Question 1

Many firms use cross-functional teams that include employees from several departments to prepare the budget.

Accepted Answer

Cross-functional teams consisting of employees from multiple departments are often used to prepare budgets, as it allows for a diverse range of perspectives and expertise to be incorporated into the budgeting process.

Question 2

An example of a cost center is a production plant.

Accepted Answer

A production plant is a typical example of a cost center as it incurs costs in producing goods or services but does not generate revenue directly.

Question 3

Little time is spent in preparing the revenue budget, as its accuracy is not as crucial as budgets involving costs.

Accepted Answer

While the accuracy of revenue budgets may not be as critical as cost budgets, it is still important to spend sufficient time and effort in preparing them. Revenue budgets provide important information for decision-making and financial planning. Failing to prepare them accurately can result in overestimating revenue, which can lead to overspending, financial difficulties, and potential business failure.

Question 4

A drawback of participative budgeting arises because employees have better information about operating conditions than their managers do.

Accepted Answer

Participative budgeting involves employees in the budgeting process, which can lead to better accuracy and buy-in from employees. However, a potential drawback is that employees may have better information about operating conditions than their managers do, leading to discrepancies or inaccuracies in the budget.

Question 5

In a centralized decision-making environment, the manager delegates decision making to individuals with relevant experience and knowledge.

Accepted Answer

In a centralized decision-making environment, the manager retains decision-making authority and may not delegate decision-making power to others.

Question 6

In preparing a cash budget, from an accounting record-keeping perspective there is no need to adjust the balance of accounts receivable and reported income to reflect the uncollectible debt.

Accepted Answer

In preparing a cash budget, it is necessary to adjust the balance of accounts receivable and reported income to reflect the uncollectible debt, as this will affect the actual cash inflows for the period. Failing to make this adjustment could result in an inaccurate cash budget and cash flow projections.

Question 7

The production budget combines the demand information provided by the revenue budget and the company's inventory policy regarding finished goods to determine production levels in the coming period.

Accepted Answer

This statement is true. The production budget takes into account the sales forecast from the revenue budget and the desired inventory levels to determine how much product should be produced in the upcoming period.

Question 8

The variable cost of goods manufactured is the sum of several cost items: material, labor, variable overhead, and variable selling and administrative expenses.

Accepted Answer

Variable cost of goods manufactured includes material, labor, and variable overhead costs, but not variable selling and administrative expenses, which are considered period costs and not included in the cost of manufacturing goods.

Question 9

In preparing a manufacturing overhead budget, depreciation is included when estimating the cash outflows associated with manufacturing overhead.

Accepted Answer

Depreciation is a non-cash expense and therefore is not included when estimating the cash outflows associated with manufacturing overhead in a budget.

Question 10

The purchasing and production managers coordinate closely to prepare the materials usage budget because it requires both price and quantity estimates.

Accepted Answer

The purchasing and production managers need to work together to estimate both the cost and quantity of materials needed for production, so they can create an accurate materials usage budget.

Question 11

Under responsibility accounting, managers are held accountable for the revenue and cost items they control.

Accepted Answer

Responsibility accounting is a system in which managers are held responsible or accountable for the revenue and costs associated with the particular areas they manage or control. This accountability can help promote good budgeting and cost control practices among managers, and can also help ensure that resource allocation decisions are made with a focus on maximizing overall organizational effectiveness.

Question 12

A top-down approach to budgeting reflects a participative style of management.

Accepted Answer

A top-down approach to budgeting is a more authoritarian style of management where the budget is created by upper management and then passed down to lower-level employees to implement. A participative style of management would involve more collaboration and input from employees at all levels in creating the budget.

Question 13

Strategic budgets bridge short-term decisions and long-term plans.

Accepted Answer

The answer of Strategic budgets bridge short-term decisions and long-term...

Question 14

A profit center is an organizational unit that has control over revenues, costs, and long-term investment decisions.

Accepted Answer

A profit center has control over revenues and costs but not over long-term investment decisions; those are typically managed by investment centers.

Question 15

Financial budgets quantify the outcomes of operating budgets in summary financial statements.

Accepted Answer

Financial budgets provide a comprehensive overview of financial outcomes including revenues, expenses and cash flow, which are derived from various operating budgets.

Question 16

The first step in preparing a master budget is to prepare the revenue budget.

Accepted Answer

The master budget typically begins with the revenue budget, which forecasts the expected sales revenue for the budget period.

Question 17

Multi-year budgets are strategic plans that specify the direction in which a company desires to head.

Accepted Answer

Multi-year budgets are typically created with a long-term perspective in mind and are intended to guide the company's strategic decisions and actions.

Question 18

In preparing a cash budget, making a scheduled payment on a loan would not be included in cash flows from operations.

Accepted Answer

Payments on loans are considered financing activities and therefore would not be included in the operating cash flow section of a cash budget.

Question 19

In preparing a direct labor budget, the cash outflow for labor depends on production volume and not on sales volume.

Accepted Answer

A direct labor budget is based on the amount of labor required to produce a certain level of production, regardless of whether that production is sold or not. Therefore, the cash outflow for labor will depend on production volume and not on sales volume.

Question 20

Effective working capital management can save companies money in terms of interest payments on costly short-term loans.

Accepted Answer

Effective working capital management involves managing a company's current assets and liabilities to ensure there is enough cash to cover day-to-day operations. This can help reduce the need for short-term loans and minimize interest payments. Therefore, it is true that effective working capital management can save companies money in terms of interest payments on costly short-term loans.

Quiz 7: Operating Budgets: Bridging Planning and Control