Deck 11: Operational Budgets

Question 1

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

Answer 1

True

Question 2

A master budget is a comprehensive plan for an upcoming financial period.

Answer 2

True

Question 3

The cash budget is included in an organisation's operating budget.

Answer 3

False

Question 4

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

Question 5

If actual activities do not follow plans, a variance is likely to result.

Question 6

Production and inventory budgets form the basis for developing the revenue budget.

Question 7

In a production budget, beginning inventory plus budgeted production equals sales plus targeted ending inventory.

Question 8

A formalised financial plan for organisational operations is called a long-term strategy.

Question 9

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

Question 10

The shortest period for which a cash budget can be prepared is six months.

Question 11

Budgeting provides a means for defining managers' decision rights (responsibility and financial decision making authority).

Question 12

Master budgets are often summarised in a company's short-term operating plans.

Question 13

When an organisation's actual revenues are greater than its budgeted revenues, the difference is referred to as a favorable variance.

Question 14

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

Question 15

Cash paid or received from the purchase or sale of property or equipment is shown in the capital budget and does not appear in the cash budget.

Question 16

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

Question 17

Favorable variances are positive amounts; unfavorable variances are negative amounts.

Question 18

To prepare a budgeted income statement, managers draw data from the revenue budget, the cost of goods sold budget, and the cash budget.

Question 19

Managers often use short-term loans or prearranged lines of credit to balance the cash budget.

Question 20

A financial budget is the master budget component that leads to all budgeted financial statements.

Question 21

Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October 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 October?

A) $80,000
B) $93,333
C) $120,000
D) $180,000

Question 22

A flexible budget reflects a range of operations.

Question 23

Sales of $250,000 are forecast for the third quarter. Gross profit is 60% of sales, and beginning inventory is $165,000. If ending inventory is budgeted as $183,000, what are the budgeted purchases?

A) $118,000
B) $132,000
C) $168,000
D) $82,000

Question 24

The principles of activity-based costing can be applied to the budgeting process.

Question 25

When managers intentionally set budgeted costs too low and budgeted revenues too high, they are creating budgetary slack.

Question 26

Budget variances cannot be calculated from a static budget.

Question 27

Ray Company's projected sales budget for the next four months is as follows: Beginning inventory for the year is 27,000 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) 90,000
B) 106,500
C) 73,500
D) 117,000

Question 28

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

Question 29

Planning Systems, has forecast the following unit sales and production for the next year, by quarter: 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) 28
B) 32
C) 56
D) 64

Question 30

Planning Systems has forecast the following unit sales and production for the next year, by quarter: 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) 50
B) 70
C) 80
D) 100

Question 31

One disadvantage of participative budgeting is employees' tendency to set targets too high to impress management with their motivation.

Question 32

Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October 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 October?

A) $140,000
B) $220,000
C) $257,000
D) $100,000

Question 33

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

Question 34

Planning Systems, has forecast the following unit sales and production for the next year, by quarter: 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) 138
B) 142
C) 156
D) 162

Question 35

Matz Ltd expects to sell 24,000 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. Matz 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) 20,000
D) 24,000

Question 36

Planning Systems, has forecast the following unit sales and production for the next year, by quarter: 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) 196
C) 204
D) 256

Question 37

Matz Ltd expects to sell 24,000 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. Matz 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) 46,000
C) 66,000
D) 18,000

Question 38

Cost-volume-profit analysis is a simplified version of a flexible budget.

Question 39

Planning Systems, has forecast the following unit sales and production for the next year, by quarter: 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) 24
B) 28
C) 30
D) 100

Question 40

Ray Company's projected sales budget for the next four months is as follows: Beginning inventory for the year is 27,000 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) 106,000
B) 90,000
C) 70,000
D) 78,000

Question 41

An advantage of a flexible budget is that it

A) Allows comparisons of the actual costs with those that should have been incurred
B) Considers only variable costs
C) Allows management freedom in meeting goals
D) Allows comparison of actual costs to master budget costs

Question 42

One objective of budgeting is motivating managers to

A) Eliminate all variances.
B) Use resources efficiently.
C) Lessen the need for communication.
D) Establish prices for external sales of goods and services.

Question 43

To overcome possible problems with budgets that are developed only by top level managers, an alternative is to use

A) Mandatory budgets
B) Authoritative budgets
C) Flexible budgets
D) Participative budgets

Question 44

Which of the following is not required to develop a budgeted income statement?

A) Sales forecast
B) Cash budget
C) Production budget
D) Marketing budget

Question 45

The Phillips Company's budgeted annual indirect labor cost is: $7,200 + $0.75 per direct labor hour. Operating budgets for the current month are based on 30,000 hours of budgeted direct labor hours. Budgeted indirect labor cost is

A) $22,500
B) $29,700
C) $22,000
D) $23,100

Question 46

Steve Company uses the following flexible budget formula for monthly repair cost: total cost = $700 + $0.40 per machine hour. The annual operating budget calls for 35,000 hours of planned machine time. Budgeted repair cost is

A) $14,000
B) $14,700
C) $22,400
D) $22,000

Question 47

Which of the following must managers develop prior to preparing a budgeted income statement?

A) Cash budget
B) Budgeted balance sheet
C) Support department budgets
D) Support department cost allocations

Question 48

Gold Company has the following balances at 31^st December 2010: Cash $6,000; 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: 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 140% 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?

A) $(280)
B) $13,720
C) $19,720
D) $6,000

Question 49

Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October 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 November?

A) $107,500
B) $105,000
C) $110,000
D) $160,000

Question 50

Gold Company has the following balances at 31^st December 31 2010: Cash $6,000; 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: 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 140% 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) $19,200
B) $30,400
C) $15,000
D) $52,800

Question 51

Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October 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 October?

A) $120,000
B) $180,000
C) $140,000
D) $60,000

Question 52

A formalised financial plan for organisational operations in the coming year is best described as a

A) Long-term strategy
B) Short-term operating plan
C) Budget
D) Decision right

Question 53

Kelita Ltd, projects sales for its first three months of operation as follows: Inventory on 1^st October 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 October?

A) $-0-
B) $40,000
C) $47,500
D) $66,500

Question 54

The actual preparation of a budget usually begins with the

A) Production budget
B) Cash budget
C) Sales budget
D) Direct materials budget

Question 55

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: Which of the following amounts is irrelevant in the preparation of TFS' budgeted income statement?

A) Beginning inventory of $10,000
B) Expected revenue of $150,000
C) Expected inflows of cash of $120,000
D) Budgeted support department costs of $30,000

Question 56

Budgets provide a mechanism for defining which of the following for individual managers?

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 57

Gold Company has the following balances at 31^st December 2010: Cash $6,000; 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: 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 140% 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) $46,400
B) $32,480
C) $38,240
D) $48,720

Question 58

Gold Company has the following balances at 31^st December 2010: Cash $6,000; 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: 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 140% 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) $38,800
B) $77,800
C) $100,000
D) $68,800

Question 59

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: TFS' budgeted gross profit for the next fiscal year will be

A) $136,000
B) $106,000
C) $125,000
D) $122,000

Question 60

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: TFS' budgeted cost of goods sold for the next fiscal year will be

A) $25,000
B) $35,000
C) $21,000
D) $28,000

Question 61

At the end of 2009, SWP prepared its master budget for 2010. Selected amounts from that budget, along with actual results for 2010, are presented below: Which items in the table have favorable variances?

A) Sales and marketing expense
B) Cost of goods sold and sales
C) Sales and research and development expense
D) Sales and interest revenue

Question 62

BNN Ltd expects to operate at a profit in its next fiscal year. Which statement about its budgeted income statement is true?

A) Operating expenses are expected to be greater than gross profit
B) Operating income is expected to be greater than net profit
C) Net profit is expected to be greater than operating income
D) Actual gross profit less operating expenses will equal expected net profit

Question 63

Uncontrollable external factors can create challenges in measuring the results for which managers should be held responsible. Which of the following is the best example of an uncontrollable external factor for a manager who oversees all of the operations for a business?

A) Production volumes were above normal levels so that overtime was paid to direct labor employees
B) Poor quality direct materials were purchased so more materials than usual were required in the manufacturing process
C) Raw materials prices changed because of a change in environmental laws.
D) Utilities costs were higher than normal even though weather and usage were typical for that time of year

Question 64

On a budgeted income statement, the gross margin is determined by

A) Revenue + cost of goods sold
B) Cost of goods sold + operating costs
C) Revenue - operating costs
D) Revenue - cost of goods sold

Question 65

At the end of 2009, SWP prepared its master budget for 2010. Selected amounts from that budget, along with actual results for 2010, are presented below: The variance for cost of goods sold could be explained by

A) Actual sales being greater than the budget
B) Actual sales being less than the budget
C) Price discounts for purchasing in bulk
D) Decreases in raw material prices

Question 66

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: TFS' budgeted profit before taxes for the next financial year will be

A) $106,000
B) $40,000
C) $66,000
D) $92,000

Question 67

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: TFS' actual profit for the next fiscal year will be

A) Greater than the budgeted profit
B) Less than the budgeted profit
C) Equal to the budgeted profit
D) Undeterminable from the information given

Question 68

A budget that reflects a range of operations is called a

A) Standard budget
B) Activity-based budget
C) Flexible budget
D) Benchmark budget

Question 69

ATR's budgeted product costs for the third quarter of 2010 were based on an expected volume of 1,500 units. The budgeted unit costs appear below: If ATR had a budgeted volume of 2,000 units, the total budgeted product cost for the third quarter of 2010 would have been

A) $22,000
B) $16,000
C) $20,500
D) None of the above

Question 70

Which of the following is a simple version of a flexible budget?

A) A budgeted income statement
B) An activity-based costing analysis
C) A variance analysis
D) A cost-volume-profit analysis

Question 71

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: Which of the following amounts will be subtracted from gross profit on TFS' budgeted income statement?

A) $30,000
B) $80,000
C) $14,000
D) $110,000

Question 72

In 2010, OSW budgeted its sales volume at 10,000 units. Actual volume was 9,800 units. If OSW uses the static budget to calculate variances and assuming that inventory levels are insignificant, which of the following statements is true?

A) Profits will be less than expected
B) Budgeted variable costs will be overstated compared to actual variable costs
C) Profits will be more than expected due to favorable cost variances
D) Sales managers will not receive a bonus

Question 73

ATR's budgeted product costs for the third quarter of 2010 were based on an expected volume of 1,500 units. The budgeted unit costs appear below: If ATR's actual volume for the third quarter of 2010 was 15% above its expected volume

A) I
B) II
C) I and II
D) None of the above (neither I nor II)

Question 74

At the end of 2009, SWP prepared its master budget for 2010. Selected amounts from that budget, along with actual results for 2010, are presented below: The research and development cost variance could be explained by

A) Starting too many projects
B) Cost increases due to new information technologies
C) Efficient cost management
D) Higher salaries

Question 75

At the end of 2009, SWP prepared its master budget for 2010. Selected amounts from that budget, along with actual results for 2010, are presented below: Which items in the table have unfavorable variances?

A) Marketing expense and cost of goods sold
B) Cost of goods sold and sales
C) Interest revenue and research and development expense
D) Interest revenue and cost of goods sold

Question 76

At the end of 2009, SWP prepared its master budget for 2010. Selected amounts from that budget, along with actual results for 2010, are presented below: SWP's total budget variance for the data provided is

A) $29,400 favorable
B) $29,400 unfavorable
C) $40,600 favorable
D) $40,600 unfavorable

Question 77

TFS Ltd, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: TFS' budgeted cost of goods available for sale for the next fiscal year will be

A) $10,000
B) $25,000
C) $15,000
D) $35,000

Question 78

Static budgets

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 79

Which of the following is based on forecasts of specific volumes of products or services?

A) Variance analysis
B) Flexible budgets
C) Static budgets
D) Financial statements

Question 80

ATR's budgeted product costs for the third quarter of 2010 were based on an expected volume of 1,500 units. The budgeted unit costs appear below: ATR's total budgeted product cost for the third quarter of 2010 was

A) $16,500
B) $12,000
C) $4,500
D) None of the above