - CMA 1289 4-8 - Budgeting
The foundation of a profit plan is the
A. Cost and expense budget.
B. Capital budget.
C. Production plan.
D. Sales forecast.
A. Cost and expense budgets can not be calculated until the sales level is estimated.
B. 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.
C. The production plan can not be calculated until the sales level is estimated.
D. Sales forecast is usually the first to prepare in the budgeting process. After sales level is determined the
production budget and expenses budget are prepared. Only after all of these other budgets are done can
profits could be estimated.
Question 41 - CMA 1290 3-15 - Budgeting
From the perspective of corporate management, the use of budgetary slack
A. Increases the effectiveness of the corporate planning process.
B. Increases the ability to identify potential budget weaknesses.
C. Increases the likelihood of inefficient resource allocation.
D. Increases the probability that budgets will not be achieved.
A. Budgetary slack exists when revenues are understated or expenses are overstated. Budget should set high but
attainable performance standards. However, budgetary slack makes it easy to achieve the budgeted level of
performance. Thus, the effectiveness of the corporate planning process decreases when there is budgetary slack.
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B. Budgetary slack exists when revenues are understated or expenses are overstated. Since the budgetary slack
distort a real attainable level of performance it is difficult to identify potential budget weaknesses.
C. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists
either revenues are understated or expenses are overstated. Hence, management won't work hard on
cost-minimization as they simply have to achieve 'easily attainable goals'. Hence, the resources most likely
will be allocated inefficiently.
D. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists either
revenues are understated or expenses are overstated.
Question 42 - CIA 1193 IV-20 - Budgeting
A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of
units produced is equal to the number of units sold. Following is financial information relating to the two divisions.
Division
A
B
Sales
$150,000 $400,000
Other revenue
10,000 15,000
Direct materials
30,000 65,000
Direct labor
20,000 40,000
Variable factory overhead
5,000 15,000
Fixed factory overhead
25,000 55,000
Variable selling and administrative expense 15,000 30,000
Fixed selling and administrative expense
35,000 60,000
Central corporate expenses (allocated)
12,000 20,000
What is the total contribution to corporate profits generated by Division A before allocation of central corporate
expenses?
A. $30,000
B. $18,000
C. $80,000
D. $20,000
A. Department A's contribution to the corporate profits is calculated as all revenues minus all expenses
except the allocated central corporate expenses. It is calculated as follows: $150,000 + $10,000 - $30,000 $20,000 - $5,000 - $25,000 - $15,000 - $35,000 = $30,000
B. In this answer the central corporate expenses allocated are deducted. However, those expenses should not be
included in calculation. See the correct answer for a complete explanation.
C. In this answer total S&A expenses are not deducted. However, those expenses should be included in the
calculation. See the correct answer for a complete explanation.
D. In this answer the other revenues are not added. These revenues should be included in the calculation. See the
correct answer for a complete explanation.
Question 43 - CMA 1293 H2 - Budgeting
(c) HOCK international, page 22
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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
Sales
Accounts payable
Payroll
Other disbursements
March
$40,000
30,000
60,000
25,000
April
May
$50,000 $100,000
40,000 40,000
70,000 50,000
30,000 10,000
In May, Raymar's budget will result in
A. Repay $20,000 principal and pay $1,000 interest.
B. Repay $90,000 principal and pay $100 interest.
C. Pay $900 interest.
D. Borrow an additional $20,000 and pay $1,000 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. 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.
C. 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.
D. 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. 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, for April they are: $70,000 of 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. Thus, we need to pay $1,000 of interest ($100,000 * (12% / 12)). Note, we also
have a cash surplus of $7,500 at the beginning of May since we borrowed more than needed to cover deficit
($100,000 - $92,500). 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 $60,000 ($50,000 + $10,000). Subtracting the total disbursements from the
collections in May we will get a $25,000 cash deficit ($75,000 - $40,000 - $60,000). However, adding to this
deficit the cash surplus from the beginning of the month we will get a deficit of only $17,500. Since
borrowings for cash deficits must be made in $10,000 increments the company needs to borrow $20,000 to
cover the $17,500 cash deficit of May.
(c) HOCK international, page 23
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Question 44 - CIA 589 IV-13 - Budgeting
Which of the following is the principal advantage of budgeting?
A. Employee motivation.
B. Forced planning.
C. Coordination of activities.
D. Performance evaluation.
A. Budgeting can serve as a number of tools, including a motivation tool. However, it is not the principal advantage of
budgeting.
B. Budgeting is a realistic plan for the future expressed in quantitative terms. Budgeting serves as planning,
control, coordination, evaluation tool, etc. However, based on the definition of budgeting, the principal
advantage is forced planning.
C. Budgeting can serve as a number of tools, including a coordination tool. However, it is not the principal advantage
of budgeting.
D. Budgeting can serve as a number of tools, including an evaluation tool. However, it is not the principal advantage of
budgeting.
Question 45 - CMA 693 H2 - Planning
Certain phases of the planning process should be formalized for all of the following reasons except that
A. Formalization provides a logical basis for rational flexibility in planning.
B. Formal plans can act as a constraint on the decision-making freedom of managers and supervisors.
C. Formalization requires the establishment and observance of deadlines for decision making and planning.
D. Informal plans and goals lack the necessary precision, understanding, and consistency.
A. Any plan is going to need to be modified as time passes and the conditions in which the company is operating start
to differ from the assumptions that were used in planning. If there was a formal plan and procedure for the
establishment of that plan, it is much easier to make the necessary modifications to the plan as the situation changes.
B. If the planning process is too formal, individuals may feel that there is no flexibility to the plan and as a
result managers may not be creative, or interested, in their decisions that they make because they feel that
the plan has already been set and cannot be altered.
C. Without a formal plan, it is very possible that the planning process will continue for long periods as a result of there
not being any deadlines.
D. This is a true statement. When the planning process is informal, the goals may not be clearly determined or agreed
upon, they may not be understood by all parties and they may not be consistent throughout an organization. As a
result, different parts of the organization may be trying to accomplish different things at the same time.
Question 46 - CIA 1190 IV-15 - Budgeting
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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. 96,000
B. 48,000
C. 88,000
D. 92,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This is the amount of ending inventory of materials. See the correct answer for a complete explanation.
C. This is the amount of materials requirements for the period's production. 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 47 - CMA 1291 H2 - Budgeting
A planning calendar in budgeting is the
A. Calendar period covered by the annual budget and the long-range plan.
B. Sales forecast by months in the annual budget period.
C. Schedule of activities for the development and adoption of the budget.
D. Calendar period covered by the budget.
A. The planning calendar is not the period covered by the annual budget and long-range plan.
B. The planning calendar is not the monthly sales forecast.
C. By definition the planning calendar includes the scheduled steps and deadlines for the budgeting process.
D. The planning calendar is not the period covered by the budget.
Question 48 - CMA 691 3-4 - Budgeting
DeBerg Company has developed the following sales projections for the calendar year.
May
June
$100,000
120,000
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July
August
September
October
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. $450,000
C. $427,500
D. $414,000
A. This is the budgeted collections for the periods from August through October. See the correct answer for a
complete explanation.
B. This is the total sales for the third calendar quarter, not the cash collected.
C. This is the amount of cash collected from sales made in the third calendar quarter.
D. 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: $414,000 This question can also be sold 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.
Question 49 - CMA 1293 3-12 - Budgeting
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.
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B. $1,608,500.
C. $1,580,500.
D. $1,600,000.
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. To solve these question we should use the formula of physical flow of goods: Beginning Inventory + Units
Purchased = Units Produced + Ending Inventory for each component (A-9, B-6 and D-28). For A-9: one
components of A-9 is necessary for each unit of finished product. Plugging numbers for A-9 into the formula
we will get the following: Units Purchased = (400,000 * 1) + 9,000 - 21,000. Solving further we calculate that the
units purchased is 388,000. The cost of purchased A-9 components is $194,000 ($0.50 * 388,000). For B-6: two
components of B-6 are necessary for each unit of finished product. Plugging numbers for B-6 into the formula
we will get the following: Units Purchased = 400,000*2 + 10,000 - 32,000. Solving further we calculate that the
units purchased is 778,000. The cost of purchased B-6 components is $194,500 ($0.25 * 778,000). For D-28:
three components of D-28 are necessary for each unit of finished product. Plugging numbers for D-28 into the
formula we will get the following: Units Purchased = 400,000*3 + 6,000 - 14,000 . Solving further we calculate
that the units purchased is 1,192,000. The cost of purchased D-28 components is $1,192,000 ($1.00*1,192,000).
Adding amounts of components purchase costs together we will get $1,580,500.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 50 - CMA 689 4-25 - Budgeting
The Hersh Company uses a performance reporting system that reflects the company's decentralization of decision
making. The departmental performance report shows one line of data for each subordinate who reports to the group
vice president. The data presented show the actual costs incurred during the period, the budgeted costs, and all
variances from budget for that subordinate's department. The Hersh Company is using a type of system called
A. Contribution accounting.
B. Cost-benefit accounting.
C. Responsibility accounting.
D. Flexible budgeting.
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. Responsibility accounting is an accounting system that measures accounting results of each
responsibility center separately. It also measures consolidated results. Under a responsibility accounting
system, managers are responsible for those items they can control.
D. Flexible budgeting is a budgeting technique according to which budgets are prepared for different levels of
production.
Question 51 - CMA 691 3-25 - Budgeting
Residual income is a better measure for performance evaluation of an investment center manager than return on
investment because
A. Desirable investment decisions will not be neglected by high return divisions.
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B. The problems associated with measuring the asset base are eliminated.
C. Only the gross book value of assets needs to be calculated.
D. Returns do not increase as assets are depreciated.
A. Residual income (RI) is calculated as the amount of return (net income before taxes) that is in excess of a
targeted amount of return on the investments that are employed by that division. RI is focused on the
dollar-amount of income that is in excess of a targeted amount. It is not focused on a percentage of return as
ROI does. When using RI to evaluate investment opportunities, any project that has a positive RI will be
accepted even if it will reduce the overall company or division ROI. Thus, desirable investment decisions will
not be neglected by high return divisions.
B. The asset base or amount of invested capital are calculated in the same manner for both methods so residual
income does not eliminate this problem.
C. The asset base or amount of invested capital are calculated in the same manner for both methods.
D. As assets are depreciated, both methods will be effected in the same manner.
Question 52 - CMA 1295 H2 - Budgeting
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. $20,920
B. $22,150
C. $20,680
D. $20,800
A. This answer uses the number of shipments instead of the number of pounds shipped. See the correct answer for a
complete explanation.
B. 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.
C. This answer uses the number of orders instead of the number of pounds shipped. See the correct answer for a
complete explanation.
D. This answer uses the planned number of pounds to be shipped. See the correct answer for a complete explanation.
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Question 53 - 3B2 CMA - Budgeting
Flexible budgets
A. Are used to evaluate capacity use.
B. Accommodate changes in activity levels.
C. Provide for external factors affecting company profitability.
D. Are budgets that project costs based on anticipated future improvements.
A. Flexible budgets are not developed to evaluate the use of capacity.
B. 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.
C. A flexible budget is a budget that is prepared for the actual level of output.
D. Flexible budget are not used to project costs based on future improvements.
Question 54 - CMA 1291 3-13 - Budgeting
A flexible budget is appropriate for
A. Control of direct labor and direct materials but not fixed factory overhead.
B. Control of direct materials and direct labor but not selling and administrative expenses.
C. Control of fixed factory overhead but not direct materials and direct labor.
D. Any level of activity.
A. Fixed costs are the same for any level of activity within the relevant range. Thus, 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 the static budget activity level.
B. A flexible budget is necessary to control direct materials, 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.
C. 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.
D. A flexible budget is prepared for different levels of activity, but it is usually prepared for only a range of level of
activity - not any level of activity.
Question 55 - CMA 1294 H5 - Budgeting
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. Raw material inventory, work-in-process inventory, and production volume.
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B. Raw material inventory, direct labor hours, and manufacturing overhead costs.
C. Production volume, finished goods inventory, and sales volume.
D. Direct labor hours, work-in-process inventory, and sales volume.
A. The sales volume is usually the first thing to determine in budgeting process of any type of business including
seasonal business. See the correct answer for a complete explanation.
B. The sales volume is usually the first thing to determine in budgeting process of any type of business including
seasonal business. See the correct answer for a complete explanation.
C. Budgets usually start with the development of the sales volume budget, and it is the most difficult budget
to prepare. Production volume and finished goods inventory budgets are the next budgets to prepare and
their development is based on the assumptions made to prepare 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.
D. Direct labor hours, work-in-process inventory are elements within the production budget. See the correct answer for
a complete explanation.
Question 56 - CMA 1290 3-18 - Budgeting
The combination of management by objectives, developed with input from the individual manager, and the budgeting
process is an example of
A. Capital budgeting.
B. Flexible budgeting.
C. Human resource management.
D. Responsibility accounting.
A. In capital budgeting the capital budget is a 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.
B. Flexible budgeting is a budgeting technique according to which budget is prepared for different levels of activity.
C. Human resource management is a staffing (personnel) function.
D. Responsibility accounting is an accounting system that measures accounting results of each
responsibility center separately. It also measures consolidated results. According to it managers are
responsible for those items they can control.
Question 57 - CMA 692 3-8 - Budgeting
The budget that is usually the most difficult to forecast is the
A. Production budget.
B. Manufacturing overhead budget.
C. Expense budget.
D. Sales budget.
A. The production budget is based mostly on the sales budget and once the sales budget and inventory budgets have
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been prepared, the production budget is relatively easy to prepare.
B. The manufacturing overhead budget is based mostly on production budget.
C. The expense budgets are based mostly on sales and production budgets.
D. The sales budget is usually the first budget to prepare and it influences all other budgets in master budget.
The level of sales revenue is quite difficult to predict as many external factors can influence it (demand for
particular product and products-substitutes, overall economic situation, government regulations,
competitors' activities, etc.). The sales budget is based on a number assumptions about the changing
environment and thus, difficult to forecast.
Question 58 - CMA 694 H3 - Budgeting
The master budget process usually begins with the
A. Sales budget.
B. Operating budget.
C. Financial budget.
D. Production budget.
A. The sales budget is the first budget to be prepared in the budgeting process. After the sales budget and all
other operating budgets are prepared, ending with the income statement, the set of financial budgets is
prepared. This overall resulting budgets are called the master budget.
B. The operating budget combines the individual operating budgets starting with the sales budget and ending with the
pro forma income statement.
C. Financial budget can not be prepared without preparing the operating budget which starts with the sales budget.
D. The production budget is usually prepared after the sales budget and the inventory budgets as production is
determined by these two budgets.
Question 59 - CMA 692 H2 - Budgeting
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 June 30
Raw material* 40,000 50,000
Work-in-process 10,000 20,000
Finished goods 80,000 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. 510,000 units.
B. 450,000 units.
C. 440,000 units.
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D. 480,000 units.
A. This answer treats the beginning and ending finished goods inventory backwards.
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. The change in work-in-progress does not need to be included in this calculation.
D. This is the number of units to be sold.
Question 60 - CMA 692 3-11 - Budgeting
Which one of the following is usually not cited as being an advantage of a formal budgetary process?
A. Serves as a coordination and communication device between management and subordinates.
B. Ensures improved cost control within the organization and prevents inefficiencies.
C. Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary
process.
D. Provides a formal benchmark to be used for feedback and performance evaluation.
A. One of the advantages of a budget is that it serves as a coordination and communication device between
management and subordinates.
B. A budget is a realistic plan for the future expressed in quantitative terms. A budget is a very useful tool and
can serve as a tool in a number of areas: planning, control, evaluation, motivation, communication, identifying
future problems. However, despite of all advantages, budgets do not prevent inefficiencies nor improves cost
control.
C. One of the advantages of a budget is that it forces management to evaluate the reasonableness of assumptions
used and goals identified in the budgetary process.
D. One of the advantages of a budget is that it provides a formal benchmark to be used for feedback and performance
evaluation.
Question 61 - CMA 1294 3-9 - Budgeting
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 projected gross profit for the month ending December 31 is
A. $134,000
B. $536,000
C. $416,000
D. $104,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. Gross profit (gross margin) is equal to the sales minus cost of goods sold. Thus, it can not be greater than the
amount of sales. 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. Gross profit (gross margin) is equal to the sales minus the cost of goods sold. December sales are
projected to be $520,000. Cost of goods sold is 80% of sales. Thus, the gross profit is 20% of sales, or
$104,000.
Question 62 - CMA 1291 3-23 - Budgeting
Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 1
Year 1
Year 2
(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. $84,000
C. $136,800
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D. $228,000
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
collectible November credit sales will be collected in December. This is $91,200 ($228,000 * 40%).
B. This represents 35% of the 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 is the estimated credit sales made in November minus the uncollectible amount of November credit sales. See
the correct answer for a complete explanation.
Question 63 - CIA 585 III-20 - Budgeting
The major feature of zero-based budgeting (ZBB) is that it
A. Takes the previous year's budgets and adjusts them for inflation.
B. Focuses on planned capital outlays for property, plant, and equipment.
C. Questions each activity and determines whether it should be maintained as it is, reduced, or eliminated.
D. Assumes all activities are legitimate and worthy of receiving budget increases to cover any increased costs.
A. Incremental budgeting usually takes the previous period budget and make adjustments to develop a budget for a
following period.
B. This is usually a major feature of a capital budget.
C. 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.
D. 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.
Question 64 - CMA 1289 4-25 - Budgeting
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:
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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. $288,800
B. $262,000
C. $310,000
D. $306,900
A. This answer is incorrect. See the correct answer for a complete explanation.
B. 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
of April and May, and 10% of credit sales in 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.
C. It is the amount of projected total sales in the second quarter, not the cash collection.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 65 - CMA 1292 H2 - Budgeting
Butteco has the following cost components for 100,000 units of product for the year.
Raw materials
Direct labor
Manufacturing overhead
Selling/administrative expense
$200,000
100,000
200,000
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. $695,000.
B. $650,000.
C. $715,000.
D. $495,000.
A. 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. 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 and $200,000 in fixed costs for a total
of $695,000.
B. This is the cost at a production level of 100,000 units.
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C. This answer assumes no fixed costs.
D. This is the variable cost of production only.
Question 66 - CMA 694 3-13 - Budgeting
A continuous (rolling) budget
A. Is one of the budgets that is part of a long-range strategic plan, unchanged unless the strategy of the company
changes.
B. Presents the plan for a range of activity so the plan can be adjusted for changes in activity.
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
D. Is a plan that is revised monthly or quarterly, dropping one period and adding another.
A. This is a strategic budget. A rolling budget is frequently revised.
B. This is a flexible budget. A rolling budget has a number of other characteristics as well.
C. This is a static budget. A rolling budget can not be static.
D. A continuous budget, also called a rolling budget, is one that is automatically 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.
Question 67 - CMA 679 4-9 - Budgeting
A flexible budget
A. Presents a statement of expectations for a period but does not present a firm commitment.
B. Classifies budget requests by activity and estimates the benefits arising from each activity.
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
D. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.
A. This is a forecast feature.
B. This is not a characteristic of flexible budgeting. This can be done with any type of budgeting system.
C. This is feature of a static budget.
D. A flexible budget is a budget that includes what the budget should be for different levels of sales. This
means that throughout the period and at the end of the period, the management of the company is able to
compare the actual results with a budget that is indicative of that level of sales.
Question 68 - CMA 697 3-12 - Budgeting
Which one of the following budgeting methodologies would be most appropriate for a firm facing a significant level of
uncertainty in unit sales volumes for next year?
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A. Top-down budgeting.
B. Static budgeting.
C. Flexible budgeting.
D. Life-cycle budgeting.
A. Top-down is a budget development approach in which the top management sets the budget. This would not be the
most appropriate method for a firm facing uncertainty in sales.
B. A fixed budget, or static budget, is a budget that is prepared for only one level of activity (a certain level of sales)
within the company. This would not be the most appropriate method for a firm facing uncertainty in sales.
C. Flexible budget is the budget can be prepared for different levels of output. The actual results will be
compared with flexible budget results (prepared using appropriate level of output). This is the method that
should be used when a company faces uncertainty as to the level of sales.
D. A life-cycle budgeting is a budgeting approach in which budget estimates a product's revenues and expenses over
its expected life cycle. It also allows the company to set a price that will cover not only the production costs, but also
the development costs by identifying all of the costs associated with this product. This would not be the most
appropriate method for a firm facing uncertainty in sales.
Question 69 - CMA 1296 H11 - Budgeting
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. $390,000
B. $127,500
C. $113,500
D. $327,000
A. This is production budget for January. See the correct answer for a complete explanation.
B. 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. We need to add to this the $12,000 of fixed costs giving us a total production
cost of $127,500.
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C. This is production budget for April. See the correct answer for a complete explanation.
D. These are the costs based on production of 150% of January sales. See the correct answer for a complete
explanation.
Question 70 - CMA 692 H8 - Budgeting
The budget that is usually the most difficult to forecast is the
A. Sales budget.
B. Production budget.
C. Manufacturing overhead budget.
D. Expense budget.
A. The sales budget is usually the most difficult to forecast because of the large number of external factors
that influence this budget. It is affected by competitors, the environment, consumer tastes, prices, the general
economy and many other factors outside of the control of the company.
B. The production budget is fairly straight-forward, once the sales budget is completed.
C. The manufacturing overhead budget is fairly straight-forward to prepare, after the production budget has been
prepared.
D. The expense budgets are based on the production budgets, which are based on the sales budget. Once the sale
budget is in place, the other budgets are fairly straight-forward.
Question 71 - CIA 590 IV-14 - Budgeting
One of the primary advantages of budgeting is that it
A. Requires departmental managers to make plans in conjunction with the plans of other interdependent departments.
B. Is continually adapted to fit changing circumstances.
C. Bases the profit plan on estimates.
D. Does not take the place of management and administration.
A. The budget is a realistic plan for the future expressed in quantitative terms. The budget serves as planning,
control, coordination, evaluation tool, etc. Budgets of individual departments are formed into one
organizational budget. Thus, one of the primary advantages of budgeting is that it requires departmental
managers to make plans in conjunction with the plans of other interdependent departments.
B. One of the disadvantages of budgeting is that it is continually adapted to fit changing circumstances.
C. One of the disadvantages of budgeting is that it bases the profit plan on estimates.
D. One of the primary advantages of budgeting is that it does take the place of management and administration.
Question 72 - CMA 1296 H13 - Budgeting
An advantage of incremental budgeting when compared with zero-base budgeting is that incremental budgeting
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A. Eliminates the need to review all functions periodically to obtain optimum use of resources.
B. Encourages adopting new projects quickly.
C. Accepts the existing base as being satisfactory.
D. Eliminates functions and duties that have outlived their usefulness.
A. Periodic review of business functions is required regardless the type of budget development approach used.
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. Incremental budgeting assumes that previous period budget
is satisfactory and is calculated adjusting the previous period budget by a number, for example 1.1, to allow
for changes planned for the new budgeting period. Thus, it is easier to prepare incremental budget and
consume less managerial effort than budget under ZBB concept.
D. This is an advantage of zero-based budgeting, not incremental budgeting.
Question 73 - CMA 697 3-14 - Budgeting
Jordan Auto has developed the following production plan:
Month
January
February
March
April
Sales
10,000
8,000
9,000
12,000
Each unit contains 3 pounds of raw material. The desired raw material ending inventory each month is 120% of the
next month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed
the following direct labor standards for production of these units:
Hours per unit
Hourly rate
Department 1 Department 2
2.0
0.5
$6.75
$12.00
How much raw material should Jordan Auto purchase in March?
A. 27,000 pounds.
B. 36,000 pounds.
C. 32,900 pounds.
D. 37,800 pounds.
A. This is the amount of material used in production in March. See the correct answer for a complete explanation.
B. This is the amount of material used in production in April. See the correct answer for a complete explanation.
C. This is the beginning inventory in March. See the correct answer for a complete explanation.
D. The basic formula to determine the level of purchase is: Beginning inventory + quantity purchased =
quantity transferred out + ending inventory. Beginning inventory in March is equal to ending inventory in
February and is 32,900 pounds (9,000 units * 3 lb. * 120% + 500 lb.). The amount of raw material required for
sales volume is 27,000 pounds (9,000 units * 3 lb.). The amount of raw material for March ending inventory is
43,700 pounds (12,000 units * 3 lb.*120% + 500). Using the formula above the amount of raw materials to
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purchase is 37,800 pounds (27,000 + 43,700 - 32,900).
Question 74 - CMA 691 3-9 - Budgeting
In developing a comprehensive budget for a manufacturing company, which one of the following items should be done
first?
A. Development of the capital budget.
B. Development of a sales plan.
C. Determination of the advertising budget.
D. Determination of manufacturing capacity.
A. The sales plan should be prepared first.
B. The sales plan/forecast is usually prepared first in budgeting process. Determining the level of sales allow
to prepare operating plan and assess financial results of the company.
C. The sales plan should be prepared first.
D. The sales plan should be prepared first.
Question 75 - CMA 694 3-15 - Budgeting
A method of budgeting in which the cost of each program must be justified, starting with the one most vital to the
company, is
A. Continuous budgeting.
B. Flexible budgeting.
C. Probabilistic budgeting.
D. Zero-based budgeting.
A. A continuous budget, also called a rolling budget, is one that is automatically prepared for a certain period of time
ahead from the present.
B. Flexible budgeting is a budgeting method according to which budgets are prepared for different levels of activities.
C. Probabilistic budgeting bases budgets on the most likely levels of activity.
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. 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.
Question 76 - CMA 1291 3-20 - Budgeting
A continuous profit plan
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A. Is an annual plan that is part of a 5-year plan.
B. Is a plan that is revised monthly or quarterly.
C. Is a plan devised by a full-time planning staff.
D. Works best for a company that can reliably forecast events a year or more into the future.
A. A continuous plan does not need to be part of a larger 5-year plan.
B. 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.
C. A continuous plan may or may not be produced by a full-time planning staff.
D. A continuous plan works for any company, whether or not they can accurately forecast more than a year into the
future.
Question 77 - CMA 697 3-15 - Budgeting
Jordan Auto has developed the following production plan:
Month
January
February
March
April
Sales
10,000
8,000
9,000
12,000
Each unit contains 3 pounds of raw material. The desired raw material ending inventory each month is 120% of the
next month's production, plus 500 pounds. (The beginning inventory meets this requirement.) Jordan has developed
the following direct labor standards for production of these units:
Hours per unit
Hourly rate
Department 1 Department 2
2.0
0.5
$6.75
$12.00
Jordan Auto's total budgeted direct labor dollars for February usage should be
A. $210,600
B. $156,000
C. $165,750
D. $175,500
A. This answer is incorrect. See the correct answer for a complete explanation.
B. The production level for February is going to be 8,000 units. Each unit requires $13.50 ($6.75*2) labor
dollars of department 1 and $6.00 ($12.00*0.5) labor dollars of department 2. in total each unit requires $19.50
labor dollars. The total production in February requires $156,000 labor dollars ($19.50*8,000).
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the amount for March. See the correct answer for a complete explanation.
Question 78 - CMA 692 3-15 - Budgeting
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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
Using a flexible budget, the total cost planned for the review and editing of 9,500 articles should be
A. $9,500,000.
B. $10,570,000.
C. $10,070,000.
D. $10,100,000.
A. This is the variable labor costs only of $9,500,000 [($10,000,000 / 10,000) * 9,500].
B. 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 have to be $9,500,000 [($10,000,000 / 10,000) * 9,500].
C. Fixed costs are the same regardless to the level of production. This answer is calculated incorrectly by adjusting
the fixed costs downward for production.
D. 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]. Adding the fixed
costs and the labor cost we can calculate the total flexible budget cost planned for the review and editing of
9,500 articles: $600,000 + $9,500,000 = $10,100,000.
Question 79 - CMA 691 3-12 - Budgeting
Flexible budgets
A. Are static budgets that have been revised for changes in prices.
B. Accommodate changes in activity levels.
C. Are used to evaluate capacity use.
D. Accommodate changes in the inflation rate.
A. Flexible budgets are prepared for different levels of activity. In other words, a flexible budget is a series of static
budgets prepared for different levels of activity, which would result as the prices change.
B. Flexible budgets are prepared for different levels of activity. In other words, a flexible budget is a series of
budgets prepared for different levels of activity. Flexible budgets are more useful than static budgets as it
allows the company to compare the actual results with the budgeted results for the actual level of activity.
C. Flexible budgets are prepared for different levels of activity and do not evaluate the usage of capacity.
D. The inflation rate may be considered in different types of budgets, fixed budget, project budget, or flexible budget,
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for example.
Question 80 - CMA 1294 3-8 - Budgeting
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
A. $161,280
B. $326,400
C. $416,000
D. $166,400
A. Purchases in December will effect the end of December balance of accounts payable as all payments are
made in the following month. Purchases made in November do not have an effect on December AP as they
are 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 will
get the amount of Accounts Payable for December of $161,280 ($128,000 + $33,280).
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.
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D. 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.
Question 81 - CMA 1296 H4 - Budgeting
Which one of the following items should be done first when developing a comprehensive budget for a manufacturing
company?
A. Development of a sales budget.
B. Determination of the advertising budget.
C. Development of the capital budget.
D. Preparation of a pro forma income statement.
A. The sales budget is usually the first budget prepared. The sales budget figures then influence all other
budgets, production, marketing budget, etc.
B. The sales budget is usually the first budget prepared.
C. The sales budget is usually the first budget prepared.
D. The sales budget is usually the first budget prepared.
Question 82 - CMA 696 H1 - Planning
In planning and controlling capital expenditures, the most logical sequence is to begin with
A. Analyzing and evaluating all promising alternatives.
B. Identifying capital addition projects and other capital needs.
C. Analyzing capital addition proposals.
D. Making capital expenditure decisions.
A. The analysis of alternatives should only be done after the company knows what the capital needs are.
B. The first step in planning on controlling capital expenditures is to first identify what the capital projects
and needs are. Only when this has been determined will it be possible to control the expenditures that are
made because without this sort of plan, it is possible that each department will purchase duplicate equipment
as there is no overall plan for acquisitions.
C. The analysis of proposals should only be undertaken after there is knowledge about what the capital needs of the
company are.
D. Making decisions about expenditures should only be done after the capital needs of the company are known.
Question 83 - CMA 692 H7 - Budgeting
Which one of the following may be considered an independent item in the preparation of the master budget?
A. Pro forma statement of financial position.
B. Pro forma income statement.
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C. Capital investment budget.
D. Ending inventory budget.
A. The pro forma statement of financial position is based on a number of elements of the master budget including pro
forma income statement.
B. The pro forma income statement is the last budget which is created from the operating budgets. The income
statement is based on the sales budgets, expense budgets and other elements of the master budget.
C. 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.
D. The ending inventory budget is based on the production budget.
Question 84 - CMA 695 H4 - Budgeting
Which one of the following is the best characteristic concerning the capital budget? The capital budget is a(n)
A. Exercise that sets the long-range goals of the company including the consideration of external influences caused by
others in the market.
B. Plan to insure that there are sufficient funds available for the operating needs of the company.
C. Plan that results in the cash requirements during the operating cycle.
D. Plan that assesses the long-term needs of the company for plant and equipment purchases.
A. This answer does not include all of what the capital budget is. See the correct answer for a complete explanation.
B. The capital budget does not address the daily operations of the company. See the correct answer for a complete
explanation.
C. The capital budget does not address the daily operations of the company. See the correct answer for a complete
explanation.
D. 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.
Question 85 - CMA 1290 3-13 - Budgeting
Budgetary slack can best be described as
A. The elimination of certain expenses to enhance budgeted income.
B. The planned underestimation of budgeted expenses.
C. A plug number used to achieve a pre-set level of operating income.
D. The planned overestimation of budgeted expenses.
A. Budgetary slack exists when revenues are understated or expenses are overstated. This is done in order to make it
easy for the department, company or individual to meet the budget. The elimination of certain items is not budgetary
slack, as it is rather making the budget appear better than the actual results will be.
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B. Budgetary slack exists when revenues are understated or expenses are overstated.
C. Budgetary slack is not a plug number.
D. When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists
either revenues are understated or expenses are overstated to which makes it difficult to properly evaluate
the performance.
Question 86 - CMA 1287 4-29 - Budgeting
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. 43,200 pounds.
B. 114,600 pounds.
C. 38,200 pounds.
D. 30,600 pounds.
A. This is the ending inventory amount. See the correct answer for a complete explanation.
B. 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). This means that a total of 114,600
units of raw materials need to be purchased this period.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the amount of beginning inventory. See the correct answer for a complete explanation.
Question 87 - CMA 692 H3 - Budgeting
Which one of the following is usually not cited as being an advantage of a formal budgetary process?
A. Ensures improved cost control within the organization and prevents inefficiencies.
B. Forces management to evaluate the reasonableness of assumptions used and goals identified in the budgetary
process.
C. Provides a formal benchmark to be used for feedback and performance evaluation.
D. Serves as a coordination and communication device between management and subordinates.
A. The budgeting process by itself will not improve cost control or prevent inefficiencies. A budget is a very
important step in the process of control and elimination of inefficiencies, but just a budget will not
accomplish either of these items.
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B. An advantage of budgeting is that it does require management to evaluate the goals that have been set.
C. Budgeting does provide a formal benchmark to be used in feedback and performance evaluation and this is an
advantage of budgeting.
D. An advantage of the budgeting process is that it does serve as a coordination and communication device between
management and subordinates.
Question 88 - CMA 1295 H4 - Budgeting
When preparing the series of annual operating budgets, management usually starts the process with the
A. Capital budget.
B. Sales budget.
C. Balance sheet.
D. Cash budget.
A. 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.
B. The sales budget is usually the first budget to be prepared.
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 cash budget is usually the last budget prepared. See the correct answer for a complete explanation.
Question 89 - CMA 692 3-25 - Budgeting
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. 665,720 units.
B. 712,025 units.
C. 638,000 units.
D. 630,500 units.
A. In this situation we observe a three month period beginning July 1, 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 sales growth rate 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 predicted to be 630,500 units (200,000 + 210,000 + 220,500). Now we can
calculate the number of units produced: beginning inventory + units produced = units sold + ending inventory
or 150,000 + units produced = 630,500 + 185,220. Solving for the missing item we find that 665,720 units will
be produced during the period.
B. This answer is incorrect. See the correct answer for a complete explanation.
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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 90 - CMA 692 H5 - Budgeting
Which one of the following may be considered an independent item in the preparation of the master budget?
A. Pro forma income statement.
B. Capital investment budget.
C. Ending inventory budget.
D. Pro forma statement of financial position.
A. The pro forma income statement is a critical element of the master budget.
B. Because the capital budget is a long-term budget for the acquisition of fixed assets, it is often considered
to be independent from the master budget. The capital budget is often prepared years in advance and it is
only reviewed each year to make certain that it is still appropriate for the company's goals.
C. The inventory budget is a very critical component of the master budget.
D. The pro forma statement of financial position is a critical element of the master budget.
Question 91 - CMA 1294 3-7 - Budgeting
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.
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Cost of goods sold is 80% of sales.
The budgeted cash collections for the month of December are
A. $520,000
B. $208,000
C. $402,000
D. $462,000
A. This is the budgeted level of sales for December. See the correct answer for a complete explanation.
B. This is 40% of the budgeted December sales. See the correct answer for a complete explanation.
C. This answer is incorrect. See the correct answer for a complete explanation.
D. Cash collections are equal to the 60% of the December sales and all of the accounts receivable from the
beginning of the period: $520,000 * 60% + $150,000 = $462,000.
Question 92 - CMA 1296 H5 - Budgeting
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. Use of management by exception.
B. Holding subordinates accountable for the items they control.
C. Participation by subordinates in the budgetary process.
D. Having top management set budget levels.
A. 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.
B. Holding subordinates accountable for the items they control would most likely motivate managers and encourage a
better performance.
C. Participation in the budgetary process would most likely motivate managers by giving them a sense of ownership of
the budget.
D. A budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,
motivation, communication, identifying future problems. When top management sets a budget level without
any employees participation it most likely will not give employees a sense of ownership of the plan. This will
not be motivating and thus, not very effective.
Question 93 - CMA 1291 3-24 - Budgeting
Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 1
Year 1
Year 2
(Actual) (Budget) (Budget)
Cash sales $80,000 $100,000 $60,000
Credit sales 240,000 360,000 180,000
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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. $299,400.
B. $294,000.
C. $239,400.
D. $240,000.
A. 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.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the total cash collection in January from all credit sales. See the correct answer for a complete explanation.
D. This is the total cash and credit sales in January. See the correct answer for a complete explanation.
Question 94 - CMA 697 3-17 - Budgeting
Which one of the following statements regarding selling and administrative budgets is most accurate?
A. Selling and administrative budgets need to be detailed in order that the key assumptions can be better understood.
B. Selling and administrative budgets are fixed in nature.
C. Selling and administrative budgets are difficult to allocate by month and are best presented as one number for the
entire year.
D. Selling and administrative budgets are usually optional.
A. The selling and administrative budget is a budget within the operating budget. It is usually prepared after
the sales revenue and production budgets are completed. Selling and administrative budgets do not contain
direct manufacturing costs but rather non-manufacturing overheads. Like the most of the other budget types
selling and administrative budgets are based on a number of assumptions and take internal and external
factors in consideration. Thus, these budgets should to be presented in details in order that the key
assumptions can be better understood.
B. Selling and administrative budgets usually have both fixed and variable components.
C. Selling and administrative budgets are usually prepared for the same time period as other budgets within the
master budget.
D. Selling and administrative budgets are optional to the same extent as every other budget within master budget is
optional.
Question 95 - CMA 1296 H9 - Budgeting
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding
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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
Karmee Company's total cash receipts for the month of April will be
A. $653,000
B. $504,000
C. $707,400
D. $629,000
A. This answer includes the bad debts from January sales. 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 is the collection in the month of June. See the correct answer for a complete explanation.
D. In April the company receives the amount of April cash sales and cash proceeds from credit sales. We
know that 80% of sales are credit sales. In April the company will receive the 30% of April credit sales, 40% of
March credit sales, and 25% of February credit sales. The cash sales in April were $125,000 (20%*$625,000).
The cash collection in April from credit sales is as follows: From April credit sales cash collection is $150,000
($625,000*80%*30%) From March credit sales cash collection is $224,000 ($700,000*80%*40%) From February
credit sales cash collection is $130,000 ($650,000*80%*25%) Adding these figures together, the total cash
collection in April is $629,000 ($125,000 + $150,000 + $224,000 + $130,000).
Question 96 - CMA 1292 3-23 - Budgeting
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The budgeting technique that is most likely to motivate managers is
A. Program budgeting and review technique.
B. Bottom-up budgeting.
C. Zero-base budgeting.
D. Top-down budgeting.
A. Program budgets are formulated by objective rather than function. This type of budget by itself will not motivate or
demotivate managers.
B. Bottom-up budgeting is the budgeting technique that motivates lower-level managers the most. The
budgeting process starts with departments of the lower level. Managers and subordinates set goals and
objectives and then the budgets are sent on the higher level, etc. At the top the company's budget is made
using those lower-levels budgets. Employees are likely to support budgets they participated in preparation of.
It gives the feeling of ownership of the process and would most likely to support its implementation and
results.
C. Zero-based budgeting is a budget which is prepared ignoring the past periods. The budget is developed from "zero"
and all expenses need to be justified for the current period. The use of this method by itself is not going to motivate or
demotivate managers.
D. Top-down budgeting is less motivating for managers as according to this budgeting technique the plan is set by
top-management and lower level managers do not participate in preparing it.
Question 97 - CMA 1292 3-13 - Budgeting
When comparing performance report information for top management with that for lower-level management,
A. Lower-level management reports are typically for longer time periods.
B. Top management reports are more detailed.
C. Lower-level management reports are likely to contain more quantitative data and less financial data.
D. Top management reports show control over fewer costs.
A. Lower-level management reports are typically for shorter time periods.
B. Top management reports are less detailed than those for lower management.
C. Lower-level management reports are likely to contain more quantitative data and less financial data. This is
because lower-level management is responsible for day-to-day operations and their reports contain
information about units of production, number of hours worked, etc. Top management, on the other hand, is
concerned about company's strategic goals, objective and overall financial results.
D. Top management reports show control over more costs.
Question 98 - CMA 692 H9 - Budgeting
Strategy is a broad term that usually means the selection of overall objectives. Strategic analysis ordinarily excludes
the
A. Trends that will affect the entity's markets.
B. Best ways to invest in research, design, production, distribution, marketing, and administrative activities.
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C. Target product mix and production schedule to be maintained during the year.
D. Forms of organizational structure that would best serve the entity.
A. Market trends are strategic in nature and would be included in strategic analysis.
B. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threats
that the company will face in the future. Research, design, production methods and the other listed items will be
included in the strategic analysis.
C. Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and
threats that the company will face in the future. The production schedule for the year is not a strategic item as
it is a short-term issue. This production plan would be more of an operational budget or plan.
D. Creating the correct internal structure for the company that will enable the fulfillment of the company's long-term
strategic objectives is a critical strategic decision.
Question 99 - CIA 590 IV-12 - Budgeting
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. $40,000
B. $84,000
C. $42,000
D. $21,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. Since there is no materials inventory kept, the number 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 will get: Units Produced =
10,000 + 12,000 * 25% - 2,500; or 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 ignores the fact that 2 lb. is necessary to produce one unit of finished product. See the correct answer
for a complete explanation.
D. This is the number of raw material purchases in January in pounds. See the correct answer for a complete
explanation.
Question 100 - CMA 692 3-28 - Budgeting
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
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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
August
September
October
November
December
$60,000
70,000
80,000
90,000
100,000
85,000
The estimated total cash collections during the fourth calendar quarter from sales made on open account during the
fourth calendar quarter would be
A. $251,400.
B. $170,500.
C. $230,000.
D. $275,000.
A. This result include the cash collection from the prior period, not only from sales in fourth quarter. See the correct
answer for a complete explanation.
B. This is the cash collected from October and November sales. See the correct answer for a complete explanation.
C. The fourth calendar quarter consists of October, November and December. Collection of October sales
during fourth quarter are: $85,500 ($90,000 * 70% + $90,000 * 15% + $90,000 * 10%). Collection of November
sales during fourth quarter are: $85,000 ($100,000 * 70% + $100,000 * 15%). Collection of December sales
during fourth quarter are: $59,500 ($85,000 * 70%). Adding these three numbers together we will get the total
cash collection of sales made in fourth quarter in fourth quarter of $230,000.
D. This is the total sales in fourth quarter. See the correct answer for a complete explanation.
Question 101 - CMA 1292 H4 - Budgeting
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. Documentation of the accounting system software.
D. A chart of accounts.
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.
C. Documentation of the accounting system software is not needed for budget preparation and is not included in the
budget manual.
D. A chart of accounts is included in the accounting manual, not the budgeting manual.
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Question 102 - CMA 1296 H2 - Budgeting
Which one of the following items would have to be included for a company preparing a schedule of cash receipts and
disbursements for the calendar year 2005?
A. The borrowing of funds from a bank on a note payable taken out in June 2005 with an agreement to pay the
principal and interest in June 2006.
B. Dividends declared in November 2005 to be paid in January 2006 to shareholders of record as of December 2005.
C. A purchase order issued in December 2006 for items to be delivered in February 2006.
D. The amount of uncollectible customer accounts for 2005.
A. In this case cash disbursements presumably will not occur until the year 2006. However, the cash receipt
(inflow) should appear in June 2005 when funds form a bank loan were received.
B. In this case cash outflow presumably will not occur until the year 2006 when dividends have to be paid. It will
therefore not be included in the 2005 cash budget.
C. In this case the cash outflow presumably will not occur until the year 2006 and so would not be included in the 2005
cash budget.
D. The bad debt is non-cash expense and will not appear in the cash budget.
Question 103 - CIA 594 III-68 - Budgeting
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.
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. $7,060 increase.
B. $60 increase.
C. $600 increase.
D. $3,230 increase.
A. First, we need to determine the purchases of raw materials for the given period. Beginning inventory of raw
materials in July is 30% of July's production requirements: 10,000 * 2 * 30% = 6,000 lb. Ending inventory of
raw materials for September is 30% of October's production requirements: 11,000 * 2 * 30% = 6,600 lb. The
number of units produced from July to 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). Now we can calculate
the amount of materials that were purchased during these three months: Beginning inventory + Amount
purchased = Production requirements + Ending inventory 6,000 + Amount purchased = 70,000 + 6,600 Amount
purchased = 70,600 lb. 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).
B. This answer is incorrect. See the correct answer for a complete explanation.
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C. This answer is incorrect. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 104 - CMA 696 H8 - Budgeting
The cash receipts budget includes
A. Extinguishment of debt.
B. Operating supplies.
C. Loan proceeds.
D. Funded depreciation.
A. The extinguishment of debt represents a cash outlay.
B. Operating supplies represents a cash outlay.
C. The cash budget is the last budget created because it draws upon information from all other budgets. 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. Any
excess cash should be invested for the time period that it will not be needed. The cash receipts (inflows)
includes all sources of cash. Loan proceeds are the cash inflows.
D. Funded depreciation represents a cash outlay.
Question 105 - CMA 691 H1 - Budgeting
Kallert Manufacturing currently uses the company's budget only as a planning tool. The company decided that it would
be beneficial to also use budgets for control purposes. In order to implement this change, the management accountant
must
A. Synchronize the budgeting and accounting system with the organizational structure.
B. Develop forecasting procedures.
C. Appoint a budget director.
D. Organize a budget committee.
A. In order to use the budget for a planning and control tool, the budget and accounting systems needs to be
synchronized. This enables management to track the budget and the actual levels of activity and expenditures.
B. The existing budget process should have forecasting procedures already in place.
C. Because the company already has a budget, there should already be a budget director.
D. Because the company already has a budget, there should already be a budget committee.
Question 106 - CMA 693 H4 - Budgeting
Which one of the following is not considered to be a benefit of participative budgeting?
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A. The budget estimates are prepared by those in direct contact with various activities.
B. Managers are more motivated to reach the budget goals since they participated in setting them.
C. Individuals at all organizational levels are recognized as being part of the team; this results in greater support of the
organization.
D. When managers set the final targets for the budget, top management need not be concerned with the overall
profitability of current operations.
A. This is a benefit of participatory budgeting.
B. This is a benefit of participatory budgeting.
C. This is a benefit of participatory budgeting.
D. Just because managers that are more directly involved with the activity have participated in the budgeting
process, does not mean that top management does not need to be concerned about overall profitability of
current operations.
Question 107 - CMA 1291 H1 - Budgeting
A distinction between forecasting and planning
A. Is not valid because they are synonyms.
B. Arises because forecasting covers the short-term and planning does not.
C. Is that forecasting is a management activity whereas planning is a technical activity.
D. Is that forecasts are used in planning.
A. Though these terms may often be used or thought of as synonyms, they are not. Forecasting is a process that is
used in planning.
B. Both planning and forecasting can be used in either a short-term or long-term time frame.
C. Forecasting is more of technical activity than planning because of the mathematical models that may be used in the
forecasting process. In any case, planning is certainly a management activity.
D. Planning is the process of determining the questions of what, how, when, where and who for a companies
operations. This plan is then communicated to all of the company to serve as a guide for future actions. A
forecast is an attempt to determine the future activity levels or environment that the company will be
operating in. Forecasts are used in the planning process as a basis for some of the decisions that need to be
made.
Question 108 - CMA 693 3-8 - Budgeting
Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for each
department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, year 2, and has
gathered the this information regarding two of the components used in both tricycles and bicycles. Wellfleet uses the
first-in, first-out inventory method.
A19 B12 Tricycles Bicycles
Beginning inventory July 1, year 1 3,500 1,200
800
2,150
Ending inventory June 30, year 2 2,000 1,800
1,000
900
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Unit cost
Projected fiscal year unit sales
Component usage:
Tricycles
Bicycles
$1.20 $4.50
$54.50 $89.60
96,000 130,000
2/unit 1/unit
2/unit 4/unit
If the economic order quantity of Component B12 is 70,000 units, the number of times that Wellfleet Company should
purchase this component during the fiscal year ended June 30, year 2 is
A. Eight times.
B. Four times.
C. Nine times.
D. Five times.
A. Dividing the total quantity to purchase by economic order quantity we will get 8.74 times. Since the number of
purchases is an integer - number of purchases is the next (higher) integer or 9. If only 8 orders were made, there
would not be enough units to meet the production and inventory requirements.
B. This answer is incorrect. It covers only the production of tricycles, and not bicycles. See the correct answer for a
complete explanation.
C. Component B 12 is used in both bicycles and tricycles. Thus, we need to find out the quantity of both
bicycles and tricycles to produce and the needed quantity of component B 12 to satisfy production
requirements. The number finished goods to produce is equal to the Units Sold + Ending Inventory Beginning Inventory. The number of tricycle to produce is: 96,000 + 1,000 - 800 = 96,200 and the number of
bicycles to produce is: 130,000 + 900 - 2,150 = 128,750. The needed quantity of B 12 to produce tricycles is
96,200 (1 * 96,200) and the quantity of B 12 to produce bicycles is 515,000 (128,750 * 4). Adding these together,
the total quantity of B 12 to satisfy production requirements is 611,200. Now we can calculate quantity of B 12
purchase: Quantity for production + Ending inventory - Beginning Inventory or 611,200 + 1,800 - 1,200 =
611,800. Dividing the total quantity to purchase by economic order quantity we will get 8.74 times. Since the
number of purchases is an integer - number of purchases is the next (higher) integer or 9.
D. This answer is incorrect. It covers only the production of bicycles, and not tricycles. See the correct answer for a
complete explanation.
Question 109 - CMA 1296 H8 - Budgeting
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 purchase of merchandise that Karmee Company will need to make during February will be
A. $260,000
B. $254,000
C. $266,000
D. $338,000
A. This is the February cost of goods sold. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. Purchases of merchandise for resale are paid for in the month following the sale. Thus, in February the
company pays for January's merchandise. Karmee's objective is to maintain a target inventory equal to 30%
of the next month's sales in units. This means that ending inventory in February was 30% of February's unit
sales and the ending inventory was 30% of March's unit sales. The cost of goods sold is 40% of sales value.
The beginning inventory in February was $78,000 (30% * $650,000 * 40%), the ending inventory in February
was $84,000 (30% * $700,000 * 40%). The cost of sales was $260,000 ($650,000 * 40%). Now we can determine
the cost of goods purchased using this formula: beginning inventory + cost goods purchased = cost of goods
sold + ending inventory. Hence, the cost of merchandise was $266,000 ($260,000 + $84,000 - $78,000).
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 110 - CMA 1283 4-23 - Budgeting
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
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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 pro forma income (loss) before income taxes for December year 1 is
A. Some amount other than those given.
B. $28,000.
C. $32,400.
D. $10,000.
A. The correct amount is given as one of the choices.
B. This amount does not consider depreciation expenses. See the correct answer for a complete explanation.
C. This amount does not consider bad debt and depreciation expenses. See the correct answer for a complete
explanation.
D. 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 we will get the amount of net income of
$10,000 ($55,000 - $22,600 - $4,400 - $18,000).
Question 111 - CMA 1295 H1 - Budgeting
Which one of the following statements regarding the difference between a flexible budget and a static budget is
correct?
A. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs.
B. A flexible budget is established by operating management, while a static budget is determined by top management.
C. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for performance
evaluation.
D. A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs for
one level of activity.
A. Both flexible and static budget include variable and fixed costs.
B. There are a number of methods of developing budgets: participative budgeting, bottom-up budgeting, top-down
approach, etc. Thus, any level of management can establish the budget it only depends of budget development
approach used.
C. Both, flexible and static budget are usually prepared for planning and performance evaluation purposes.
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
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the budget period.
Question 112 - CMA 696 H2 - Planning
The first step in the sales planning process is to
A. Assemble all the data that are relevant in developing a comprehensive sales plan.
B. Develop management guidelines specific to sales planning, including the sales planning process and planning
responsibilities.
C. Prepare a sales forecast consistent with specified forecasting guidelines, including assumptions.
D. Secure managerial commitment to attain the goals specified in the comprehensive sales plan.
A. The assembling of all relevant data is not the first step of the sales planning process.
B. Because the sales plan is the starting point for the planning process of the company, it is important that
the sales plan is developed correctly. The first step, therefore, is to make certain that the guidelines for this
plan, the process for the plan and the responsibilities are established. Only after this is done will the process
of looking at numbers, trends, competitors, markets start.
C. Preparing a forecast is not the first step in the sales planning process.
D. Obtaining management commitment to attain the goals of the sales plan is not the first step in the sales planning
process.
Question 113 - CMA 1295 H6 - Budgeting
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. Sales forecast.
B. Schedule of cash receipts and disbursements.
C. Raw materials purchases budget.
D. Production budget.
A. Sales forecast will give information to determine the level of production. However, it does not provide direct
information to prepare labor budget.
B. Cash budget is the last budget in master budget and it obviously direct labor budget has to be prepared before
cash budget.
C. Raw materials purchases budget does not give information for direct labor budget preparation.
D. Once sales budget and the inventory budget have been produced, the give information with which to
prepare the production budget. The production budget then gives information to prepare the direct labor,
direct materials and manufacturing overhead budgets as the production budget determines how much of the
product is going to be produced.
Question 114 - CMA 691 H2 - Budgeting
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All types of organizations can benefit from budgeting. A major difference between governmental budgeting and
business budgeting is that
A. Governmental budgeting is usually done on a zero-base.
B. Business budgeting can be used to measure progress in achieving company objectives, whereas governmental
budgeting cannot be used to measure progress in achieving objectives.
C. Governmental budgeting usually represents a legal limit on proposed expenditures.
D. Business budgeting is required by the SEC.
A. Governmental budgeting does not need to be used, and is rarely used, in governmental budgeting.
B. Governmental budgeting can also be used to measure progress in achieving objectives.
C. Governmental budgets differ from business budgets because a governmental budget represents the legal
amount that the government can spend. In order to spend more than the budgeting amount, legislation must
be passed by the government to allow the additional spending.
D. The SEC (Securities Exchange Commission) does not require businesses to budget.
Question 115 - CMA 1290 3-14 - Budgeting
The use of budgetary slack does not allow the preparer to
A. Be flexible under unexpected circumstances.
B. Increase the probability of achieving budgeted performance.
C. Use the budget to control subordinate performance.
D. Project actual expenses.
A. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it allows a manager to
be more flexible under unexpected circumstances.
B. Budgetary slack exists when revenues are understated or expenses are overstated. Thus, it is easy to attain a
budget performance increasing budgeted profitability.
C. A budget can serve as a control tool. Actual performance results are compared with budgeted. The budget
should set the performance standards at high but attainable level. When a budget is easily achieved, it is said
to have budgetary slack in it. When budgetary slack exists either revenues are understated or expenses are
overstated to which makes it difficult to properly evaluate the performance.
D. Budgetary slack exists when revenues are understated or expenses are overstated. The projected actual expenses
are usually estimated by a manager, those expenses do not appear as budgeted expected expenses though. The
projected actual expenses are usually overstated (budgetary slack is added) to be easily attainable.
Question 116 - CMA 1296 H7 - Budgeting
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
Monthly Sales
January
$600,000
Month
Type of
Monthly Sale
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February
March
April
May
June
650,000
All Months:
700,000
Cash sales 20%
625,000
Credit sales 80%
720,000
800,000
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 amount for cost of goods sold that will appear on Karmee Company's pro forma income statement for the month
of February will be
A. $260,000
B. $254,000
C. $272,000
D. $195,000
A. The sales are estimated to be $650,00 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%).
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 answer is incorrect. See the correct answer for a complete explanation.
Question 117 - CMA 1290 3-17 - Budgeting
The operating budget process usually begins with the
A. Sales budget.
B. Financial budget.
C. Balance sheet.
D. Income statement.
A. The sales budget is the part of operating budget and is usually the first budget to be prepared in the
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budgeting process. It is therefore the foundation of the operating budget.
B. The financial budget is neither an operating budget nor a part of the operating budget.
C. The pro forma balance sheet is a part of the financial budget, not the operating budget.
D. The pro forma income statement is a part of the financial budget, not the operating budget.
Question 118 - CMA 692 3-26 - Budgeting
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. $2,200,000.
B. $2,880,000.
C. $2,640,000.
D. $2,400,000.
A. This is the number of pounds that needs to be purchased. See the correct answer for a complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. First, we need to identify the quantity of material that needs to be purchased. The beginning inventory level
on July 1 was 800,000 pounds. The level of production in pounds was 2,400,000 lb. (600,000 units * 4 lb./unit).
The ending inventory was 600,000 lb. of material (2,400,000 lb. * 25%). Now we can determine the quantity to
purchase: Beginning inventory + quantity purchased = quantity used in production + ending inventory
800,000 + quantity purchased = 2,400,000 + 600,000 Solving for the missing item, we determine that the
quantity purchased is equal to 2,200,000 pounds. Given a cost of $1.20 per pound of material we can
determine the cost of materials purchased is $2,640,000 ($1.20 * 2,200,000).
D. This is the number of pounds that will be used. See the correct answer for a complete explanation.
Question 119 - CIA 1190 IV-17 - Budgeting
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
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applicable costs including costs that are not controllable by individual managers.
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 120 - CMA 1292 H5 - Budgeting
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
$2,400,000
Direct materials
675,000
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. $510,000.
B. $420,000.
C. $225,000.
D. $270,000.
A. In this calculation variable costs are incorrectly treated as fixed costs. See the correct answer for a complete
explanation.
B. The flexible budget is the budget developed for different levels of output. 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 contribution per unit is $6.50
($975,000 / 150,000). Fixed costs for the flexible budget remain the same as for static budget since the fixed
cost do not fluctuate with the level of output. The flexible budget contribution margin is $1,170,000 ($6.50 *
180,000). Subtracting the fixed costs from the expected contribution margin for actual level of output we
arrive to a flexible budget operating income of $420,000 ($1,170,000 - $250,000 - $500,000 = $420,000).
C. This is the static budget operating income not adjusted for the actual level of output.
D. This is calculated using the static budget operating income per unit of $1.50 ($225,000 / 150,000) and multiplied by
the new level of output 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 output.
Question 121 - CMA 1291 3-25 - Budgeting
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Information pertaining to Noskey Corporation's sales revenue is presented in the following table.
November December January
Year 1
Year 1
Year 2
(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. $283,500
B. $405,000
C. $168,000
D. $220,500
A. 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).
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.
C. 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.
D. This answer is calculated based on credit sales only, and not total sales. See the correct answer for a complete
explanation.
Question 122 - CMA 693 3-7 - Budgeting
Wellfleet Company manufactures recreational equipment and prepares annual operational budgets for each
department. The Purchasing Department is finalizing plans for the fiscal year ending June 30, year 2, and has
gathered the this information regarding two of the components used in both tricycles and bicycles. Wellfleet uses the
first-in, first-out inventory method.
Beginning inventory July 1, year 1
Ending inventory June 30, year 2
Unit cost
Projected fiscal year unit sales
Component usage:
Tricycles
Bicycles
A19
3,500
2,000
$1.20
B12 Tricycles Bicycles
1,200
800
2,150
1,800
1,000
900
$4.50
$54.50 $89.60
96,000 130,000
2/unit 1/unit
2/unit 4/unit
The budgeted dollar value of Wellfleet Company's purchases of component A19 for the fiscal year ending June 30,
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year 2 is
A. $540,600.
B. $2,017,800.
C. $538,080.
D. $309,000.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This answer incorrectly assumes that cost of A 19 is $4.50, not $1.20. In fact, $4.50 is a cost of part B 12. See the
correct answer for a complete explanation.
C. This is a very large question with a couple of minor details that are essential to getting the question
correct. It is, however, the same basic premise as the previous questions about how many units need to be
produced or purchased. The first thing that we need to do is determine how many bicycles and tricycles need
to be produced. The number of bicycles that will be sold is 130,000. However, during the period, inventory will
decrease by 1,250 units, so this means that only 128,750 bicycles will be produced. The sales of tricycles will
be 96,000, but during the year inventory will increase by 200, so production needs to be 96,200. We now need
to calculate how many of part A19 will be needed during the period. There are 2 A19 in a bicycle and 2 in a
tricycle. This is a total of 449,900 units of A19 ((128,750 * 2) + (96,200 * 2)). We are told that the ending
inventory for A19 is 2,000 and the beginning inventory is 3,500. So, 448,400 units must be purchased during
the period (449,900 + 2,000 - 3,500). At a cost of $.120 per unit, this is a total budgeted cost of $538,080.
D. This is the cost of the component needed for bicycle production only. See the correct answer for a complete
explanation.
Question 123 - CMA 1283 4-24 - Budgeting
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
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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: 20% of December
sales and 80% of January sales. Thus, purchases in December are equal to $204,000 ($220,000 * 20% +
$200,000 * 80%). Since the gross margin is equal to 25% the AP are equal to 75% of estimated sales, or
$153,000.
Question 124 - CMA Sample Q3-8 - Budgeting
In an organization that plans by using comprehensive budgeting, the master budget is
A. The current budget updated for operations for part of the current year.
B. The booklet containing budget guidelines, policies, and forms to use in the budgeting process.
C. A budget of a not-for-profit organization after it is approved by the appropriate authoritative body.
D. A compilation of all the separate operational and financial budget schedules of the organization.
A. This is a feature of the current budget.
B. This is the definition of a budget manual.
C. A master budget may be prepared any type of organization.
D. The master budget is a comprehensive expression of management's operating and financial plans for a
future time period (usually a year) that is summarized in a set of budgeted financial statements. It embraces
the impact of both operating and financing decisions.
Question 125 - CMA 696 H4 - Budgeting
The budgeting tool or process in which estimates of revenues and expenses are prepared for each product beginning
with the product's research and development phase and traced through to its customer support phase is a(n)
A. Activity-based budget.
B. Life-cycle budget.
C. Master budget.
D. Zero-base budget.
A. Activity-based budgeting focuses on the budged cost of activities necessary to produce and sell products and
services.
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B. A life-cycle budget is one that follows a product through its entire life - from development through its
decline. It estimates a product's revenues and expenses over its expected life cycle. It also allows the
company to set a price that will cover not only the production costs, but also the development costs by
identifying all of the costs associated with this product.
C. The master budget is the composition of pro forma of balance sheet, cash budget, statement of cash flow and the
capital budget.
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.
Question 126 - CIA 1193 IV-14 - Budgeting
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. A static budget.
B. An imposed budget.
C. Zero-base budgeting.
D. Incremental budgeting.
A. A static budget is a budget that is prepared for only one level of activity.
B. An imposed budget is budget that is prepared by top management without the participation of lower level
management.
C. 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.
D. Incremental budgeting is based on the prior period's budget.
Question 127 - CMA 691 3-27 - Budgeting
A controllable expense
A. Is an expense that will remain semivariable in total over the relevant range in a given time period.
B. Is an expected future expense that will be different under various alternatives.
C. Is one that is directly influenced at a given level of managerial authority within a given time period.
D. Is an expense whose actual amount will not normally differ from the standard (budget) amount.
A. This is the definition of a semivariable cost.
B. This is the definition of an incremental (differential) cost.
C. By definition a controllable expense is an expense that is directly influenced at a given level of managerial
authority within a given time period. Therefore, that manager is able to control this expense.
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D. This is similar to a fixed cost.
Question 128 - CMA 1292 H3 - Budgeting
The information contained in a cost of goods manufactured budget most directly relates to the
A. Materials used, direct labor, overhead applied, and finished goods inventories budgets.
B. Materials used, direct labor, overhead applied, and ending work-in-process budgets.
C. Materials used, direct labor, overhead applied, and work-in-process inventories budgets.
D. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets.
A. Finished goods should not be included, but work-in-progress should be included.
B. The beginning work-in-progress budget should also be included in a cost of goods manufactured budget.
C. These are the items that would be in a cost of goods manufactured budget.
D. Finished goods are not included in the cost of goods manufactured budget.
Question 129 - CMA 695 H2 - Budgeting
A plan that is created using budgeted revenue and costs but is based on the actual units of output is known as a
A. Static budget.
B. Flexible budget.
C. Continuous budget.
D. Strategic plan.
A. A static budget, or fixed budget, is a budget that is prepared for only one level of activity (a certain level of sales)
within the company. It does not take into account the actual number of units produced.
B. By definition, a flexible budget is a budget that is developed for different levels of output.
C. A continuous budget, also called a rolling budget, is one that is automatically 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. Long-term (or Strategic) planning is for periods greater than one year and is based on the objectives of the
organization. It does not include budgeted revenue and costs, or the current actual level of production.
Question 130 - CMA 1294 H4 - Budgeting
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 planned activities for a period but does not present a firm commitment.
C. Drops the current month or quarter and adds a future month or quarter as the current month or quarter is
completed.
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D. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
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 represents the same firm commitment that other types of budgets represent.
C. A continuous budget, also called a rolling budget, is one that is automatically 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 can be prepared for different level of activities. The budget that is prepared for only one level
of activity is a static budget.
Question 131 - CMA 1294 H6 - Budgeting
The goals and objectives upon which an annual profit plan is most effectively based are
A. Qualitative measures of organizational activity such as product innovation leadership, product quality levels, and
product safety.
B. A combination of financial, quantitative, and qualitative measures.
C. Quantitative measures such as growth in unit sales, number of employees, and manufacturing capacity.
D. Financial measures such as net income, return on investment, and earnings per share.
A. An annual profit plan should be based on combination of financial, quantitative, qualitative measures. This answer
includes only financial measures.
B. An annual profit plan should be based on a combination of financial, quantitative and qualitative measures.
The development of goals and objectives is the first step in the planning process. Top management must
establish the major goals and objectives, set priorities and communicate these priorities to the people within
the organization. Lower levels of the organization bear a part of overall organizational goals and objectives
which become subunit's goals and objectives. However, specific departments' goals and objectives may
contradict to other department's goals and objectives. For example, an increase in market size (goal one) may
contradict with the profitability of sales (goal two). Thus, profit plans are based on multiple measures.
C. An annual profit plan should be based on combination of financial, quantitative, qualitative measures. This answer
includes only financial measures.
D. An annual profit plan should be based on combination of financial, quantitative, qualitative measures. This answer
includes only financial measures.
Question 132 - CIA 1190 IV-16 - Budgeting
A company is preparing its cash budget for the coming month. All sales are made on account. Given the following:
Cash
Accounts receivable
Sales
Cash disbursements
Beginning Budgeted
Balances Amounts
$50,000
180,000
$800,000
780,000
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Depreciation
Ending accounts receivable balance
25,000
210,000
What is the expected cash balance of the company at the end of the coming month?
A. $45,000
B. $40,000
C. $70,000
D. $15,000
A. This answer is incorrect. See the correct answer for a complete explanation.
B. 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. This answer is incorrect. See the correct answer for a complete explanation.
D. 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.
Question 133 - CMA 1296 H10 - Budgeting
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
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Salaries
1,080,000
The amount of cash collected in March for Karmee Company from the sales made during March will be
A. $636,000
B. $350,000
C. $140,000
D. $308,000
A. This is the total cash collection in March and includes collections from previous months' sales. However, the
question is about the March sales collection in March.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the amount of cash collected in March from cash sales. However, the amount of cash collected from credit
March sales in March has to be included as well.
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 134 - CMA 1294 3-19 - Budgeting
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. 8,400 units.
B. 8,000 units.
C. 7,200 units.
D. 8,800 units.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. This is the sales level of second quarter. 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 of 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: Units Produced = 8,000 + 2,400 1,600; or Units Produced = 8,800.
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Question 135 - CIA 593 IV-13 - Budgeting
Flexible budgeting
A. Helps control costs through comparison of actual and flexible budgeted amounts.
B. Does not help control variable costs.
C. Does not help control fixed costs.
D. Helps control costs through comparison of actual and master budgeted amounts.
A. Flexible budget is prepared for different levels of activity. One of the main purposes of flexible budgeting is
cost control by comparing actual results with flexible budget figures for the actual level of activity.
B. Flexible budgeting helps control variable costs.
C. Flexible budgeting helps control fixed costs.
D. Flexible budgeting helps control costs through the comparison of actual and flexible budgeted amounts.
Question 136 - CMA 694 H2 - Budgeting
The production budget process usually begins with the
A. Direct materials budget.
B. Manufacturing overhead budget.
C. Direct labor budget.
D. Sales budget.
A. The direct materials budget can not be prepared until it is determined how much of product is going to be produced.
B. The manufacturing overhead budget can not be prepared until it is determined how much of product is going to be
produced.
C. The direct labor budget can not be prepared until it is determined how much of product is going to be produced.
D. The budgeting process starts with the sales budget. It is impossible to prepare a production or master
budget without the sales budget being prepared.
Question 137 - CMA 1295 H5 - Budgeting
The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the
A. Sales volume variance.
B. Production volume variance.
C. Standard cost variance.
D. Flexible budget variance.
A. The sales volume variance is the difference between the flexible budget amount and the static budget amount.
B. The production volume variance is the difference between budgeted fixed overhead and the fixed overhead
allocated on the basis of the budgeted quantity of the fixed overhead allocation base allowed for the actual output
produced.
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C. The standard cost variance is not necessarily based on flexible budget amounts.
D. By definition the flexible budget variance is the difference between the actual results and the flexible
budget amount based on the actual level of output achieved in the budgeted period.
Question 138 - HOCK CMA P3A H27 - Budgeting
Of the following, which is considered a separate item in preparing the master budget?
A. Pro forma income statement.
B. Capital investment budget.
C. Ending inventory budget.
D. Pro forma statement of financial position.
A. Once all of the budgets have been prepared, the company is able to prepare its pro forma (projected)
financial/income statements. All of the pro forma financial statements are interconnected in the same manner as the
actual year-end financial statements. The composition of all of these budgets together (the pro forma balance sheet,
income statement, cash budget or budgeted statement of cash flows, and the capital budget) together make up the
master budget.
B.
The capital investment budget is not necessarily connected to the budget for the next period (the master
budget), because 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.
However, the capital budget is not completely independent from the master budget. Any capital expenditures
that are to be made in the budget year will need to be included in the budgeting process and incorporated into
the master budget. The use of the cash, as well as any anticipated financing, must be included in the cash
budget; the pro forma balance sheet must reflect the investment and the financing; and the pro forma income
and cash flow statements must reflect any net income planned for the coming period as a result of the capital
investments.
C. The production budget will generate the development of the ending inventory budget.
D. Once all of the budgets have been prepared, the company is able to prepare its pro forma (projected)
financial/income statements. All of the pro forma financial statements are interconnected in the same manner as the
actual year-end financial statements. The composition of all of these budgets together (the pro forma balance sheet,
income statement, cash budget or budgeted statement of cash flows, and the capital budget) together make up the
master budget.
Question 139 - CMA 689 4-28 - Budgeting
The two most appropriate factors for budgeting manufacturing overhead expenses would be
A. Management judgment and sales dollars.
B. Machine hours and production volume.
C. Management judgment and contribution margin.
D. Management judgment and production volume.
(c) HOCK international, page 75
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A. Sales dollars may not be an appropriate factor for budgeting manufacturing overhead expenses as overhead is
based on production value.
B. Machine hours may not be an appropriate factor for budgeting manufacturing overhead expenses.
C. Contribution margin may not be an appropriate factor for budgeting manufacturing overhead expenses as it is
calculated deducting the variable costs from the sales revenue. However, some overhead costs are variable.
D. Production volume is the most important factor in budgeting manufacturing overhead. Some overheads
are variable and directly depend on the level of production. The other part are fixed overhead and remain
unchanged with the relevant range. However, if production exceeds the relevant range, the fixed costs
increase and thus, are also dependent on the level of production. Management judgment is a very important
factor in manufacturing overhead budgeting, as budgeting is based on future events prediction. Overhead
allocation is based on predetermined rates. How accurately management assesses the future situation
influences the overhead allocated and therefore the costs of production.
Question 140 - CIA 1193 IV-13 - Budgeting
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
C. $207,000
D. $216,000
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. This is a dollar cost of materials required for February production ($4.00 * 3 * 17,250).
D. First, we need to determine the production requirements for January and February by using the formula for
the physical flow of goods: Beginning Inventory + Units produced = Units Sold + Ending Inventory Beginning
inventory for January is equal to 50% of January sales. Ending inventory for January is equal to 50% of
February sales. Plugging this numbers into the formula, we will get: 15,000 * 50% + Units produced = 15,000 +
18,000 * 50%; or Units produced in January = 16,500 Doing the same calculation for February, we will get the
following: 18,000 * 50% + Units produced = 18,000 + 16,500 * 50%; or Units produced in February = 17,250 We
know that three pounds of raw materials are needed for each units 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. Beginning inventory for January is 99,000 lb. (16,500 * 3 * 200%), the ending inventory for January
is 103,500 lb. (17,250 * 3 * 200%). Plugging these numbers into the formula of the physical flow of goods we
will get the following: 99,000 + Units purchased = 16,500 * 3 + 103,500; or Units purchased = 54,000.
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).
(c) HOCK international, page 76
Part 2 : 11/11/10 07:38:10
Question 141 - CMA 1296 H1 - Planning
Which one of the following reasons is not a significant reason for planning in an organization?
A. Monitoring profitable operations.
B. Developing a basis for controlling operations.
C. Forcing managers to consider expected future trends and conditions.
D. Promoting coordination among operating units.
A. Monitoring is a control function, and not a planning function. Though monitoring is very important to the
company, it is not a reason for planning.
B. Without a plan it is very difficult to control, so this is a reason for planning.
C. In the planning process managers need to consider future trends and conditions and this will assist the company in
their planning for, and potentially avoiding, negative events in the future.
D. The coordination of efforts between operating units is a reason for planning because planning helps make certain
that everyone is working towards the same goal.
Question 142 - CMA 695 H7 - Budgeting
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table
tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly
Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to
assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month's sales
are in the finished goods inventory. Rokat also purchases sufficient raw materials to ensure that raw materials
inventory is 60% of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as
follows:
July
2,300
August
2,500
September 2,100
Rokat's ending inventories in units for June 30 are
Finished goods
1,900
Raw materials (legs) 4,000
The number of tables to be produced during August is
A. 1,900 tables.
B. 1,440 tables.
C. 1,400 tables.
D. 2,340 tables.
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 is the number of units that will be produced in July. See the correct answer for a complete explanation.
D.
(c) HOCK international, page 77
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The beginning inventory level of finished goods in August is 40% of August sales, or 1,000 units (40% ×
2,500). The ending inventory of finished goods in August is 40% of the sales in September, or 840 units (2,100
× 40%). Now we can determine the number of units to produce in August using the following basic formula:
Beginning Inventory + Units Produced − Units Sold = Ending Inventory. So the equation is:
1,000 + P − 2,500 = 840.
Solving for P, we get P = 840 − 1,000 + 2,500, and P = 2,340.
Question 143 - CMA 1291 3-8 - Budgeting
A segment of an organization is referred to as a profit center if it has
A. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply and significant control over the amount of invested capital.
B. Authority to make decisions over the most significant costs of operations including the power to choose the sources
of supply.
C. Authority to provide specialized support to other units within the organization.
D. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply.
A. This is the definition of an investment center.
B. This is the definition of a cost center.
C. This is refers to support center and it is not classified as a center under responsibility accounting.
D. By definition, a profit center is a segment of the organization that has authority to make decisions affecting
the major determinants of profit. This includes the power to choose its markets and sources of supply.
Question 144 - CMA 697 3-11 - Budgeting
When developing a budget, an external factor to consider in the planning process is
A. The implementation of a new bonus program.
B. A change to a decentralized management system.
C. The merger of two competitors.
D. New product development.
A. The implementation of a new bonus program is an internal factor.
B. A change to a decentralized management system is an internal factor.
C. In developing a budget, internal and external factors are considered and assumptions about those factors
are made. Internal factors are the factors that take place inside the organization, external factors are those
outside of company's direct control. Some of the external factors are: state of economy, government
regulations, labor market, competitor's activities including mergers and acquisitions. Thus, the merger of two
competitors is an external factor that should be considered in the development of a budget.
(c) HOCK international, page 78
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D. New product development is an internal factor.
Question 145 - CMA 691 3-11 - Budgeting
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 availability of raw material without regard to inventory levels.
B. Expected change in the quantity of finished goods and work-in-process inventories.
C. Expected change in the quantity of finished goods and raw material inventories.
D. Expected change in the quantity of work-in-process inventories.
A. The existing levels of inventories of work-in-process and finished goods are both considered in the determination of
production levels.
B. 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.
C. The expected change in the work-in process level, not the raw materials inventories levels should be considered in
determining the production budget.
D. The expected change in the level of finished goods inventories should be considered as well in the development of
the production budget.
Question 146 - CIA 1193 IV-27 - Budgeting
A company develops a budget that is based on the behavior of costs and revenues over a range of sales for the
upcoming year. This is an example of a
A. Capital budget.
B. Production budget.
C. Cash budget.
D. Flexible budget.
A. The capital budget does not include revenues and costs.
B. A production budget does not include revenues.
C. A cash budget does not include non-cash revenues and costs.
D. The flexible budget is the budget that is prepared for different levels of activity (sales). The budget that is
based on the behavior of costs and revenues over a range of sales is an example of a flexible budget.
Question 147 - CIA 587 III-16 - Budgeting
A manufacturing firm has certain peak seasons; namely the Christmas season, the summer season, and the last 2
weeks of February. During these periods of increased output, the firm leases additional production equipment and
hires additional temporary employees. Which of the following budget techniques would best fit this firm's needs?
(c) HOCK international, page 79
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A. Zero-based budgeting.
B. Static budgeting.
C. Project budgeting.
D. Flexible 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. Flexible budgeting should be used.
B. Static budgeting is a budgeting technique that prepares budget for only one level of output. For the firm operating in
seasonal business it is critical to plan operations and predict financial results for different levels of sales and output.
C. Project budgeting is a budgeting technique to prepare a budget for a specific project. As such, the time frame of the
budget may be very short or more long-term, depending upon the length of the project not ongoing operations.
Flexible budgeting should be used.
D. Flexible budgeting is a budgeting technique that prepares budget for different levels in output. It allows to
plan operations and predict financial results for different sales levels. For the firm operating in seasonal
business it is critical to prepare flexible budget.
Question 148 - CMA 1295 H8 - Budgeting
The process of creating a formal plan and translating goals into a quantitative format is
A. Budget manual preparation.
B. Budgeting.
C. Process costing.
D. Job-order costing.
A. A budget manual details the budgeting process.
B. A budget is a realistic plan for the future expressed in quantitative terms.
C. Process costing is the method in which costs are assigned to individual products when the products are all
relatively similar (homogeneous) and are mass-produced.
D. Job-order costing is the method in which all of the costs associated with a specific job (or client) are accumulated
and charged to that job (or client). The costs are accumulated on what is called a job-cost sheet.
Question 149 - CMA 1296 H6 - Budgeting
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
(c) HOCK international, page 80
Part 2 : 11/11/10 07:38:10
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. $420,000
B. $385,000
C. $255,000
D. $290,000
A. This answer incorrectly includes depreciation. Depreciation is not a cash expenditure. See the correct answer for a
complete explanation.
B. Operating expenses other that COGS paid in the month of April are: 10% of March's sales, the advertising
monthly payment, monthly salaries, quarterly insurance payment and 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 ($700,000*10%), $60,000 ($720,000 / 12), $90,000 ($1,080,000 / 12), $45,000 ($180,000 / 4), and $120,000
($240,000 / 2). The total amount of disbursements in April is $385,000.
C. This answer does not include variable expenses or advertising. See the correct answer for a complete explanation.
D. This answer does not include variable expenses or advertising and it includes depreciation. See the correct answer
for a complete explanation.
Question 150 - CMA 1293 3-11 - Budgeting
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
(c) HOCK international, page 81
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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
A. 379,000 units.
B. 412,000 units.
C. 402,000 units.
D. 388,000 units.
A. This number does not take ending inventory level into consideration. See the correct answer for a complete
explanation.
B. This result is based on the incorrect calculation of adding the beginning inventory and subtracting ending inventory.
See the correct answer for a complete explanation.
C. This is the number of unit sales of finished product. See the correct answer for a complete explanation.
D. To solve these question we should use the formula of physical flow of goods: Beginning Inventory + Units
Purchased = Units Produced + Ending Inventory. We know that one detail of A-9 is necessary for each unit of
finished product. Plugging the numbers for A-9 into the formula we will get the following: Units Purchased =
(400,000 * 1) + 9,000 - 21,000. Solving further, the number of units purchased is 388,000.
Question 151 - CMA 686 4-23 - Budgeting
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 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. $20,425.
B. $21,500.
C. $19,475.
D. $20,500.
A. Depreciation is a fixed cost and does not change with the level of production.
B. The flexible budget is the budget that is prepared for different levels of output. Fixed costs remain the
same regardless the level of output. Since depreciation is a fixed cost, the amount of depreciation expense
for flexible budget is equal to the depreciation expense for the static budget, or $21,500 ($258,000 / 12).
C. Depreciation is a fixed cost and does not change with the level of production.
D. Depreciation is a fixed cost and does not change with the level of production.
(c) HOCK international, page 82
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Question 152 - CIA 589 IV-12 - Budgeting
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
B. $50,000
C. $20,000
D. $30,000
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 made during 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 necessary
financing. 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 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 or ending cash balance. See the correct answer for a complete
explanation.
Question 153 - CMA 679 4-7 - Budgeting
A continuous budget
A. Drops the current month or quarter and adds a future month or a future quarter as the current month or quarter is
completed.
B. Presents a statement of expectations for a period 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. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.
A. A continuous budget, also called a rolling budget, is one that is automatically 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.
B. This is a feature of a forecast.
C. This is a feature of a static budget.
D. This is a feature of a flexible budget.
Question 154 - CMA 693 3-10 - Budgeting
(c) HOCK international, page 83
Part 2 : 11/11/10 07:38:10
A firm develops an annual cash budget in order to
A. Determine the opportunity costs of alternative sales and production strategies.
B. Support the preparation of its cash flow statement for the annual report.
C. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be deferred.
D. Avoid the opportunity costs of non-invested excess cash and minimize the cost of interim financing.
A. The cash budget does not determine the opportunity costs of alternative sales and production strategies.
B. The cash flow statement in the annual report is based on actual results not on budgeted figures.
C. 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.
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 155 - CMA 695 H1 - Planning
Strategic planning, as practiced by most modern organizations, includes all of the following except
A. A long-term focus.
B. Strategies that will help in achieving long-range goals.
C. Top-level management participation.
D. Analysis of the current month's actual variances from budget.
A. By definition strategic planning requires a long-term focus.
B. Strategic planning is specifically related to the strategies that will help in achieving long-term goals.
C. Strategic planning does require top-level management participation.
D. Strategic planning is involved in long-range planning for the company and the analysis of current month
variances is not a strategic planning item.
Question 156 - CMA 1290 3-19 - Budgeting
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. Flexible budget.
B. Static budget.
C. Zero-base budget.
D. Capital budget.
A. Flexible budget is prepared for different levels of production and it is not static.
B. This is a static budget because the static budget is prepared for only one level of activity (a certain level of
(c) HOCK international, page 84
Part 2 : 11/11/10 07:38:10
sales).
C. In zero-budget the current year budget is prepared without any reference to, or use of, the prior period's budget.
Whether or not he budget is a zero-based budget is not relevant to using it as a comparison figure or not.
D. 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.
Question 157 - CMA 1294 H3 - Budgeting
A systemized approach known as zero-base budgeting (ZBB)
A. Classifies the budget by the prior year's activity and estimates the benefits arising from each activity.
B. Presents planned activities for a period of time but does not present a firm commitment.
C. Commences with the current level of spending.
D. Divides the activities of individual responsibility centers into a series of packages that are prioritized.
A. Zero-base budgeting is not based on prior year's activities.
B. Zero-base budgeting (as do other types of budgeting) represent a firm commitment.
C. Zero-base budgeting does not commence with the current level of spending. Rather, it starts with zero.
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. 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 158 - CMA 681 4-2 - Budgeting
The imputed interest rate used in the residual income approach for performance measurement and evaluation can
best be characterized as the
A. Historical weighted average cost of capital for the company.
B. Marginal after-tax cost of new equity capital.
C. Target return on investment set by management.
D. Average return on investment that has been earned by the company over a particular period.
A. The historical weighted average cost of capital for the company may be used in residual income calculation only if it
is set as a target rate of return. Otherwise, this past figure is irrelevant to the evaluation of future managerial
performance.
B. The marginal after-tax cost of new equity capital may be used in the residual income calculation only if it is set as a
target rate of return. Otherwise, this past figure is irrelevant to the evaluation of future managerial performance.
C. In residual income calculation management normally set a desired target rate of return to achieve. The
target rate of return may be set based prior experience or any other estimations depending on management
decision.
(c) HOCK international, page 85
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D. The average return on investment that has been earned by the company over a particular period may be used in
residual income calculation only if it is set as a target rate of return. Otherwise, this past figure is irrelevant to the
evaluation of future managerial performance.
Question 159 - CMA 1296 H12 - Budgeting
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. 14,500 units.
B. 45,000 units.
C. 16,500 units.
D. 54,000 units.
A. This is the budgeted production for April.
B. The level of production has to be based on the following month projected sales, not on the current month's sales.
C. This is the budgeted production for February.
D. 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.
Question 160 - CMA 697 3-21 - Budgeting
The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year. Because of
the nature of the product and emphasis on quality, extra production cannot be stored as finished goods inventory.
When developing a contingency budget that would anticipate a raw material buildup, the two most significant items
that will be affected are
A. Sales and ending inventory.
B. Production and cash flow.
C. Production volume and raw material.
(c) HOCK international, page 86
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D. Raw material and cash flow.
A. Ending inventory can not be affected because extra production cannot be stored as finished goods inventory.
However, sales may decrease because of stock out if the company won't find another raw materials supplier.
B. Production volume can not be affected because extra production cannot be stored as finished goods inventory.
C. Production volume can not be affected because extra production cannot be stored as finished goods inventory.
D. In this situation contingency plan may consider acquisition of additional amount of raw material to supply
production during the strike at its major supplier. However, purchase of additional quantity of raw materials
than is needed for normal operations will require a cash outlay. Thus more cash will be frozen in raw
materials and the cash flow will be affected.
Question 161 - CMA 1291 3-26 - Budgeting
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. $11,700.
B. $13,500.
C. $13,975.
D. $13,000.
A. This answer is incorrect. See the correct answer for a complete explanation.
B. Indirect materials are considered to be 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 budgeted costs for
indirect material in October would be $13,500 ($1.25 * 10,800).
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the actual indirect materials cost. See the correct answer for a complete explanation.
Question 162 - CMA 1283 4-25 - Budgeting
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.
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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. $160,000.
B. $120,000.
C. $153,000.
D. $150,000.
A. This is the amount of sales in January for which inventory is bought in December. See the correct answer for a
complete explanation.
B. The level of inventory at the end of December is equal to 80% of the inventory necessary to fulfill the next
moth's (January) projected sales. The gross margin is 25%, thus, the inventory value is 75% of sales price.
Since the expected sales are $200,000 in January, we can calculate the inventory at the end of December:
($200,000 * 80%) * 75% = $120,000.
C. This is the balance of AP. See the correct answer for a complete explanation.
D. This answer is incorrect. See the correct answer for a complete explanation.
Question 163 - CMA 695 H5 - Budgeting
Rokat Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table
tops are manufactured by Rokat, but the table legs are purchased from an outside supplier. The Assembly
Department takes a manufactured table top and attaches the four purchased table legs. It takes 20 minutes of labor to
assemble a table. The company follows a policy of producing enough tables to ensure that 40% of next month's sales
are in the finished goods inventory. Rokat also purchases sufficient raw materials to ensure that raw materials
inventory is 60% of the following month's scheduled production. Rokat's sales budget in units for the next quarter is as
follows:
July
2,300
August
2,500
September 2,100
Rokat's ending inventories in units for June 30 are
Finished goods
1,900
Raw materials (legs) 4,000
Assume that Rokat Corporation will produce 1,800 units in the month of September. How many employees will be
required for the Assembly Department? (Fractional employees are acceptable since employees can be hired on a
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part-time basis. Assume a 40-hour week and a 4-week month.)
A. 15 employees.
B. 60 employees.
C. 600 employees.
D. 3.75 employees.
A. This answer assumes that there is only one week in which production can occur. See the correct answer for a
complete explanation.
B. This answer is incorrect. See the correct answer for a complete explanation.
C. This is the number of hours needed, not the number of employees needed. See the correct answer for a complete
explanation.
D. Because this is a mathematical calculation, there are different ways it can be done. One of them is as
follows: 1,800 units will be produced and each table needs 20 minutes. That is 36,000 minutes or 600 hours.
Each employee works 160 hours a month, so 600 ÷ 160, or 3.75 employees will be needed.
Question 164 - CMA 691 3-15 - Budgeting
Which one of the following schedules would be the last item to be prepared in the normal budget preparation process?
A. Cash budget.
B. Cost of goods sold budget.
C. Direct labor budget.
D. Manufacturing overhead budget.
A. The cash budget is the last budget to be prepared because all other budgets are inputs to it.
B. The cost of goods sold budget is a part of the operating budget and it is prepared before the cash budget.
C. The direct labor budget is part of the operating budget and it is prepared before the cash budget.
D. The manufacturing overhead budget is a part of the operating budget and it is prepared before the cash budget.
Question 165 - CMA 695 3-26 - Budgeting
Clear Plus, Inc. manufactures and sells boxes of pocket protectors. The static master budget and the actual results for
May appear below.
Unit sales
Static
Actuals Budget
12,000 10,000
Sales
$132,000 $100,000
Variable costs of sales 70,800 60,000
Contribution margin
Fixed costs
61,200
32,000
40,000
30,000
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Operating income
$29,200 $10,000
The budgeted operating income for Clear Plus, Inc. using a flexible budget for May is
A. $18,000
B. $29,200
C. $30,000
D. $12,000
A. The flexible budget contribution margin per unit is calculated using the static budget figures: $40,000 ÷
10,000 units = $4.00 per unit. The flexible budget contribution margin equals actual units times the
contribution margin per unit, or $48,000 ($4.00 * 12,000). Fixed costs do not vary with the level of output and
constant by nature. Thus, we use the static (master) budget figure of $30,000. Now we can determine the
operating income for the flexible budget. It is flexible budget contribution margin less fixed costs, which is
$48,000 − $30,000, or $18,000.
B. This is the actual operating income, not the flexible budget operating income. See the correct answer for a
complete explanation.
C. This answer incorrectly uses actual sales revenue ($132,000), but we should use the flexible budget sales revenue
of $120,000. See the correct answer for a complete explanation.
D. This answer incorrectly assumes that all costs are variable. In fact, the fixed costs do not change with the level of
output and we have to use the static (master) budget figure for fixed costs (FC = $30,000) in our calculations for the
flexible budget.
Question 166 - CMA 697 - Budgeting
After the goals of the company have been established and communicated, the next step in the planning process is
development of the
A. Production budget.
B. Sales budget.
C. Selling and administrative budget.
D. Direct materials budget.
A. The production budget can be prepared only after the sales budget has been prepared.
B. After goals and objectives, the sales budget is the next step in the planning process. This is because all
other activity in the company is based off of how many units they expect to sell.
C. The selling and administrative budget can be prepared only after the sales budget has been prepared.
D. The direct materials budget can be prepared only after the production budget has been prepared.
Question 167 - CMA 1294 3-18 - Budgeting
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
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Raw material*
Work-in-process
Finished goods
40,000
10,000
80,000
50,000
10,000
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. 1,010,000 units.
B. 1,020,000 units.
C. 990,000 units.
D. 1,000,000 units.
A. We know that two units of material are needed to produce each unit of finished good. Thus, the number of
raw materials needed for production is 1,000,000. The inventory level of raw materials increased during the
year by 10,000, thus, 1,010,000 units of raw materials need to be purchased.
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 number of raw materials needed for production and does not take the materials inventory level increase
into consideration. See the correct answer for a complete explanation.
Question 168 - CMA 1283 4-22 - Budgeting
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
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The budgeted cash collections for December year 1 are
A. $212,000.
B. $208,000.
C. $132,000.
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. Cash collection of December sales in December is 60% of the sales level, or $132,000 ($220,000 * 60%).
December cash collection 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 cash collection in December is $208,000 ($132,000 + $76,000).
C. This is the amount of cash collected from December sales in December. See the correct answer for a complete
explanation.
D. This is the budgeted cash collections for January Year 2. See the correct answer for a complete explanation.
Question 169 - CMA 697 3-20 - Budgeting
Which one of the following best describes the role of top management in the budgeting process? Top management
A. Lacks the detailed knowledge of the daily operations and should limit their involvement.
B. Needs to be involved, including using the budget process to communicate goals.
C. Should be involved only in the approval process.
D. Needs to separate the budgeting process and the business planning process into two separate processes.
A. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,
motivation, communication, identifying future problems. To use the budget as a communication and motivational tool,
top management should be involved in budgeting process even though they lack detailed knowledge of the daily
operations.
B. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,
motivation, communication, identifying future problems. To use the budget as a communication and
motivational tool top management should be involved in budgeting process.
C. The budget is a very useful tool and can serve as a tool in a number of areas: planning, control, evaluation,
motivation, communication, identifying future problems. To use the budget as communication an motivation tool the
top management should be involved in budgeting process not only in the approval level.
D. The budget is a realistic plan for the future expressed in quantitative terms. In other words budgeting is a part of
overall planning process.
Question 170 - CMA 1292 H6 - Budgeting
Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is
the
A. Statement of cash flows.
B. Income statement.
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C. Statement of cost of goods sold.
D. Capital expenditure plan.
A. The Statement of Cash Flows is the last to be prepared. All other elements of budgeting process must be
completed before Statement of Cash Flow. The Statement of Cash Flows reconciles net income with net
operating cash flow, a process that requires balance sheet data (e.g., changes in receivables, payables, and
inventories) as well as net income.
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 answer is incorrect. See the correct answer for a complete explanation.
Question 171 - CMA 696 H3 - Budgeting
Comparing actual results with a budget based on achieved volume is possible with the use of a
A. Master budget.
B. Monthly budget.
C. Rolling budget.
D. Flexible budget.
A. The master budget is a composition of pro forma of balance sheet, cash budget, statement of cash flow and the
capital budget. Since it is prepared for only one level of activity, it is not likely to be used for comparison of results.
B. A monthly budget is a budget prepared for a period of one month. See the correct answer for a complete
explanation.
C. A rolling budget, also called a continuous budget, is one that is automatically 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. Flexible budget is the budget developed for the actual level of output. The actual results can be compared
to the flexible budget as the flexible budget allows a comparison to be made between what the actual results
were and what the results should have been, given the actual level of output.
Question 172 - CMA 692 H4 - Budgeting
The budget that describes the long-term position, goals, and objectives of an entity within its environment is the
A. Strategic budget.
B. Capital budget.
C. Cash management budget.
D. Operating budget.
A. The strategic budget describes the long-term position, goals, and objectives of an entity within its
environment.
B. The capital budget relates to the acquisition of fixed assets.
C. The cash management budget relates to the cash inflows, outflows and balance of the company.
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D. The operating budget is a short-term budget that is related to the operations of the company.
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