Deck 14: Planning for Profit and Cost Control

Question 1

In a participative budgeting system, budget information flows in both directions, from bottom to top and from top to bottom.

Answer 1

True

Question 2

Vector Company seeks input from salespeople regarding the number of units they believe they can sell during the upcoming budget period. This is an example of participative budgeting.

Answer 2

True

Question 3

Under continuous budgeting, a new month is added to the end of the budget period each time the present month expires, so that a twelve-month budget is available at all times.

Answer 3

True

Question 4

A schedule of cash receipts is often prepared in conjunction with the sales budget.

Question 5

The marketing department is primarily responsible for establishing the sales forecast.

Question 6

The responsibility for the coordination of a company's budgeting activities normally rests with the Chief Financial Officer (CFO).

Question 7

Strategic planning deals with the establishment of long-term company objectives.

Question 8

If a budgeting system is designed correctly, top management will not have to get involved in the process.

Question 9

Janice was questioned recently about her department's spending in excess of the budget. This is an example of using the budget for performance measurement.

Question 10

The nature of planning changes with the length of the time period being considered. Generally, the shorter the time period, the more general the plans.

Question 11

The first budget prepared in a master budget is the cash receipts budget.

Question 12

If a company purchases its inventory on account, it need not prepare a schedule of cash payments for inventory purchases.

Question 13

The capital budget does not affect any of a company's operating budgets.

Question 14

One advantage of participatory budgeting is that it allows subordinates to perform the budgeting function, thus freeing up upper management for more important tasks.

Question 15

Although only 20 units are on hand at the beginning of the year, World Company plans to sell 100 units during Year 2. Assuming the company desires an ending inventory of 10 units, it should plan to purchase 110 units.

Question 16

The master budget generally starts with a sales forecast.

Question 17

Interest expense is not included in the selling and administrative budget because a company cannot estimate interest expense until it prepares the cash budget and makes borrowing projections.

Question 18

The selling and administrative expense budget is prepared prior to the cash budget.

Question 19

Four purposes or advantages for budgeting are planning, coordination, performance measurement, and punitive action.

Question 20

The three major components of the master budget are the financial budgets, the capital budgets, and the pro forma financial statements.

Question 21

Budgeting that involves the development of a master budget to direct the firm's activities over the short term is referred to as:

A) capital budgeting.
B) operations budgeting.
C) strategic planning.
D) None of these answers is correct.

Question 22

Which of the following is not an advantage of budgeting?

A) Provides assurance that accounting records are in accordance with generally accepted accounting principles
B) Forces coordination among departments to promote decisions in the best interests of the company as a whole
C) Provides advance notice of potential shortages, bottlenecks, or other weaknesses in operating plans
D) Provides a way to evaluate performance

Question 23

One company's practice is to provide bonuses to salespeople who exceed their sales targets. Which of the following advantages of budgeting enables the company to establish its recognition program?

A) Planning
B) Coordination
C) Performance measurement
D) Corrective action

Question 24

Select the incorrect statement about budgeting committees.

A) Membership on the budget committee is restricted most often to accountants because the budget involves numbers.
B) Budget committees usually have responsibility for the coordination of budgeting activities.
C) The budget committee is responsible for settling disputes among various departments over budget matters.
D) One of the responsibilities of the budget committee is to monitor the organization's progress toward achieving its budget standards.

Question 25

The master budget normally covers:

A) 3 months.
B) 1 year.
C) 1-5 years.
D) 5-10 years.

Question 26

Select the correct statement about the master budget.

A) The master budget is a group of detailed budgets and schedules representing the company's operating and financial plans for the past accounting period.
B) The master budget usually includes operating budgets and capital budgets and pro forma financial statements.
C) The budgeting process usually begins with preparing the strategic budgets.
D) Preparing the master budget begins with the cash budget.

Question 27

A company's numerous specific budgets (sales, inventory purchases, etc.) together are referred to as the:

A) grand plan.
B) strategic plan.
C) current budget.
D) master budget.

Question 28

The cash budget includes three sections: (1) operating activities, (2) investing activities, and (3) financing activities.

Question 29

The pro forma income statement gives managers an advance estimate of a company's profitability.

Question 30

The cash budget is not the same as the pro forma cash flow statement.

Question 31

Planning concerned with long-range decisions such as defining the scope of the business is referred to as:

A) operations budgeting.
B) master planning.
C) capital budgeting.
D) strategic planning.

Question 32

When a company's district managers submitted their preliminary budget proposals, top management discovered that the southern district manager had requested a new project management information system. Unfortunately, the system is incompatible with the system used at headquarters. Which of the following advantages of budgeting reduces the likelihood that the company will end up with two incompatible systems?

A) Planning
B) Coordination
C) Performance measurement
D) Corrective measures

Question 33

The basic cash budget format is Total cash available − Total cash disbursed = Surplus or shortage of cash +/ − Effects of financing = Ending cash.

Question 34

Jason had been operating his machine for an entire month before he realized that it was generating more scrap than usual. Which advantage of budgeting would have helped him identify this problem sooner?

A) Performance measurement
B) Coordination
C) Planning
D) Corrective action

Question 35

The budgeting process formalizes and documents managerial plans to clearly communicate objectives to both superiors and subordinates. This budgeting requirement is an example of:

A) performance measurement.
B) planning.
C) budget coordination.
D) taking corrective action.

Question 36

The budgeting process that involves adding a month to the end of the budget period at the end of each month, thus maintaining a twelve-month planning horizon, is referred to as:

A) participative budgeting.
B) capital budgeting.
C) continuous budgeting.
D) zero-based budgeting.

Question 37

Depreciation expense will appear on the schedule of cash payments for selling and administrative expenses.

Question 38

Pro forma financial statements are prepared at the end of the year and are used to evaluate the performance of managers.

Question 39

Budgeting that involves decisions such as whether to buy or lease equipment or build a new factory is referred to as:

A) capital budgeting.
B) operations budgeting.
C) facilities planning.
D) strategic planning.

Question 40

Select the incorrect statement about the planning process.

A) The longer the time period, the more specific the plans.
B) Planning decisions can often be subdivided into three distinct planning phases: short term, intermediate term, and long term.
C) The nature of planning changes with the length of the time period being considered.
D) The shorter the time period, the less general the plans.

Question 41

Select the correct statement about budgeting and human behavior.

A) People are usually very comfortable with budgets.
B) The attitudes of upper managers significantly impact budget effectiveness.
C) Budgets increase individual freedom within an organization.
D) Participative budgeting contributes to fear and resentment.

Question 42

Which of the following items is not needed to prepare a sales budget by product line?

A) Expected purchase price of each product.
B) Expected unit sales of each product.
C) Expected selling price of each product.
D) All of the answers are correct.

Question 43

Compton Company expects the following total sales: $$\begin{array} { l l } \text { Manth } & \text { Sales } \\\text { March } & \$ 30,000 \\\text { April } & \$ 20,000 \\\text { May } & \$ 30,000 \\\text { Jure } & \$ 25,000\end{array}$$ The company expects 60% of its sales to be credit sales and 40% for cash. Credit sales are collected as follows: 30% in the month of sale, 70% in the month following the sale. The budgeted accounts receivable balance on May 31 is:

A) $12,240.
B) $12,600.
C) $20,400.
D) $21,000.

Question 44

Benton Company's sales budget shows the following expected total sales: $\begin{array}{ll}\text { Month}& \text {Sales }\\ \text { January } & \$ 25,000 \\\text { February } &\$ 29,000 \\\text { March } & \$ 34,000 \\\text { April } &\$41,000\end{array}$ The company expects 70% of its sales to be on account (credit sales). Credit sales are collected as follows: 25% in the month of sale and 67% in the month following the sale, with the remainder being uncollectible and written off. The total cash receipts during April would be:

A) $19,200.
B) $21,525.
C) $27,105.
D) $35,421.

Question 45

Which of the following items would be least useful in preparing a schedule of cash receipts?

A) Expected revenue from cash sales.
B) Number of units expected to be purchased.
C) Service charges for credit card sales.
D) Past accounts receivable collection experience.

Question 46

Select the correct statement.

A) The four advantages of budgeting include planning, coordination, performance measurement, and reporting.
B) In a participative budgeting system, budget information flows in one direction only, from bottom to top.
C) The three major categories of the master budget are operating budgets, capital budgets, and pro forma financial statements.
D) The accounting department normally coordinates the development of the sales forecast.

Question 47

Which of the following is a benefit of participative budgeting?

A) Employees tend to be more motivated to achieve the budget.
B) A twelve-month planning horizon is maintained at all times.
C) Budget planning is highly centralized.
D) Communication is clearer because it flows in only one direction-upward.

Question 48

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2: $\begin{array}{ccccc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Credit sales } & \$ 120,000 & \$ 280,000 & \$ 310,000 & \$ 220,000 \\\text { Cash sales } & \$ 20,000 & \$ 50,000 & \$ 60,000 & \$ 24,000 \end{array}$ Based on the company's collection history, 42% of credit sales are collected in month of sale and the remainder is collected in the following month. Total budgeted cash receipts in February are expected to be:

A) $60,000.
B) $162,400.
C) $352,600.
D) $228,000.

Question 49

The budgeting technique that provides for employee input into the planning process is known as:

A) continuous budgeting.
B) perpetual budgeting.
C) participative budgeting.
D) zero-based budgeting.

Question 50

Which of the following would represent the order in which most master budgets are prepared?

A) Sales, Income Statement, Cash, Purchases
B) Purchases, Cash, Sales, Income Statement
C) Purchases, Sales, Cash, Income Statement
D) Sales, Purchases, Cash, Income Statement

Question 51

Select the incorrect statement regarding the human factor in the budgeting process.

A) Budgets force employees to follow the organization's plan.
B) The evaluation feature of budget systems is frightening for many people.
C) There is a tendency for people to be uncomfortable with budgets.
D) Proper handling of human relations is essential to the establishment of an effective budget system.

Question 52

Compton Company expects the following total sales: $$\begin{array} { l l } \text { Manth } & \text { sales } \\\text { March } & \$ 25,000 \\\text { April } & \$ 15,000 \\\text { May } & \$ 25,000 \\\text { Jure } & \$ 20,000\end{array}$$ The company expects 70% of its sales to be credit sales and 30% for cash. Credit sales are collected as follows: 25% in the month of sale, 75% in the month following the sale. The budgeted accounts receivable balance on May 31 is:

A) $13,825.
B) $15,225.
C) $17,160.
D) $21,750.

Question 53

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2: $\begin{array}{ccccc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Credit sales } & \$ 120,000 & \$ 280,000 & \$ 310,000 & \$ 220,000 \\\text { Cash sales } & \$ 20,000 & \$ 50,000 & \$ 60,000 & \$ 24,000 \end{array}$ Based on the company's collection history, 42% of credit sales are collected in month of sale, and the remainder is collected in the following month. Cash collections in January from December credit sales would be:

A) $69,600.
B) $81,200.
C) $72,000.
D) $84,000.

Question 54

Markham Company has completed its sales budget for the first quarter of Year 2. Projected credit sales for the first four months of the year are shown below: $$\begin{array} { l l } \text { January } & \$ 22,000 \\\text { February } & \$ 28,000 \\\text { March } & \$ 37,000 \\\text { April } & \$ 40,000\end{array}$$ The company's past records show collection of credit sales as follows: 30% in the month of sale and the balance in the following month. The total cash collection from receivables in March is expected to be:

A) $37,000.
B) $23,800.
C) $34,300.
D) $30,700.

Question 55

Markham Company has completed its sales budget for the first quarter of Year 2. Projected credit sales for the first four months of the year are shown below: $$\begin{array} { l l } \text { January } & \$ 30,000 \\\text { February } & \$ 36,000 \\\text { March } & \$ 45,000 \\\text { April } & \$ 48,000\end{array}$$ The company's past records show collection of credit sales as follows: 40% in the month of sale and the balance in the following month. The total cash collection from receivables in March is expected to be:

A) $18,000.
B) $45,000.
C) $41,400.
D) $39,600.

Question 56

Which of the following would be prepared first when a merchandising company uses a master budget?

A) Selling and administrative expense budget
B) Budgeted income statement
C) Sales forecast
D) Inventory purchases budget

Question 57

What is the role of top management in a participative budgeting system?

A) Top management has no role-the budget is entirely developed by the lower-level employees.
B) Top management must always tighten employee-set budget standards to eliminate employees' attempts to build slack into the standards.
C) Top management must ensure that employee-generated objectives are consistent with those of the company.
D) All of the answers are correct.

Question 58

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2: $\begin{array}{ccccc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Credit sales } & \$ 51,000 & \$ 131,000 & \$ 146,000 & \$ 101,000 \\\text { Cash sales } & \$ 18,000 & \$ 16,000 & \$ 21,000 & \$ 3,000\end{array}$ Based on the company's collection history, 43% of credit sales are collected in month of sale, and the remainder is collected in the following month. Cash collections in January from December credit sales would be:

A) $29,070.
B) $24,000.
C) $19,860.
D) $32,130.

Question 59

Which of the following budgets needs to be prepared prior to preparing an inventory purchases budget?

A) Selling and administrative expense budget
B) Sales budget
C) Cash budget
D) All of the answers are correct.

Question 60

Benton Company's sales budget shows the following expected total sales: $$\begin{array} { l l } \text { Manth } & \text { Sales } \\\text { January } & \$ 25,000 \\\text { February } & \$ 30,000 \\\text { March } & \$ 35,000 \\\text { April } & \$ 40,000\end{array}$$ The company expects 80% of its sales to be on account (credit sales). Credit sales are collected as follows: 25% in the month of sale and 72% in the month following the sale, with the remainder being uncollectible and written off. The total cash receipts during April would be:

A) $16,000.
B) $28,160.
C) $24,640.
D) $36,160.

Question 61

Select the correct equation format for the purchases budget.

A) Beginning inventory + expected sales = required purchases.
B) Cost of budgeted sales + beginning inventory - desired ending inventory = required purchases.
C) Beginning inventory + expected sales - desired ending inventory = required purchases.
D) Cost of budgeted sales + desired ending inventory - beginning inventory = required purchases.

Question 62

Which of the following cash budget equations is incorrect?

A) Cash payments + cash receipts = cash requirements
B) Beginning cash + cash receipts = total cash available
C) Cash payments + cash cushion = total cash needed
D) Period 1 ending cash balance = Period 2 beginning cash balance

Question 63

The following budget information is available for the Arch Company for January Year 2: $\begin{array}{llr} \text { Sales } &\$860,000\\ \text { Cost of goods sold } &540,000\\ \text { Utilities expense } &2,800\\ \text {Administrative salaries } &100,000\\ \text { Sales commissions } & \text {\( 5 \% \) of Sales}\\ \text { Advertising } &20,000\\ \text { Depreciation on store equipment } &50,000\\ \text {Rent on administration building } &60,000\\ \text { Miscellaneous administrative expenses} &10, 000\\\end{array}$
All operating expenses are paid in cash in the month incurred. Compute the total budgeted selling and administrative expenses (excluding interest) amount for January Year 2.

A) $262,500
B) $283,000
C) $240,000
D) $285,800

Question 64

The following budget information is available for Crescent Company for January Year 2: $\begin{array}{llr} \text { Sales } &\$800,000\\ \text { Cost of goods sold } &540,000\\ \text { Utilities expense } &2,500\\ \text {Administrative salaries } &100,000\\ \text { Sales commissions } & \text {\( 5 \% \) of Sales}\\ \text { Advertising } &20,000\\ \text { Depreciation on store equipment } &50,000\\ \text {Rent on administration building } &60,000\\ \text { Miscellaneous administrative expenses} &10, 000\\\text { Percentacre of sales on credit }&80\%\end{array}$ All operating expenses are paid in cash in the month incurred. The amount of expected cash outflow for selling and administrative expenses would be:

A) $262,500.
B) $247,500.
C) $232,500.
D) $312,500.

Question 65

Which of the following would appear on a selling and administrative expense budget, but would not appear on a schedule of cash payments for selling and administrative expenses?

A) Cost of goods sold
B) Depreciation expense
C) Salary expense
D) Sales expense

Question 66

O'Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2. The company has budgeted sales as follows: $\begin{array}{lc}\text { Dec. Year 1 } & \$ 44,000 \\\text { Jan. Year 2 } & \$ 46,500 \\\text { Feb. Year 2 } & \$ 51,000 \\\text { Mar. Year 2 } & \$ 61,500\end{array}$ Cost of goods sold is expected to be 75% of sales. The company would like to have ending inventory each month equal to 25% of the following month's predicted cost of sales. The total cost of purchases in January Year 2 is:

A) $35,719.
B) $46,500.
C) $44,438.
D) $59,250.

Question 67

Select the correct statement regarding the selling and administrative (S&A) expense budget.

A) The S&A budget is prepared after the sales budget.
B) The S&A budget is prepared before the cash budget.
C) The S&A budget is prepared before the pro forma income statement.
D) All of the answers are correct.

Question 68

Hilliard Company budgeted the following transactions for April Year 2: $\begin{array}{llr} \text { Sales (75\% collected in month of sale) }&\$200,000\\ \text {Cash operating expenses } &105,000\\ \text { Cash purchases of investments } &75,000\\ \text { cash payment of debt} &15,000\\ \text { Depreciation on operating assets} &12,000\\\end{array}$
The beginning cash balance was $50,000. The company desires to have a $25,000 ending cash balance. The surplus (or shortage) of cash before considering any borrowings in April would be:

A) $40,000 surplus.
B) $40,000 shortage.
C) $20,000 shortage.
D) There is no cash surplus or shortage.

Question 69

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: $\begin{array}{llcc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Cost of goods}& \$41,000 &\$71,000 &\$91,000 &\$ 61,000 \\\text { sold }\end{array}$
Desired ending inventory levels are 26% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be:

A) $68,800.
B) $83,200.
C) $90,700.
D) $112,480.

Question 70

Hernandez Company expects credit sales for January to be $48,000. Cash sales are expected to be $28,000. The company expects credit and cash sales to increase 10% for the month of February. Credit sales are collected in the month following the month in which sales are made. Based on this information, the amount of cash collections in February would be:

A) $78,800.
B) $83,600.
C) $76,000.
D) $80,800.

Question 71

Which of the following items typically found on the selling and administrative expense budget will also impact the cash budget?

A) Depreciation expense
B) Administrative salaries
C) Advertising expense
D) Both administrative salaries and advertising expense are correct.

Question 72

Payne Company provided the following information relevant to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: $\begin{array}{llcc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Cost of goods}& \$80,000 &\$140,000 &\$180,000 &\$ 120,000 \\\text { sold }\end{array}$
Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January Year 2 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase.
Budgeted cash payments for inventory in February Year 2 would be:

A) $132,600.
B) $152,600.
C) $99,000.
D) $159,000.

Question 73

Which of the following items is not needed to prepare an inventory purchases budget for a merchandising business?

A) Expected unit selling price
B) Beginning inventory
C) Expected unit sales
D) Desired ending inventory

Question 74

Skymont Company wants an ending inventory each month equal to 30% of that month's cost of goods sold. Cost of goods sold for February is projected at $45,000. Ending inventory at the end of January was $12,000. Based on this information, purchases for February would be:

A) $31,500.
B) $46,500.
C) $43,500.
D) $33,000.

Question 75

Budgeted depreciation expense would not appear on a:

A) Selling and administrative expense budget.
B) Budgeted income statement.
C) Cash budget.
D) All of the answers are correct.

Question 76

Hernandez Company expects credit sales for January to be $100,000. Cash sales are expected to be $60,000. The company expects credit and cash sales to increase 10% for the month of February. Credit sales are collected in the month following the month in which sales are made. Based on this information, the amount of cash collections in February would be:

A) $166,000.
B) $160,000.
C) $170,000.
D) $176,000.

Question 77

Sales for January are budgeted at 50,000 units, and the company expects sales to increase 4% each month. How many units will need to be purchased in February if the company's policy is to keep ending inventory each month at 10,000 units?

A) 52,000 units
B) 54,000 units
C) 62,000 units
D) None of these answers is correct.

Question 78

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: $\begin{array}{llcc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Cost of goods}& \$80,000 &\$140,000 &\$180,000 &\$ 120,000 \\\text { sold }\end{array}$
Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be:

A) $135,000.
B) $165,000.
C) $180,000.
D) $225,000.

Question 79

Skymont Company wants an ending inventory each month equal to 25% of that month's cost of goods sold. Cost of goods sold for February is projected at $90,000. Ending inventory at the end of January was $18,000. Based on this information, purchases for February would be:

A) $67,500.
B) $94,500.
C) $72,000.
D) $85,500.

Question 80

Which of the following budgets or schedules uses data contained in the selling and administrative expense budget?

A) Cash receipts schedule
B) Cash payments schedule
C) Inventory purchases budget
D) Sales budget