Deck 9: Budgeting

Question 1

A master budget is best described as:

A) a budget of the cash flows predicted for a future period of time.
B) a summary of a number of interrelated budgets.
C) the one and only budget that is of interest to management.
D) a budget for a manufacturing business.

Answer 1

B

Question 2

If 'other expenses' in the profit and loss report is $32,000 including $8,000 of depreciation, and accrued 'other expenses' at the beginning of the year is $1,000 and 0 at the end of the year, the figure for 'other expenses' that will appear in the cash flow statement for the year is:

A) $32,000
B) $33,000
C) $23,000
D) $25,000

Answer 2

D

Question 3

Which of the following could be the cause of a favourable materials price variance?

A) the price of materials in the original budget was set too high
B) a discount on the purchase of materials
C) well-trained production workers
D) A and B

Answer 3

D

Question 4

A budget can help in decision-making by:

A) identifying excesses or shortages of cash.
B) identifying future resource constraints.
C) predicting purchase requirements for raw materials.
D) all of the above.

Question 5

The Gel Company, a hair products wholesaler, budgeted $150,000 of credit sales and $20,000 of cash sales for June. All merchandise is marked up to sell at 125% of its invoice cost. What is the budgeted cost of sales for June?

A) $140,000
B) $127,500
C) $132,500
D) $136,000

Question 6

Where budget targets have proven to be unrealistically optimistic, management is best advised to:

A) insist that junior management conform to budgets.
B) revise budgets to match actual results.
C) revise budgets into the realm of achievability.
D) ignore budgets and allow managers to use their own initiative.

Question 7

One of the approaches to setting budgets is known as the 'top down' approach. This is best described as:

A) setting the sales forecast and working from this to other budgets.
B) budget targets set at the lowest level of management.
C) budget targets set by senior management.
D) production budget set first and working from this to other budgets.

Question 8

The reconciliation between budgeted profit and actual profit can be summarised as:

A) budgeted profit minus all favourable variances plus all adverse variances equals actual profit.
B) actual profit plus all favourable variances minus all adverse variance equals budgeted profit.
C) actual profit plus all favourable variances plus all adverse variances equals budgeted profit.
D) budgeted profit plus all favourable variances minus all adverse variance equals actual profit.

Question 9

The Talent Agency had the following estimates for the six months ending 31 December 2015. The estimated cash balance at 31 December 2015 is:

A) $2,100 (overdraft)
B) $6,050
C) $3,950 (overdraft)
D) $3,450

Question 10

The debtor's budget shows the planned amount owing from credit sales. The closing balance of the debtors account is calculated as follows:

A) (opening balance plus sales) plus cash receipts.
B) (opening balance less sales) less cash receipts.
C) (opening balance plus sales) less cash receipts.
D) (opening balance less sales) plus cash receipts.

Question 11

Which of these is not a limitation of the traditional approach to control through budgets?

A) The expense of preparing a budget is too great for the average business.
B) The difficulty of creating clear lines of demarcation between areas of responsibility of various managers.
C) The difficulty of separating the causes of variances into controllable or uncontrollable factors.
D) None of the above, i.e. all are limitations.

Question 12

Which of these could be the cause of an unfavourable labour efficiency variance?

A) an increase in the hourly wage rate
B) a drop in production
C) machine breakdowns
D) all of the above

Question 13

Where there is a significant favourable variance, management is best advised to:

A) ignore it because it does not cause immediate concern.
B) investigate because it may mean that targets are unrealistically low.
C) investigate it to find out why things are not going according to plan.
D) B and C

Question 14

The raw material variance is best explained by:

A) better use of materials by the production manager.
B) the variance cannot be explained unless the budget is flexed to actual production.
C) a change in price of the raw materials.
D) the production manager failing to control the material usage.

Question 15

The closing cash at bank balance for Werich Ltd over the past three months has been increasing by $100,000 per month. The best advice to management would be to:

A) invest the surplus cash into income-yielding deposits.
B) reward employees with a cash bonus.
C) decrease the price per unit of product.
D) pay creditors more slowly.

Question 16

Budget formats can best be described as:

A) conforming to accounting standards.
B) subject to management choice in style and layout.
C) the same from one business to the next.
D) none of the above.

Question 17

The outlay which does not appear in the cash budget is:

A) depreciation.
B) interest on bank loan.
C) repayment of loan.
D) drawings.

Question 18

The typical overall time period for which a budget is set is:

A) three months.
B) two years.
C) five years.
D) twelve months.

Question 19

In the budgeting process, management by exception refers to:

A) motivating staff to boost the reputation of the business.
B) concentrating most of management's efforts on those who do not achieve the budget.
C) delegating responsibility, leaving management free for other things.
D) rewarding exceptional effort.

Question 20

Co-ordination between budgets refers to a situation when:

A) a plan comes together with industry and government targets.
B) more than one entity in an industry adopts similar goals.
C) plans of one department match and are complementary to those of other departments.
D) different parts of the organisation operate at cross-purposes.

Question 21

Use the information below to answer the following questions.
Sales in December were $960,000. Projected sales for the first quarter of 2015 are: January $1,080,000
February $1,200,000
March $1,280,000
Sales are 20% cash and 80% on credit. Debtors pay in the month following the sale.
Refer to the table above. Calculate the cash collected from debtors for the month of February.

A) $864,000
B) $1,080,000
C) $1,200,000
D) $960,000

Question 22

Which of the following could not be a possible cause of an unfavourable materials usage variance?

A) an increase in the price of the raw materials
B) poor-quality materials
C) faulty machinery
D) inexperienced workers

Question 23

Use the information below to answer the following questions.
Refer to the table above. Which of these variance calculations is correct for Raw materials, Labour and Overheads respectively?

A) 12,000 U; $70,000 U; $50,000 F
B) 12,000 U; $70,000 F; $50,000 U
C) $12,000 F; $70,000 F; $50,000 U
D) none of the above

Question 24

If budgeted profit is $11,000, favourable variances are $3,100 and unfavourable variances are $7,450, actual profit (loss) is:

A) $6,650 profit.
B) $15,350 profit.
C) $21,550 profit.
D) ($450) loss.

Question 25

A common feature of most cash budgets is:

A) the budget period is broken into months.
B) a columnar format.
C) a section for non-cash expenses such as doubtful debts and depreciation.
D) A and B

Question 26

The change in the price of raw materials multiplied by the actual materials bought calculates which variance?

A) materials usage variance
B) materials price variance
C) sales price variance
D) labour price variance

Question 27

The group which oversees the budgeting process within an organisation is the:

A) budget committee.
B) estimates committee.
C) board of directors.
D) variance committee.

Question 28

Identify the unfavourable variance.

A) budgeted payment for interest $1,000, actual interest $1,000
B) budgeted payment for rent $12,000, actual rent $11,500
C) budgeted receipts from debtors $60,000, actual receipts $65,000
D) budgeted payment for wages $42,000, actual wages $45,000

Question 29

A budget is best defined as:

A) a financial plan for a future period of time.
B) a non-financial plan for a future period of time.
C) a prediction for a future period.
D) a forecast for a future period of time.

Question 30

The original budget was set at 15,000 units and estimated variable overheads at $345,000 ($23 per unit). If actual output is 16,000 units, calculate the variable overhead total and unit cost that would be shown in a budgeted flexed to actual output.

A) $345,000: $22.50
B) $361,000: $23.50
C) $368,000: $23
D) $345,000: $23

Question 31

A policy to overcome a factory labour shortage would be which of the following?

A) introduce overtime
B) sub-contract out some production
C) delay customer's orders
D) all of the above

Question 32

A budget system that always provides plans for a full 12 months into the future is known as:

A) future budget.
B) advance budget.
C) yearly budget.
D) rolling budget.

Question 33

In which order do the following steps in the budget-setting process actually occur? i) Co-ordinate the budget
Ii) Identify the limiting factor
Iii) Compare budget and actual performance

A) ii, i, iii
B) i, ii, iii
C) iii, i, ii
D) ii, iii, i

Question 34

Use the information below to answer the following questions.
Sales in December were $960,000. Projected sales for the first quarter of 2015 are: January $1,080,000
February $1,200,000
March $1,280,000
Sales are 20% cash and 80% on credit. Debtors pay in the month following the sale.
Refer to the table above. Calculate the total cash sales for the three months, January, February and March.

A) $256,000
B) $712,000
C) $2,848,000
D) $960,000

Question 35

Which budget criticism can be dealt with by adapting and improving budgeting practices?

A) Budgets can be seen as a bureaucratic exercise in cost-cutting.
B) Bottom-up budgeting can lead to budget padding to make targets easier to achieve.
C) Budgets can make people feel undervalued.
D) All can be dealt with by adapting and improving budgeting practices.

Question 36

When preparing its sales forecast, an organisation can use the 'bottom-up' approach. One of the features of this approach is that:

A) it is particularly effective in unstable external environments.
B) operating personnel are motivated to prepare realistic budgets and accept them as benchmarks in performance evaluation.
C) multiple levels of managers and salespersons are involved in the forecasting process.
D) all of the above.

Question 37

Budget targets should be:

A) challenging and achievable.
B) loose and achievable.
C) achievable.
D) easy.

Question 38

The main way in which budgets provide a means of control in an organisation is by allowing:

A) management to control the budget targets.
B) senior management to control lower-level managers.
C) actual performance to be compared against budget targets.
D) budget targets to be set at maximum performance.

Question 39

Use the information below to answer the following questions.
Refer to the table above. The labour variance can best be described as:

A) being caused by an increase in the pay rate for labour.
B) an adverse variance resulting from excessive use of labour and/or a rise in the hourly rate of pay.
C) being caused by more efficient labour.
D) a favourable variance resulting from the efficient use of labour and/or a reduction in the hourly pay rate.

Question 40

The calculation of closing inventory for a finished goods inventory budget is:

A) (opening balance plus sales of finished goods) less purchases.
B) (opening balance plus purchases) plus cash sales of finished goods.
C) (opening balance plus purchases) less sales of finished goods.
D) none of the above.

Question 41

The statement about the uses of budgets that is not true is:

A) They can assist in identifying short-term problems.
B) They are mainly used to set prices.
C) They can provide a system of authorisation for managers to spend up to a particular limit.
D) None of the above, i.e. all are true statements.

Question 42

What variance does the difference between the actual cost of the direct labour hours worked and the planned cost of the direct labour hours measure?

A) the total direct labour variance
B) the direct labour efficiency variance
C) the direct labour rate variance
D) none of the above

Question 43

Budgets are generally regarded as having several areas of usefulness. Which of these is not one of them?

A) They can be used to allocate direct expenses.
B) They can facilitate control within the business.
C) They tend to promote forward thinking.
D) They help co-ordinate the various sectors of the business.

Question 44

The master budget would typically consist of a budgeted:

A) income statement, balance sheet and cash flow statement.
B) income statement and cash flow statement.
C) income statement and balance sheet.
D) balance sheet and cash flow statement.

Question 45

Budget targets should be:

A) goals set by management to ensure that targets can be easily met.
B) targets derived from experience set at reasonable levels of performance.
C) set to the highest possible standard of performance.
D) unachievable so that there is always an incentive to do better.

Question 46

The best description of the role of the budget committee is:

A) predicting the economic environment for the period.
B) predicting the budget.
C) setting goals for individual departments.
D) supervising and taking responsibility for the budget-setting process.

Question 47

Flexing the budget means:

A) ignoring previously set targets.
B) revising the original budget estimates to produce a budget based on the actual volume of activity.
C) revising the budget sales figure to match actual sales.
D) revising the budget to reflect changes in management behaviour.

Question 48

Use the information below to answer the following questions.
Refer to the table above. The raw materials variance can best be described as:

A) an adverse variance resulting from excessive use of raw materials.
B) a favourable variance resulting from efficient use of raw materials.
C) an adverse variance resulting from a rise in the price of raw materials.
D) an adverse variance resulting from excessive use of raw materials and/or an increase in their price.

Question 49

Each month, which variances should management investigate?

A) all variances
B) only favourable variances
C) only unfavourable variances
D) all variances management deems significant

Question 50

Budgets are said to be useful in promoting forward thinking and identification of short-term problems, because:

A) management can react to problem areas as they occur.
B) potential problem areas can be identified early enough to allow management to explore ways of overcoming the problem.
C) management can foresee future promotion opportunities.
D) all of the above.

Question 51

Which statement is not correct?

A) The 'top down' approach to budgeting tends to improve motivation.
B) Setting demanding, but achievable, targets is a better motivator than setting undemanding targets.
C) Unrealistic targets have adverse effects on managers' performance.
D) The existence of budgets tends to provide motivation to improve performance.

Question 52

Use the information below to answer the following questions.
Refer to the table above. The unfavourable sales variance of $100,000 is best explained by:

A) the sales manager failing to sell the budgeted units.
B) an increase in expenses.
C) a decrease in price of the units sold.
D) none of the above.

Question 53

There is often a limiting factor that stops a business from achieving its objectives to the maximum extent. In most instances, the limiting factor is:

A) the ability of the business to sell its products.
B) the unrealistic goals of production managers.
C) the ability of the business to advertise its products.
D) the unrealistic objectives set by management.

Question 54

Leonard Company is preparing its second-quarter production budget. Projected sales in units are 600 for April, 680 for May, and 750 for June. Leonard's policy is to have finished goods inventory equal to 20 per cent of the next month's projected unit sales. What should be the production quota for May?

A) 666 units
B) 694 units
C) 680 units
D) 830 units

Question 55

Where there is an insignificant adverse variance, management is best advised to:

A) ignore it, as the cost of investigation may outweigh the benefit.
B) keep the variance under review.
C) ignore it as it may be compensated by an insignificant favourable variance.
D) investigate immediately and in full detail.

Question 56

An adverse variance is best described as a:

A) variance where the actual performance falls short of the budget target.
B) variance where actual performance exceeds the budget target.
C) combination of variances.
D) variance where labour efficiencies have occurred.

Question 57

Use the information below to answer the following questions.
Sales in December were $960,000. Projected sales for the first quarter of 2015 are: Sales are 20% cash and 80% on credit. Debtors pay in the month following the sale.
Refer to the table above. Calculate total cash collected from sales for the month of March.

A) $256,000
B) $1,216,000
C) $1,280,000
D) $1,456,000

Question 58

If the principal objective of a firm is to enhance wealth, the most important budget target to meet is:

A) sales.
B) profit.
C) bank balance.
D) production.

Question 59

If the opening balance of cash for one month is $20,000, cash receipts are estimated to be $389,000 and cash payments are estimated as $300,000 the opening cash balance at the beginning of the next month is:

A) $69,000
B) $109,000
C) $89,000
D) cannot be calculated

Question 60

How many of the following items would be included in a cash budget? · Dividends paid to shareholders
· Doubtful debts
· Purchase of fixed asset
· Bonus share issue

A) 4
B) 2
C) 1
D) 3

Question 61

Xon Company is planning to purchase fixed assets at a cost of $200,000. The planned delivery date is 1 February 2015. A deposit of $10,000 is to be paid on 1/11/14. The amount that will appear in the cash budget for November 2014 is:

A) $190,000 outflow.
B) $10,000 outflow.
C) $200,000 outflow.
D) $10,000 inflow.

Question 62

Use the information below to answer the following questions.
Sales in December were $960,000. Projected sales for the first quarter of 2015 are: Sales are 20% cash and 80% on credit. Debtors pay in the month following the sale.
Refer to the table above. What will be the balance of debtors on 1 March?

A) $864,000
B) $1,200,000
C) $1,280,000
D) $960,000

Question 63

Management's interest in variances is due to:

A) the desire to gain the maximum information.
B) the need to gain the information that may assist them to put things back in control.
C) the need to compensate employees.
D) the desire to check all details.