Deck 7: Operating Budgets: Bridging Planning and Control

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

An example of a cost center is a production plant.

Question 7

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

Question 8

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

Question 9

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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.

Question 20

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

Question 21

Cody Manufacturing started doing business on January 1^st of the current year.Cody estimates that its sales will be 9,000 units in the first quarter, 7,000 units in the second quarter, 14,000 units in the third quarter and 12,000 units in the fourth quarter.Cody's selling price is set at $20 per unit and is not expected to change during the year.Cody intends to have 10% of the next quarter's sales in its ending inventory each quarter.How many units should Cody budget for second quarter's production?

A)6,300 units.
B)9,700 units.
C)7,700 units.
D)7,000 units.
E)None of the above.

Question 22

Which of the following is not an example of conflicts created in the budgeting process?

A)Because firms want to use the most up-to-date information about local operating conditions, they ask lower-level employees for this information, but these employees may not be forthright in sharing their information.
B)Because a production manager may be overly pessimistic about expected costs, the quality of information used to plan costs may be reduced.
C)Downplaying expected sales may lead to more achievable targets for the managers, but reduce the quality of information used to plan sales.
D)The planned targets in budgets become the benchmark for actual results, thereby facilitating control.
E)All of the above are examples of conflicts in the budgeting process.

Question 23

Jackson Company's payment policy is to pay 40 percent of its accounts payable in the quarter purchases are made and 60 percent in the following quarter.Assume Jackson's credit purchases totaled $400,000 in quarter 1, $420,000 in quarter 2, $530,000 in quarter 3 and $580,000 in quarter 4.What will Jackson's cash payments be for quarter 3?

A)$482,500
B)$560,000
C)$530,000
D)$464,000
E)None of the above.

Question 24

Which of the following is not a reason why firms use budgets?

A)Performance evaluation.
B)Coordination.
C)Planning.
D)Operating leverage.
E)All of the above are reasons why firms use budgets.

Question 25

The Tafoya Company has budgeted the following sales for the 1^st quarter of 2012: $$\begin{array} { l l } \text { January } & \$ 80,000 \\\text { February } & \$ 70,000 \\\text { March } & \$ 90,000\end{array}$$ All sales are made on account.The company expects to collect 40% of sales on account in the month of the sale, 50% in the month following the sale, and the final 10% two months following the sale.Bad debts are immaterial to the budget.The balance in accounts receivable at the end of March will be:

A) $61,000
B)$54,000
C)$71,000
D)$64,000

Question 26

Which of the following is not a financial budget?

A)Production budget.
B)Budgeted Income Statement.
C)Cash budget.
D)Budgeted Balance Sheet.
E)All of the above are financial budgets.

Question 27

Jackson Company's credit history indicates that 60 percent of revenue is collected in the quarter the sales occur, 35 percent in the quarter following the month of sales, and 5 percent in the quarter thereafter.Assume Jackson's cash sales remain steady at $25,000 each quarter, credit sales are $600,000 in quarter 1, $520,000 in quarter 2, $480,000 in quarter 3, and $650,000 in quarter 4.What will Jackson's cash collections from sales be for the quarter 3?

A)$500
B)$525,000
C)$505,000
D)$540,500
E)None of the above.

Question 28

Which is the correct order of budget preparation for a merchandising company?

A)Selling and administrative expense budget, cash budget, budgeted income statement, budgeted balance sheet.
B)Sales budget, cash budget, selling and administrative expense budget, budgeted income statement.
C)Sales budget, cash budget, budgeted balance sheet, budgeted income statement
D)Cash budget, selling and administrative expense budget, budgeted income statement, budgeted balance sheet.

Question 29

Which of the following is not a benefit of budgeting?

A)It allows for coordination between various business units.
B)It sets goals for the organization.
C)It formalizes the plans of management.
D)It reduces the need for analysis with regard to company expenses

Question 30

Budgets are used to:

A)Enable various departments to coordinate their activities in a way that benefits the company as a whole.
B)Highlight linkages among departments and force each department to consider how its actions influence the actions of other departments.
C)Communicate the plan targets to everyone in the organization.
D)A and C only.
E)All of the above are reasons budgets are used.

Question 31

The sales budget of the Owens Company for each of the next three months is shown: $$\begin{array} { l l } \text { January } & 40,000 \text { units } \\\text { February } & 50,000 \text { units } \\\text { March } & 30,000 \text { units }\end{array}$$ The company's policy requires that 20% of the following month's budgeted sales units are on hand at the beginning of each period.How many units must be produced in February?

A)40,000 units
B)46,000 units
C)56,000 units
D)54,000 units

Question 32

Which of the following is not a major component of the cash budget?

A)Cash inflow from operations.
B)Cash outflow for operations.
C)Non-cash flow from operations.
D)Cash flows for special items.
E)All of the above are major components of the cash budget.

Question 33

The budgeted amount of raw materials necessary for a period is computed by:

A)Subtracting the beginning inventory of raw materials from the materials necessary to meet the production budget
B)Subtracting the desired ending inventory of raw materials to the raw materials necessary to meet the production budget and adding that result to the desired ending inventory of raw materials
C)Adding the desired ending inventory of raw materials to the raw materials necessary to meet the production budget
D)Adding the desired ending inventory of raw materials to the raw materials necessary to meet the production budget and subtracting the desired ending inventory of raw materials

Question 34

Which of the following is not a method for companies to manage cash shortfalls?

A)Accelerate revenues.
B)Defer payments.
C)Alter timing of special cash inflows.
D)Borrow.
E)All of the above are methods to manage cash shortfalls.

Question 35

Which of the following are questions marketing and production managers address when preparing the production budget?

A)Is there enough production capacity to meet projected sales?
B)Should the company add more temporary or permanent capacity?
C)What inventory level is needed for each product?
D)What is the estimated cost of direct material to be used in production?
E)All of the above are questions to address when preparing the production budget.

Question 36

In the cash budget, which of the following is not an item of cash outflow for operations?

A)Payments for marketing and administrative costs.
B)Payments to direct labor.
C)Payments to purchase a machine that will last for several years.
D)Expenditures on manufacturing overhead.
E)All of the above are items of cash outflow for operations.

Question 37

The Gretzky Company has budgeted the following sales for the 1^st quarter of 2012:

January $120,000
February $150,000
March $160,000
Only 20% of the company's sales are made in cash.The company expects to collect 30% of sales on account in the month of the sale, 60% in the month following the sale, and the final 10% will be collected two months following the sale.Bad debts are immaterial to the budget.Total budgeted cash collections in March will be:

A)$128,000
B)$182,000
C)$152,000
D)$120,000

Question 38

Which of the following is the sequence involved in which operating budgets link long- and short-term plans?

A)Short-term plans; Operational plans; Evaluate; Long-term plans.
B)Short-term plans; Operations plans; Evaluate; Revise.
C)Long-term plans; Short-term plans; Operational plans; Revise.
D)Long-term plans; Operational plans; Evaluate; Revise.
E)None of the above.

Question 39

Wallace Company makes and sells a single product.Each unit requires two hours of labor at $8 per hour.The company has budgeted to sell 8,000 units and produce 10,000 units during the current month.Each product requires three pounds of material for each unit produced.Budgeted direct labor costs for the current month would be:

A)$160,000
B)$128,000
C)$80,000
D)$192,000
E)$64,000

Question 40

All of the following would be found on a cash budget except:

A)Budgeted cash collections
B)Budgeted borrowings
C)Budgeted depreciation expense
D)Budgeted direct labor costs

Question 41

The Brady Company has budgeted the following activity for April:
Sales of $1,000,000 all in cash
The cost of goods sold is 75% of the selling price
Inventory purchases of $800,000 were paid for in cash
Selling and Administrative expenses are budgeted at $80,000 and are paid in cash in the period incurred.
Depreciation expense for April is budgeted at $14,000
The cash balance at March 31^st is $45,000
The budgeted cash balance at the end of April will be:

A)$165,000
B)$120,000
C)$151,000
D)$(85,000)

Question 42

In relation to budgeting, which of the following does not depend on management style?

A)The quality of information obtained.
B)The delegation of decision rights.
C)The cost of budgeting.
D)The commitment to budgets.
E)All of the above depend on management style.

Question 43

The sales budget for the Johnson Company indicates the following units to be sold: $$\begin{array} { l l } \text { January } & 10,000 \\\text { February } & 8,000 \\\text { March } & 12,000 \\\text { April } & 16,000\end{array}$$ The company requires that ending inventory be equivalent to 20% of the following month's sales.If each unit is budgeted to have a cost of $4.50, the budgeted balance in the company's ending inventory account at March 31^st will be:

A)$4,000
B)$14,400
C)$12,000
D)$18,000

Question 44

Which of the following is a concern of using prior performance as the starting point for developing budgets?

A)This approach can foster a business-as-usual mentality.
B)This approach may blind decision makers to the need for drastic changes in business by making them focus narrowly on small changes from the status quo.
C)This approach can lead to ratcheting up performance expectations, but are less likely to ratchet down.
D)Both A and B are concerns.
E)A, B and C are concerns.

Question 45

The Ramirez Company budgets variable manufacturing overhead at 60% of direct labor costs.If the company estimates that 10,000 direct labor hours will be used at an average rate of $8.50 per hour.Fixed manufacturing overhead costs are budgeted at $45,000 with $10,000 of that amount being depreciation on plant machinery.Total budgeted manufacturing overhead will be:

A)$130,000
B)$96,000
C)$120,000
D)$86,000

Question 46

Which of the following is not a common form of a responsibility center?

A)Cost Center.
B)Investment Center
C)Revenue Center.
D)Profit Center.
E)All of the above are common forms of responsibility centers.

Question 47

Which of the following is not a characteristic of bottom-up budgeting?

A)Encourages organization-wide input into the process.
B)Takes advantage of employees' intimate knowledge of operations when formulating plans.
C)Is not as time consuming as top-down budgeting.
D)Increases employees' commitment to achieving budget goals.
E)All of the above are characteristics of bottom-up budgeting.

Question 48

The Crescent Company, a merchandising company, maintains a minimum cash balance of $25,000.Budgeted items for the 1^st quarter of 2013 includes the following: $$\begin{array} { l l } \text { Beginning cash balance } & \$ 32,000 \\\text { Cash collections } & \$ 530,000 \\\text { Selling and Administrative Costs } & \$ 450,000 \\\text { Dividend Payment } & \$ 50,000 \\\text { Equipment Purchase } & \$ 90,000 \\\text { Depreciation expense } & \$ 10,000\end{array}$$ In order to maintain the minimum cash balance, the company will need to borrow:

A)$25,000
B)$28,000
C)$85,000
D)$53,000

Question 49

The Yow Company makes and sells a single product, the Zingo.Each Zingo requires 1.5 direct labor hours at an average rate of $7.60 per hour.If the budgeted direct labor cost for June is $151,050, the company's budgeted production must be:

A)16,600 units
B)11,400 units
C)19,875 units
D)13,250 units

Question 50

The Ferguson Company makes and sells a single product.The company has estimated the following costs in order to prepared their selling and administrative expenses budget for 2013: $\begin{array}{ll}&\text { Variable Cost per }& \text { Fixed Costs }\\& \text { Unit Sold } \\\text { Sales Commission } & \$ .40&-- \\\text { Shipping } & \$ .60&-- \\\text { Advertising } & \$ .30&\$35,000 \\\text { Depreciation on Office Equipment } & -&\$16,000 \\\text { Other } & \$ .35&\$96,000\end{array}$ If the sales budget indicates that 120,000 units will be sold in 2013, the total budgeted selling and administrative expenses will be:

A)$329,000
B)$345,000
C)$198,000
D)$147,000

Question 51

The Murcer Company has budgeted the following activity for October:
Sales of $300,000 all in cash
Inventory of finished goods at September 30^th is $120,000
The cost of goods sold is 60% of the selling price
Planned merchandise inventory at October 31^st is $100,000
All purchases were paid for in cash
Budgeted inventory purchases for October are:

A)$300,000
B)$280,000
C)$160,000
D)$152,000