Deck 6: Budgeting

Question 1

Below are various statements about different budgeting techniques. Which is false?

A)Budget ratcheting tightens targets when performance fails to meet the target by a predetermined percentage
B)Budget lapsing prevents managers from hoarding funds
C)Master(static) budgets are prepared for a single level of activity
D)Budget lapsing encourages managers to spend money regardless of cost or value
E)None of the above

Answer 1

A

Question 2

Different Types of Budgets
The Sticky Company makes a glue that is used to glue the layers of wood veneer together to make plywood. The process for making the glue has been used for many years and the customers are satisfied with the product. The Sticky Company has had very low turnover of personnel and the president and the managers have all been with the company for many years. Although the company appears very stable today, plywood prices are rising and the construction industry is beginning to switch to a cheaper product called chipboard. Chipboard uses a different glue than the glue made by the Sticky Company.
Required:
Given the present condition of Sticky Company, should the company use long-term budgets, line-item budgets, budget lapsing, flexible budgets, or zero-based budgeting?

Answer 2

If the market for the glue for plywood was viewed as a stable market, then Sticky Company is likely to use long-term budgets. The managers and employees have all been with the Sticky Company for many years, so there is no need to use line-item budgeting and not much need to transfer information. Therefore, incremental budgeting is probably better than zero-based budgeting. Budget lapsing is generally not used in a profit company. Flexible budgets are probably appropriate because the demand for the product depends on the demand for plywood, which is not controlled by the managers of Sticky Company.
If Sticky Company is facing a transition due to the conversion from plywood to chipboard, the company is likely to change its budgeting. There will be a greater focus on short-term budgets because of increased uncertainty about the long run. Line item and fixed budgets may be used more frequently because more control from central administration may be desired in an attempt to adapt to a new environment. Zero-based budgeting may be instituted to increase information flow.

Question 3

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
What quantities of fabric and/or stuffing must be purchased in March?

A)1248 pounds of stuffing
B)747.6 yards of fabric
C)1630.8 pounds of stuffing
D)600.4 yards of fabric
E)None of the above

Answer 3

D

Question 4

Top-down versus Bottom-up Budgets
Describe (a) the benefits of top-down budgeting and (b) the benefits of bottom-up budgeting.

Question 5

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
Assume that the production target for February is 650 bears. What is the production budget for the month of February?

A)$26,000
B)$54,900
C)$57,500
D)$59,450
E)None of the above

Question 6

A chair manufacturer has established the following flexible budget for the month. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Units Produced and Sold }$
$\begin{array} { | l | r | r | r | } \hline & 1,000 & 1,500 & 2,000 \\\hline \text { Sales } & \$ 10,000 & \$ 15,000 & \$ 20,000 \\\hline \text { Variable Costs } & ( 5,000 ) & ( 7,500 ) & \langle 10,000 ) \\\hline \text { Fixed Costs } & ( 2,000 ) & ( 2,000 ) & ( 2,000 ) \\\hline \text { Profit } & \$ 3,000 & \$ 5,500 & \$ 8,000 \\\hline\end{array}$ Required:
a. What is the sales price per chair?
b. What is the expected profit if 1,600 chairs are made?

Question 7

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
How many bears must be produced in February?

A)600
B)540
C)624
D)744
E)None of the above

Question 8

The Jung Corporation's budget calls for the following production: $\begin{array}{|l|l|}\hline \text { Quarter 1 } & 45,000 \text { units } \\\hline \text { Quarter 2 } & 38,000 \text { units } \\\hline \text { Quarter 3 } & 34,000 \text { units } \\\hline \text { Quarter 4 } & 48,000 \text { units } \\\hline\end{array}$ Each unit of production requires three pounds of direct material. The company's policy is to begin each quarter with an inventory of direct materials equal to 30 percent of that quarter's direct material requirements.
Required:
Compute budgeted direct materials purchases for the third quarter.

Question 9

Picture Maker is a freestanding photo kiosk consumers use to download their digital photos and make prints. Shashi Sharma has a small business that leases several Picture Makers from the manufacturer for $120 per month per kiosk, and she places them in high-traffic retail locations. Customers pay $0.18 per print. (The kiosk only makes six- by eight-inch prints.) Sharma has one kiosk located in the Sanchez Drug Store, for which Sharma pays Sanchez $80 per month rent. Sharma checks each of her kiosks every few days, refilling the photographic paper and chemicals, and collects the money. Sharma hires a service company that cleans the machine, replaces any worn or defective parts, and resets the kiosk's settings to ensure the kiosk continues to provide high-quality prints. This maintenance is performed monthly and is independent of the number of prints made during the month. The average cost of the service runs about $90 per month, but it can vary depending on the extent of repairs and parts required to maintain the equipment.
Paper and chemicals are variable costs, and maintenance, equipment lease, and store rent are fixed costs. If the kiosk is malfunctioning and the print quality deteriorates, Sanchez refunds the customer's money and then gets his money back from Sharma when she comes by to check the paper and chemical supplies. These occasional refunds cause her variable costs perprint for paper and chemicals to vary over time.
The following table reports the results from operating the kiosk at the Sanchez Drug Store last month. Budget variances are computed as the difference between actual and budgeted amounts. An unfavorable variance (U) exists when actual revenues fall short of budget or when actual expenses exceed the budget. Last month, the kiosk had a net loss of $23, which was $87 more than budgeted. $\begin{array}{c}\text { Sanchez Drug Store Kiosk }\\ \text { Last Month}\\\begin{array}{|l|r|r|c|}\hline& \text { Actual } & \text { Variance } & (U= \\&\text { Results } & \text { from } & \text { unfavorable } F= \\&& \text { Budget } & \text { favorable })\\\hline\text { Revenue } & \$ 360 & \$ 108 & U \\\hline \text { Expenses: } & & & \\\hline \text { Paper } & \$ 65 & \$ 13 & \mathrm{~F} \\\hline \text { Chemicals } & 28 & 2 & \mathrm{U} \\\hline \text { Maintenance } & 90 & 10 & \mathrm{~F}\\\hline\begin{array}{l} \text { Equipment } \\\text { lease }\end{array} & 120 & 0 & \\\hline \text { Store rent } & 80 & 0 & \\\hline \begin{array}{l}\text { Total } \\\text { expenses }\end{array} & \$ 383 & \$ 21 & \mathrm{~F} \\\hline \begin{array}{l}\text { Net income } \\\text { (los s) }\end{array} & (\$ 23) & (\$ 87) & \mathrm{U} \\\hline\end{array}\end{array}$
Required:
a. Prepare a schedule that shows the budget Sharma used in calculating the variances in the preceding report.
b. How many good prints were made last month at the Sanchez Drug Store kiosk?
c. Prepare a flexible budget for the Sanchez Drug Store kiosk based on a volume of 2,000 prints.

Question 10

The Effect of Budgets on Organization
Describe how budgets and budgeting systems help solve the organization problem. Give examples.

Question 11

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
What are budgeted conversion costs for January?

A)$35,000
B)$37,400
C)$39,040
D)$41,200
E)None of the above

Question 12

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
Given the production target of 650 bears for February, assume that the actual output for February was 630 bears and that actual production costs totaled $54,280. Which is true?"

A)BB did well, saving $620 compared with the master budget
B)BB did well, saving $620 compared with the flexible budget
C)BB missed the master budget target by $300
D)BB missed the flexible budget target by $300
E)Unable to assess performance

Question 13

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
What is the purchases budget for February?

A)$12,905.60
B)$21,142.40
C)$11,571.20
D)$12,480.00
E)None of the above

Question 14

The Gold Bay Hotel is in the process of developing a master budget and pro-forma financial statements. The beginning balance sheet for the current fiscal year is estimated to be: $\begin{array}{c}\text { Gold Bay Hotel}\\\text { Estimated Balance Sheet}\\\text { Current Year}\\\begin{array}{|l|r|l|r|}\hline\text { Cash } & \$ 20,000 & \begin{array}{l}\text { Accounts } \\\text { Payable }\end{array} & \$ 20,000 \\\hline \begin{array}{l}\text { Accounts } \\\text { Receivable }\end{array} & 30,000 & \begin{array}{l}\text { Notes } \\\text { Payable }\end{array} & 500,000 \\\hline \text { Facilities } & 3,010,000 & \text { Capital Stock } & 100,000 \\\hline \begin{array}{l}\text { Accumulated } \\\text { Dep. }\end{array} & \$ 1,100,000) & \begin{array}{l}\text { Retained } \\\text { Earnings }\end{array} & 1,340,000 \\\hline \text { Total As sets } & \$ 1,960,000 & \text { Total Equities } & \$ 1,960,000\\\hline\end{array}\end{array}$ During the year the hotel expects to rent 30,000 rooms. Rooms rent for an average of $90 per night. The hotel expects to sell 40,000 meals during the year at an average price of $20 per meal. The variable cost per room rented is $30 and the variable cost per meal is $8. The fixed costs not including depreciation is expected to be $2,000,000. Depreciation is expected to be $500,000. The hotel also expects to refurbish the kitchen at a cost of $200,000, which is capitalized (included in the facility account). Interest of the note payable is expected to be $50,000 and $100,000 of the note payable will be retired during the year. The ending accounts receivable amount is expected to be $40,000 and the ending accounts payable is expected to be $30,000.
Required:
Prepare pro-forma financial statements for the end of the current year.

Question 15

Because people prepare budgets, budget figures are often biased. Which is true?

A)Sales quantity forecasts tend to be exaggerated to make the sales team look good
B)Production cost estimates tend to be overstated to create wriggle room (budgetary slack)
C)Efficient organizations begin their budget process with last year's budget, and adjust the figures by a certain percentage
D)When senior management sets budget numbers, a more realistic budget can be developed
E)None of the above

Question 16

The organizational process of budgeting performs several important functions. Which is true?

A)Assigns decision rights
B)Shares knowledge
C)Forces planning
D)Measures performance
E)All of the above

Question 17

The Fancy Umbrella Company makes beach umbrellas. The production process requires 3 square meters of plastic sheeting and a metal pole. The plastic sheeting costs $0.50 per square meter and each metal pole costs $1.00. At the beginning of the month, the company has 5,000 square feet of plastic and 1,000 poles in raw materials inventory. The preferred raw material amount at the end of the month is 3,000 square feet of plastic sheeting and 600 poles. The company has 300 finished umbrellas in inventory at the beginning of the month and plans to have 200 finished umbrellas at the end of the month. Sales in the coming month are expected to be 5,000 umbrellas.
Required:
a. How many umbrellas must the company produce to meet demand and have sufficient ending inventory?
b. What is the cost of materials that must be purchased?

Question 18

Below are some budgeting techniques which are used rarely (or more often) by government agencies and corporations. Which is true? $$\begin{array} { | l | l | c | c | } \hline &&\text { Private } & \text { Public } \\&&\text { sector } & \text { sector }\\\hline \text { a. } & \begin{array} { l } \text { Encumbrance } \\\text { accounting }\end{array} & \text { Often } & \text { Rarely } \\\hline \text { b. } & \text { Flexible budgeting } & \text { Rarely } & \text { Often } \\\hline \text { c. } & \text { Budget lapsing } & \text { Often } & \text { Rarely } \\\hline \text { d. } & \text { Zero-based budgeting } & \text { Rarely } & \text { Often } \\\hline \text { e. } & \text { None of the above } & & \\\hline\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D
E)Option E

Question 19

Barrington Bears has developed the following sales forecasts for the next few months. January 500, February 600, March 720, April 800 and May 770. BB has 80 bears on hand on Dec. 31. Normal ending inventory policy is to hold 20% of next month's sales. Each bear needs .8 yards of fabric and two pounds of stuffing. Fabric is budgeted to cost $15 per yard and stuffing $4 per pound. Direct labor is paid $18 per hour. Each bear takes 40 minutes to hand-finish. Variable overheads total $21 per direct labor hour. Fixed overheads amount to $25,000 per month.
Eighty yards of fabric and 100 pounds of stuffing were in stock at year-end. Ten percent and 25% of next month's stuffing and fabric needs respectively are planned for raw materials ending inventory each month.
Assume that in March there was a favorable variance from the production master budget. Which factors may not have contributed to this result?

A)BB spent less per labor hour than planned
B)BB wasted less materials than planned
C)BB spent more on fixed overhead than planned
D)BB produced fewer units than planned
E)c) and d) only