Deck 6: Operational Budgets

Question 1

A budget cycle refers to the length of time that the budget period covers.

Answer 1

B

Question 2

Budgets are used to monitor performance and compare expected to actual results.

Answer 2

A

Question 3

The component of a master budget that contains management's plans for revenues, production, and operating costs is the operating budget.

Answer 3

A

Question 4

The operating budget is a comprehensive plan of the entity's entire financial and operational activities for an upcoming financial period.

Question 5

Budgets help competitors understand an entity's activities for the next period.

Question 6

The first stage in the budget cycle is to reassess organisational vision and core competencies.

Question 7

The operating budget is another name for master budget.

Question 8

The master budget starts with a series of assumptions about future events and activities.

Question 9

Managers need information from about current beginning inventories and required ending inventories to prepare the capital budget.

Question 10

The ending inventories budget is typically expressed in terms of units, while the production budget is typically expressed in costs.

Question 11

Budgets are generally developed for the organisation as a whole as department managers do not have budget authority.

Question 12

The production budget requires a forecasted level of sales volume.

Question 13

The master budget includes two components: an operating budget and a flexible budget.

Question 14

The master budget reflects the entity's future operating and financing decisions and is often summarized in a set of budgeted financial statements.

Question 15

Beginning inventory plus budgeted production equals sales plus targeted ending inventory in a production budget.

Question 16

Preparation of the operating budgets should start with the capital budget.

Question 17

A budget is a formalised financial plan for organisational operations for a specific future period.

Question 18

The cash budget is part of the operating budgets.

Question 19

Decision rights refer to the responsibility and financial decision making authority of each individual manager.

Question 20

Together the direct materials budget, direct labour budget and manufacturing budget provide the information to calculate cost of goods sold.

Question 21

Depreciation is a cash outflow in the cash budget.

Question 22

The purpose of the cash budget is to ensure that that entity has sufficient cash for future expansion.

Question 23

A favourable variance may be caused by efficient use of resources or less activity than expected.

Question 24

Budgeted operating cash receipts are calculated using budgeted sales revenue.

Question 25

One reason that variances can occur is when there is deviation from budgeted volume levels.

Question 26

Cash payments are always budgeted to take place in the month in which the transaction is budgeted to occur.

Question 27

Differences in actual and budgeted sales volume will often lead to budget variances as variable costs vary according to volume.

Question 28

Differences between budgeted amounts and actual amounts are called budget benchmarks.

Question 29

The sales volume and revenue budget is linked to the organisational strategy.

Question 30

Budgeting is complex for multinational companies due to cultural and legal influences.

Question 31

The budgeted statement of financial position is prepared before budgeted income statement.

Question 32

An unfavourable variance occurs when actual costs are lower than budgeted costs.

Question 33

Favourable variances are always positive amounts; unfavourable variances are always negative amounts.

Question 34

Dividends paid to shareholders are shown in the budgeted statement of financial position and does not appear in the cash budget.

Question 35

Managers typically use excess cash to replay short term debt.

Question 36

Support department costs are included in the budgeted income statement.

Question 37

An organization operating in a highly competitive and volatile environment is likely to have more significant budget variances than an established business with low uncertainty about business operations.

Question 38

Retail entities do not require budgets for inventory.

Question 39

In government organisations budgets can be used to place restrictions on spending authority.

Question 40

Cash receipts, cash disbursements and short term borrowing or investments all appear in the cash budget.

Question 41

The correct sequence for the following components in the operating budget is:
I. Sales Forecast
II. Production Budget
III. Revenue Budget
IV. Budgeted Cost of Sales

A) I, II, III, IV
B) III, I, IV, II
C) I, III, II, IV
D) IV, I, III, II

Question 42

Budgetary slack occurs when a divisional manager under-utilises support department resources.

Question 43

A danger of under estimating sales forecasts is that the entity may lose the capacity to increase sales in the short term.

Question 44

The flexible budget uses actual volume to calculate variable costs.

Question 45

The budgeted statement of financial position does NOT use information from which of the following:

A) Budgeted statement of cash flows.
B) Cash budget.
C) Capital budget.
D) Budgeted income statement.

Question 46

Budgeted variable costs are likely to be understated if production volume is less than forecasted.

Question 47

When evaluating actual results at the end of an accounting period, the flexible budget provides the appropriate benchmark for actual operations.

Question 48

Profit sharing, cash bonus schemes and awards dinners are all ways of rewarding employees who achieve budget targets.

Question 49

A flexible budget is used at the end of a period to evaluate the accuracy of the original master budget.

Question 50

The starting point of the budget cycle is:

A) Reassess organisational vision and core competencies.
B) Reconsider long term strategy
C) Translate strategies and operating plans into financial data.
D) None of the above.

Question 51

Participative budgeting is another name for top down budgeting.

Question 52

Budget variances can sometimes occur due to unanticipated changes in the price of direct materials, direct labour or overhead costs.

Question 53

One way to decrease budgetary slack is to offer bonuses for accurate forecasts.

Question 54

The production department manager should not be held responsible for variances due to changes in forecasted sales volume.

Question 55

Some entities monitor individual manager performance by comparing actual results to budgeted results.

Question 56

Participative budgeting involves customers and managers at all levels in the organisation.

Question 57

Which of the following is not an objective of budgeting?

A) Assigning decision rights.
B) Establishing prices for the internal transfer of goods and services.
C) Motivating managers to use resources efficiently.
D) Improving customer relations.

Question 58

A flexible budget separates fixed and variable costs to accurately reflect the effects of activity on cost.

Question 59

Targets developed via a participative budgeting are non-negotiable.

Question 60

A master budget is typically developed for:

A) One week.
B) One month.
C) One year.
D) The dates corresponding to the tax year.

Question 61

Rainbow Legacy Ltd has the following balances at 31^st December 2019: Cash $46,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow:
$$\begin{array} { l l } \text { January } & \$ 100,000 \\\text { February } & \$ 180,000 \\\text { March } & \$ 120,000 \\\text { April } & \$ 200,000\end{array}$$ Other data:
-Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales
-Cost of goods sold is 40% of sales
-Ending inventory must be 150% of the next month's cost of sales
-Purchases are paid 70% in month of purchase and 30% in the following month
-The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for depreciation
-All costs are paid in the month incurred
-Minimum cash balance requirement is $6,000
What will be the ending cash balance for January before lending (if required)?

A) $3,240
B) $78,800
C) $19,720
D) $6,000

Question 62

Vaviano Ltd expects to sell 34,000 units of finished goods over the next 6-month period. The company has 10,000 units on hand and its managers want to have 14,000 units on hand at the end of the period. To produce one unit of finished product, two units of direct materials are needed. Vaviano has 100,000 units of direct material on hand and has budgeted for an ending inventory of 110,000 units. What is the number of finished units to be produced?

A) 38,000
B) 28,000
C) 34,000
D) 24,000

Question 63

Vaviano Ltd expects to sell 34,000 units of finished goods over the next 6-month period. The company has 10,000 units on hand and its managers want to have 14,000 units on hand at the end of the period. To produce one unit of finished product, two units of direct materials are needed. Vaviano has 100,000 units of direct material on hand and has budgeted for an ending inventory of 110,000 units. What is the amount of direct material to be purchased (in units)?

A) 38,000
B) 66,000
C) 86,000
D) 76,000

Question 64

Super Solar Systems has forecast the following unit sales and production for the next year, by quarter: $$\begin{array} { | l | l | l | l | l | } \hline & 1 ^ { \text {st } } & 2 ^ { \text {nd } } & 3 ^ { \text {rd } } & 4 ^ { \text {th } } \\\hline \text { Production } & 75 & 80 & 70 & 50 \\\hline \text { Sales } & 60 & 70 & 75 & 60 \\\hline\end{array}$$ Super Solar has the following beginning inventories:
$$\begin{array} { | l | l | } \hline \text { Firished Goods } & 50 \\\hline \text { Direct Material A } & 50 \\\hline \text { Direct Material B } & 50 \\\hline\end{array}$$ A finished unit requires one unit of material A and two units of material
B There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories.
What is the ending inventory for material B in quarter 1?

A) 150
B) 32
C) 16
D) 132

Question 65

Mr Lewis's Co has projected sales for the next four months as follows: $\begin{array} { l c } & \underline { \text { Units } } \\\text { January } & 70,000 \\\text { February } & 90,000 \\\text { March } & 55,000 \\\text { April } & 65,000\end{array}$
Beginning inventory for the year is 47,000 units. Ending inventory for each month should be 30% of the next month's sales. How many units should the company produce in January?

A) 50,000
B) 97,000
C) 70,000
D) 90, 000

Question 66

Rainbow Legacy Ltd has the following balances at 31^st December 2019: Cash $46,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow:
$$\begin{array} { l l } \text { January } & \$ 100,000 \\\text { February } & \$ 180,000 \\\text { March } & \$ 120,000 \\\text { April } & \$ 200,000\end{array}$$ Other data:
-Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales
-Cost of goods sold is 40% of sales
-Ending inventory must be 150% of the next month's cost of sales
-Purchases are paid 70% in month of purchase and 30% in the following month
-The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for depreciation
-All costs are paid in the month incurred
-Minimum cash balance requirement is $6,000
What is the budgeted cost of purchases for February?

A) $108,000
B) $36,000
C) $72,000
D) $120,000

Question 67

Sales of $550,000 are forecast for the third quarter. Gross profit is 40% of sales, and beginning inventory is $165,000. If ending inventory is budgeted as $215,000, what are the budgeted purchases?

A) $270,000
B) $330,000
C) $165,000
D) $380,000

Question 68

Limelite Ltd, projects sales for its first three months of operation as follows: $$\begin{array} { | l | l | l | l | } \hline & \text { Jaruary } & \text { February } & \text { March } \\\hline \text { Credit Sales } & \$ 150,000 & \$ 188,000 & \$ 176,000 \\\hline \text { Cash Sales } & \$ 60,000 & \$ 50,000 & \$ 55,000 \\\hline & \$ 210,000 & \$ 238,000 & \$ 231,000 \\\hline\end{array}$$ Inventory on 1^st January is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What are the anticipated cash receipts for January?

A) $150,000
B) $60,000
C) $210,000
D) $135,000

Question 69

Limelite Ltd, projects sales for its first three months of operation as follows: $$\begin{array} { | l | l | l | l | } \hline & \text { Jaruary } & \text { February } & \text { March } \\\hline \text { Credit Sales } & \$ 150,000 & \$ 188,000 & \$ 176,000 \\\hline \text { Cash Sales } & \$ 60,000 & \$ 50,000 & \$ 55,000 \\\hline & \$ 210,000 & \$ 238,000 & \$ 231,000 \\\hline\end{array}$$ Inventory on 1^st January is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What are the anticipated cash receipts for February?

A) $107,500
B) $121,250
C) $71,250
D) $238,000

Question 70

Rainbow Legacy Ltd has the following balances at 31^st December 2019: Cash $46,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow:
$$\begin{array} { l l } \text { January } & \$ 100,000 \\\text { February } & \$ 180,000 \\\text { March } & \$ 120,000 \\\text { April } & \$ 200,000\end{array}$$ Other data:
-Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales
-Cost of goods sold is 40% of sales
-Ending inventory must be 150% of the next month's cost of sales
-Purchases are paid 70% in month of purchase and 30% in the following month
-The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for depreciation
-All costs are paid in the month incurred
-Minimum cash balance requirement is $6,000
Cash receipts for April will be:

A) $77,600
B) $77,800
C) $155,600
D) $78,000

Question 71

Limelite Ltd, projects sales for its first three months of operation as follows: $$\begin{array} { | l | l | l | l | } \hline & \text { Jaruary } & \text { February } & \text { March } \\\hline \text { Credit Sales } & \$ 150,000 & \$ 188,000 & \$ 176,000 \\\hline \text { Cash Sales } & \$ 60,000 & \$ 50,000 & \$ 55,000 \\\hline & \$ 210,000 & \$ 238,000 & \$ 231,000 \\\hline\end{array}$$ Inventory on 1^st January is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What are the anticipated cash disbursements for January?

A) $89,000
B) $150,000
C) $178,000
D) $68,000

Question 72

Limelite Ltd, projects sales for its first three months of operation as follows: $$\begin{array} { | l | l | l | l | } \hline & \text { Jaruary } & \text { February } & \text { March } \\\hline \text { Credit Sales } & \$ 150,000 & \$ 188,000 & \$ 176,000 \\\hline \text { Cash Sales } & \$ 60,000 & \$ 50,000 & \$ 55,000 \\\hline & \$ 210,000 & \$ 238,000 & \$ 231,000 \\\hline\end{array}$$ Inventory on 1^st January is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What is the projected cost of goods sold for January?

A) $150,000
B) $84,000
C) $188,000
D) $140,000

Question 73

Super Solar Systems has forecast the following unit sales and production for the next year, by quarter: $$\begin{array} { | l | l | l | l | l | } \hline & 1 ^ { \text {st } } & 2 ^ { \text {nd } } & 3 ^ { \text {rd } } & 4 ^ { \text {th } } \\\hline \text { Production } & 75 & 80 & 70 & 50 \\\hline \text { Sales } & 60 & 70 & 75 & 60 \\\hline\end{array}$$ Super Solar has the following beginning inventories:
$$\begin{array} { | l | l | } \hline \text { Firished Goods } & 50 \\\hline \text { Direct Material A } & 50 \\\hline \text { Direct Material B } & 50 \\\hline\end{array}$$ A finished unit requires one unit of material A and two units of material B There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. What is ending finished goods inventory for quarter 2?

A) 145
B) 75
C) 65
D) 70

Question 74

Rainbow Legacy Ltd has the following balances at 31^st December 2019: Cash $46,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow:
$$\begin{array} { l l } \text { January } & \$ 100,000 \\\text { February } & \$ 180,000 \\\text { March } & \$ 120,000 \\\text { April } & \$ 200,000\end{array}$$ Other data:
-Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales
-Cost of goods sold is 40% of sales
-Ending inventory must be 150% of the next month's cost of sales
-Purchases are paid 70% in month of purchase and 30% in the following month
-The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for depreciation
-All costs are paid in the month incurred
-Minimum cash balance requirement is $6,000
The cash disbursements for purchases in March are:

A) $78,000
B) $32,480
C) $81,200
D) $48,000

Question 75

Super Solar Systems has forecast the following unit sales and production for the next year, by quarter: $$\begin{array} { | l | l | l | l | l | } \hline & 1 ^ { \text {st } } & 2 ^ { \text {nd } } & 3 ^ { \text {rd } } & 4 ^ { \text {th } } \\\hline \text { Production } & 75 & 80 & 70 & 50 \\\hline \text { Sales } & 60 & 70 & 75 & 60 \\\hline\end{array}$$ Super Solar has the following beginning inventories:
$$\begin{array} { | l | l | } \hline \text { Firished Goods } & 50 \\\hline \text { Direct Material A } & 50 \\\hline \text { Direct Material B } & 50 \\\hline\end{array}$$ A finished unit requires one unit of material A and two units of material
B There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. How much material B must be purchased in quarter 1?

A) 264
B) 132
C) 150
D) 160

Question 76

Mr Lewis's Co has projected sales for the next four months as follows: $$\begin{array} { l c } & \underline { \text { Units } } \\\text { January } & 70,000 \\\text { February } & 90,000 \\\text { March } & 55,000 \\\text { April } & 65,000\end{array}$$ Beginning inventory for the year is 47,000 units. Ending inventory for each month should be 30% of the next month's sales. How many units should the company produce in February?

A) 59,500
B) 97,000
C) 79,500
D) 90, 000

Question 77

Limelite Ltd, projects sales for its first three months of operation as follows: $$\begin{array} { | l | l | l | l | } \hline & \text { Jaruary } & \text { February } & \text { March } \\\hline \text { Credit Sales } & \$ 150,000 & \$ 188,000 & \$ 176,000 \\\hline \text { Cash Sales } & \$ 60,000 & \$ 50,000 & \$ 55,000 \\\hline & \$ 210,000 & \$ 238,000 & \$ 231,000 \\\hline\end{array}$$ Inventory on 1^st January is $40,000. Subsequent beginning inventories should be 40% of that month's cost of goods sold. Goods are priced at 140% of their cost. 50% of purchases are paid for in the month of purchase; the balance is paid in the following month. It is expected that 50% of credit sales will be collected in the month following sale, 30% in the second month following the sale, and the balance the third month. A 5% discount is given if payment is received in the month following sale.
What is the projected cost of purchases for January?

A) $80,000
B) $68,000
C) $120,000
D) $178,000

Question 78

Mr Lewis's Co has projected sales for the next four months as follows: $$\begin{array} { l c } & \underline { \text { Units } } \\\text { January } & 70,000 \\\text { February } & 90,000 \\\text { March } & 55,000 \\\text { April } & 65,000\end{array}$$ Beginning inventory for the year is 47,000 units. Ending inventory for each month should be 30% of the next month's sales. How many units need to be available for sale in February?

A) 117,000
B) 90,000
C) 47,000
D) 106,500

Question 79

Super Solar Systems has forecast the following unit sales and production for the next year, by quarter: $$\begin{array} { | l | l | l | l | l | } \hline & 1 ^ { \text {st } } & 2 ^ { \text {nd } } & 3 ^ { \text {rd } } & 4 ^ { \text {th } } \\\hline \text { Production } & 75 & 80 & 70 & 50 \\\hline \text { Sales } & 60 & 70 & 75 & 60 \\\hline\end{array}$$ Super Solar has the following beginning inventories:
$$\begin{array} { | l | l | } \hline \text { Firished Goods } & 50 \\\hline \text { Direct Material A } & 50 \\\hline \text { Direct Material B } & 50 \\\hline\end{array}$$ A finished unit requires one unit of material A and two units of material
B There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. What is the ending inventory for material A for quarter 2?

A) 70
B) 14
C) 82
D) 60

Question 80

Super Solar Systems has forecast the following unit sales and production for the next year, by quarter: $$\begin{array} { | l | l | l | l | l | } \hline & 1 ^ { \text {st } } & 2 ^ { \text {nd } } & 3 ^ { \text {rd } } & 4 ^ { \text {th } } \\\hline \text { Production } & 75 & 80 & 70 & 50 \\\hline \text { Sales } & 60 & 70 & 75 & 60 \\\hline\end{array}$$ Super Solar has the following beginning inventories:
$$\begin{array} { | l | l | } \hline \text { Firished Goods } & 50 \\\hline \text { Direct Material A } & 50 \\\hline \text { Direct Material B } & 50 \\\hline\end{array}$$ A finished unit requires one unit of material A and two units of material
B There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. How much material A must be purchased in quarter 2?

A) 78
B) 80
C) 156
D) 16