Question 1

Which of the following best describes an operating budget?
A)An estimate of cash expenditures for long-term assets.
B)A short-term budget that focuses on the daily operations of the organization.
C)A series of budget schedules outlining the organization's plans for the next three years.
D)An estimate of all operating costs other than production.
E)None of the answer choices is correct.

Accepted Answer

An operating budget is a short-term budget that focuses on the daily operations of the organization. It estimates revenues and expenses over a specific period, typically one year, and helps organizations plan their day-to-day activities. Option A is incorrect because long-term assets are usually included in a capital budget. Option C is incorrect because a three-year plan would be considered a strategic plan, not an operating budget. Option D is incorrect because production costs are included in an operating budget.

Question 2

Companies generally obtain sales forecasts from many different sources.

Accepted Answer

Companies obtain sales forecasts from a variety of sources, such as market research firms, internal sales teams, industry experts, customer feedback, and historical sales data.

Question 3

A direct labor budget is regarded as the starting point for the master budget.

Accepted Answer

The starting point for the master budget is typically the sales forecast or sales budget, from which production needs and subsequently direct labor needs are determined.

Question 4

The budgeted balance sheet shows an estimate of the organization's profit for a given budget period.

Accepted Answer

The budgeted balance sheet shows the financial position of the organization at the end of the budget period. The budgeted income statement shows an estimate of the organization's profit for the given budget period.

Question 5

Conflicts rarely exist between the planning and control phases of budgeting.

Accepted Answer

Conflicts can arise between the planning and control phases of budgeting due to unforeseen events, changes in the market, inaccurate forecasting, or discrepancies in accounting. These conflicts can lead to adjustments needing to be made to the plans and budgets, causing tension between the planning and control teams.

Question 6

Sales personnel who are paid a bonus for exceeding budgeted sales have an incentive to underestimate sales when establishing the sales budget.

Accepted Answer

By underestimating sales when establishing the sales budget, sales personnel create a lower target, making it easier to exceed the budget and thus earn a bonus, providing a clear incentive for such behavior.

Question 7

Service companies tend to have more budget schedules than manufacturing companies.

Accepted Answer

Manufacturing companies typically have more complex operations involving the production, inventory, and distribution of physical goods, leading to a need for more detailed and numerous budget schedules compared to service companies, which primarily deal with non-tangible products and may have simpler operational structures.

Question 8

A budget committee is primarily responsible for overseeing the budget process and approving the master budget.

Accepted Answer

A budget committee typically plays a key role in developing, reviewing, and ultimately approving the master budget for an organization. They may work with various department heads and stakeholders to ensure that the budget aligns with overall strategic goals, and they may also monitor actual financial performance throughout the year to ensure that the budget is being followed appropriately.

Question 9

The usual starting point in budgeting is the sales budget.

Accepted Answer

The sales budget is typically the starting point in budgeting as it provides a projection of the expected revenue for the upcoming period. This information is used to guide the allocation of resources and development of other budgets, such as the production budget and the operating budget.

Question 10

The production budget is based on sales projections plus an estimate of desired ending finished goods inventory,less beginning finished goods inventory.

Accepted Answer

The production budget takes into account the sales projections as well as the desired ending finished goods inventory, less the beginning finished goods inventory. This helps to determine the production requirements for the upcoming period.

Question 11

In a production budget,if the units to be produced is equal to the expected sales in units,then desired units of ending inventory is equal to the units in beginning inventory.

Accepted Answer

This is because if the units to be produced are equal to the expected sales in units, then there is no need for additional units in ending inventory since all units produced will be sold. Therefore, the desired units of ending inventory will be the same as the units in beginning inventory to maintain a consistent inventory level.

Question 12

Organizations use budgets to control operations,because budgets provide a means to evaluate employee and company performance.

Accepted Answer

Budgets provide a way to set targets and assess whether actual performance is meeting those targets. By tracking financial performance against the budget, organizations can identify areas where they are falling short and take corrective action. This can help improve efficiency, reduce waste, and ensure that the organization is achieving its goals. Evaluating employee and company performance is a key aspect of controlling operations, and budgets provide valuable data for this purpose.

Question 13

Merchandising companies and service organizations do not use production budgets.

Accepted Answer

Merchandising companies and service organizations do not have a production process, so they do not need to create a production budget. Instead, they may have budgets for purchasing inventory or supplies, labor, and other expenses related to their specific business operations.

Question 14

An operating budget is similar to a capital budget in that both are long-term budgets.

Accepted Answer

An operating budget is a short-term budget typically covering one year, while a capital budget is a long-term budget covering several years and focused on long-term investments in assets such as equipment, buildings, or land.

Question 15

The units to be produced in the production budget is typically the same as the expected sales in units in the sales budget.

Accepted Answer

The units to be produced in the production budget typically include expected sales in units from the sales budget plus desired ending inventory minus beginning inventory, to ensure enough products are available to meet sales demands and inventory requirements.

Question 16

In general,the budgeted income statement is probably the most carefully scrutinized component of the master budget.

Accepted Answer

This is because the budgeted income statement shows the expected revenues, costs, and profits for the upcoming period, which is crucial information for decision-making and planning. It is usually reviewed by various stakeholders, including top management, investors, creditors, and regulatory bodies, to assess the financial health and performance of the organization.

Question 17

Establishing a sales budget that underestimates likely sales will have no effect on materials and labor in a production process.

Accepted Answer

If sales are underestimated, the production process may not have enough materials and labor to meet the actual demand. This could lead to production delays and potentially lost sales. It is important to accurately forecast sales in order to properly plan for production needs.

Question 18

Depreciation is deducted at the bottom of a manufacturing overhead budget to determine cash payments for overhead.

Accepted Answer

The answer of Depreciation is deducted at the bottom of...

Question 19

For most nonprofit organizations,the approved budget serves as the legal authority for expenditures.

Accepted Answer

The approved budget is a legal document that outlines the organization's planned revenues and expenses and serves as the basis for financial decision-making and accounting. All expenditures must be made in accordance with the approved budget or with any updated versions that have been approved by the organization's governing body or board of directors. This helps ensure that the organization stays within its means and is accountable to its stakeholders.

Question 20

A top-down approach to budgeting motivates employees and leads to greater budget acceptance.

Accepted Answer

A top-down approach to budgeting involves upper management setting the budget without input or participation from lower-level employees. This can lead to a lack of motivation and resentment towards the budget. A bottom-up approach, where employees are given the opportunity to participate in the budgeting process, can lead to greater engagement and acceptance of the budget.

Quiz 9: How Are Operating Budgets Created

Which of the following best describes an operating budget?