Deck 23: Operational Budgeting

Question 1

The behavioral approach to budgeting has as its goal the complete elimination of inefficiency.

Answer 1

False

Question 2

A company that is profitable may not have sufficient cash on hand to meet its immediate needs.

Answer 2

True

Question 3

In preparing a master budget,budgeted levels for production,manufacturing costs,and operating expenses normally are determined after preparing the sales forecast.

Answer 3

True

Question 4

Because a budget is merely a forecast of future events,its benefits are extremely narrow and limited.

Question 5

If a budget is to provide a basis for evaluating departmental performance,departmental managers should not know what their budget targets are until after the budget period has ended.

Question 6

The typical starting point of a master budget would be to prepare a budgeted balance sheet.

Question 7

A cash budget determines the maximum amount of money that can be spent during the period.

Question 8

A budget prepared using the total quality management approach is always achievable by departments within a company.

Question 9

In a master budget,the sales forecast would be dependent upon the budgeted production figures.

Question 10

A budget provides a comprehensive plan enabling multiple departments to work together in a coordinated manner.

Question 11

The total quality management approach to budgeting sets budgeted amounts at levels that can be achieved through reasonably efficient operations.

Question 12

If the total quality management approach is employed to determine the level at which budgeted amounts are set,then absolute efficiency is assumed.

Question 13

The operating cycle is the average time required to manufacture products for sale.

Question 14

Under the "total quality management" philosophy,budgeted amounts should be set at realistic and achievable levels rather than at levels representing absolute efficiency.

Question 15

A company's operating cycle is the time between purchases of direct materials and conversion of these materials back into cash.

Question 16

A master budget actually includes a number of related budgets.

Question 17

Once a company determines its desired production level,it uses that estimated production level to forecast sales for the period.

Question 18

If the behavioral approach is employed to determine the levels at which budgeted amounts are set,then reasonable and achievable levels should be used.

Question 19

A master budget is a comprehensive financial plan setting forth the financial and operational goals of a business.

Question 20

The preparation of a budgeted balance sheet requires consideration of the budgeted capital expenditures and budgeted net income.

Question 21

Benefits derived from budgeting do not include:

A)Improved relationship with shareholders.
B)Enhanced management responsibilities.
C)Improved coordination of activities.
D)Enhanced performance evaluations.

Question 22

The most widely used budgeting philosophy is the:

A)Operational approach.
B)Behavioral approach.
C)Strategic approach.
D)Tactical approach.

Question 23

Capital expenditures budgets are typically prepared for a period of:

A)3 months.
B)6 months.
C)The entire fiscal year.
D)Several years.

Question 24

Mentha Company currently has the following statistics: Days in inventory - 80
Operating cycle - 148
What is Mentha's days in accounts receivable?

A)80 days.
B)68 days.
C)148 days.
D)Cannot be determined from the information given.

Question 25

The benefits of budgeting include all of the following except:

A)Enabling the company to produce more for less cost.
B)Assigning responsibility for situations that require corrective action.
C)Coordinating activities between departments within the organization.
D)Creating standards for evaluating performance.

Question 26

When budgeted amounts are set at reasonable and achievable levels:

A)They reflect a "total quality management" philosophy of management.
B)A highly efficient department should fall slightly short of budget standards.
C)Meeting the budgeted amounts ensures a maximum level of profitability.
D)Failure to stay within the budget is viewed as an unacceptable level of performance.

Question 27

Which philosophy in setting budgeted amounts assumes both the complete elimination of inefficiencies and a level of absolute efficiency?

A)The behavioral approach.
B)The total quality management approach.
C)The strategic approach.
D)The master budget approach.

Question 28

Mentha Company currently has the following statistics: Days in accounts receivable - 68
Operating cycle - 148
What is Mentha's days in inventory?

A)80 days.
B)68 days.
C)148 days.
D)Cannot be determined from the information given.

Question 29

Flexible budgets can be prepared for sales budgets but not for productions budgets.

Question 30

A performance report can be easily adjusted to show budgeted revenues and costs at different levels of activity.

Question 31

A budget that adds a new month when the current month ends is called a:

A)Capital budget.
B)Master budget.
C)Rolling budget.
D)There is no such budget.

Question 32

Which of the following is not a benefit of a careful and thorough budgeting process?

A)Budgeting increases management's awareness of the company's external economic environment.
B)Budgeted net income assures the company of operating profitably.
C)The budget may provide advance warning of pending problems.
D)Budgets provide a yardstick for evaluating future performance.

Question 33

In a flexible budget,both variable and fixed costs will vary with the level of activity.

Question 34

The master budget may be comprised of:

A)The production budget.
B)The current period income statement.
C)The current period balance sheet.
D)The current period statement of cash flows.

Question 35

Which of the following is not a characteristic of the total quality approach to setting budgetary targets?

A)Absolute efficiency.
B)A perception that the budget is fair.
C)Budgetary targets that are unattainable.
D)Budgeted performance expectations that cannot be exceeded.

Question 36

Flexible budgeting may be viewed as combining the concepts of budgeting with cost-volume-profit analysis.

Question 37

A flexible budget allows management to spend more or less for labor and materials without regard to the amount of production.

Question 38

Mentha Company currently has the following statistics: Days in inventory - 80
Days in accounts receivable - 68
What is Mentha's operating cycle?

A)80 days.
B)68 days.
C)148 days.
D)Cannot be determined from the information given.

Question 39

A master budget usually includes all of the following except:

A)A sales forecast.
B)A cash budget.
C)A projected tax return.
D)Projected financial statements.

Question 40

A common means of performance evaluation occurs by comparing budgeted amounts with actual amounts.

Question 41

The sales forecast directly affects many elements of the master budget.Which of the following would be least affected by short-term fluctuations in the sales forecasts?

A)The production schedule.
B)The budgeted income statement.
C)The capital expenditures budget.
D)The operating expense budget.

Question 42

As the volume of output increases:

A)Variable costs per unit will increase.
B)Variable costs per unit will decrease.
C)Variable costs per unit will not change.
D)Variable costs in total will decrease.

Question 43

Which of the following is a major component of a master budget?

A)A production throughput schedule.
B)A machinery maintenance schedule.
C)A cash budget.
D)An employee training budget.

Question 44

A flexible budget is one that:

A)Is revised monthly in the light of changing business conditions.
B)Is a compromise plan reflecting diverse views of various supervisors.
C)Contains estimated cost data for several different levels of activity.
D)Separates factory overhead between the variable and fixed portions.

Question 45

Which of the following is considered an operating budget?

A)The prepayments budget.
B)The debt service budget.
C)The customer service budget.
D)The capital expenditures budget.

Question 46

Which element of a master budget would normally be prepared first?

A)A production budget.
B)A cash budget.
C)A budget of operating expenses.
D)A sales forecast.

Question 47

The production schedule in units:

A)Cannot be prepared until the budgeted income statement is completed.
B)Is dependent upon the sales forecast for the period.
C)Is based upon the manufacturing cost budget,that is,upon the level of funds available for manufacturing costs.
D)Is the starting point in the preparation of the master budget.

Question 48

Which of the following is considered a financial budget?

A)The marketing budget.
B)The cost of goods sold budget.
C)The overhead budget.
D)The capital expenditures budget.

Question 49

Which of the following is not considered an operating budget?

A)Manufacturing cost budget.
B)Production schedule.
C)Capital expenditures budget.
D)Sales forecast.

Question 50

Costs that rise and fall proportionately with the volume of output are often

A)Variable costs.
B)Flexible costs.
C)Idle capacity costs.
D)Uncontrollable costs.

Question 51

A segment of a master budget relating to that portion of a business under the control of a particular manager is termed a:

A)Performance report.
B)Production report.
C)Responsibility budget.
D)Cash budget.

Question 52

If the volume of output of a factory for the month of June is 50,000 units,while the budgeted output was 40,000 units:

A)Comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget.
B)Actual fixed costs per unit may be expected to exceed budgeted levels.
C)Actual cost per unit will be higher than standard cost per unit.
D)Both total production costs and unit production costs should be approximately 25% above budgeted levels.

Question 53

A cash budget is affected directly by each of the following except:

A)A capital expenditures budget.
B)A sales forecast.
C)A manufacturing cost budget.
D)A budgeted income statement.

Question 54

Sherman has budgeted sales for the upcoming quarter as follows: The desired ending finished goods inventory for each month is one-half of next month's budgeted sales.Three pounds of direct material are required for each unit produced.If direct material costs $5 per pound,and must be paid for in the month of purchase,the budgeted direct materials purchases (in dollars)for April are:

A)$17,500.
B)$40,500.
C)$26,250.
D)$38,250.

Question 55

As the volume of output decrease:

A)Fixed costs per unit will increase.
B)Fixed costs per unit will decrease.
C)Fixed costs per unit will not change.
D)Fixed costs in total will decrease.

Question 56

Wateredge Corporation has budgeted a total of $361,800 in costs and expenses for the upcoming quarter.Of this amount,$45,000 represents depreciation expense and $7,300 represents the expiration of prepayments.Wateredge's current payables balance is $265,000 at the beginning of the quarter.Budgeted payments on current payables for the quarter amount to $370,000.The company's estimated current payables balance at the end of the quarter is:

A)$179,500.
B)$204,500.
C)$203,500.
D)$310,000.

Question 57

Preparation of a budgeted income statement does not require:

A)Estimates of cost of goods sold.
B)Estimates of the timing of cash receipts and payments.
C)Preparation of sales forecast.
D)Anticipation of operating expenses.

Question 58

A budget that can be easily adjusted to show budgeted revenues,costs,and cash flows at different levels of activity is known as:

A)A flexible budget.
B)A master budget.
C)A production budget.
D)A multi-level budget.

Question 59

Which element of a master budget would normally be prepared last?

A)A cash budget.
B)A budgeted balance sheet.
C)A budgeted income statement.
D)A production budget.

Question 60

In a cash budget,the budgeted level of cash receipts depends on all of the following except:

A)The sales forecast.
B)The credit terms offered to customers.
C)The credit terms offered by suppliers.
D)Experience in collecting receivables.

Question 61

Flexible budgeting may be viewed as combining the concepts of budgeting and:

A)Incremental analysis.
B)Product costing.
C)Cost-volume-profit analysis.
D)Financial statement analysis.

Question 62

In a flexible budget for a profit center,which of the following items would not be expected to vary with the level of activity?

A)Revenue.
B)Fixed manufacturing overhead.
C)Direct materials cost.
D)Variable manufacturing overhead.

Question 63

Flexible budgeting
What is meant by the term flexible budget? What role do flexible budgets play in evaluating performance?

Question 64

Explain what is meant by "profit rich,yet cash poor".

Question 65

Armstrong,Inc.uses a flexible budget.Armstrong produced 16,000 units in May incurring direct materials cost of $20,480.Its master budget for the year projected direct materials cost of $362,500,at a production volume of 290,000 units.A flexible budget for May should reflect direct materials cost of:

A)$20,480.
B)$20,000.
C)$21,000.
D)$19,750.

Question 66

Budgeted material purchases and payments to suppliers
On January 1 of the current period,Gotham Corporation has direct materials on hand of $82,000.Of this amount,Gotham owes suppliers $51,000 on account.The company has prepared the following budget estimates for January: (a)Purchases of direct materials budgeted in January amount to: $_______________
(b)Cash payments to suppliers budgeted in January amount to: $_______________
Computations

Question 67

Elements of the master budget
Describe briefly the purpose of a master budget and discuss its elements.

Question 68

Establishing budgeted amounts
(a)The text discusses two basic philosophies as to the levels at which budgeted amounts should be set.Identify and describe briefly each of these two philosophies.
(b)Which of the two management philosophies would be more likely to elicit the following comment?
"At our company,budgeted revenue is set so high and budgeted costs so low that no department can ever meet the budget.This way,department managers can never relax; they are motivated to keep working harder no matter how well they are already doing."

Question 69

Discuss the benefits that a company may derive from a formal budgeting process.

Question 70

Flexible budgeting may be used for profit centers by applying cost-volume-profit relationships to the actual level of:

A)Units produced.
B)Resources consumed.
C)Costs incurred.
D)Sales achieved.

Question 71

Steps in the budgeting process
Listed below are eight operating budgets.In the space provided,list which of these budgets is typically prepared first,second,third,etc.
(a)____Operating expense budget
(b)____Budgeted income statement
(c)____Ending finished goods forecast
(d)____Production schedule (in units)
(e)____Manufacturing cost estimates
(f)____Cost of goods sold budget
(g)____Sales forecast
(h)____Manufacturing cost budget

Question 72

Aron Company makes computer screens,Model 1 and Model 2.Aron anticipates selling the screens as follows: The inventory on 1/1/15 is 2500 units of Model 1 and 3000 units of Model 2.Aron wants to have on hand 45% of the anticipated sales of the following month for each model.Prepare a production budget for the first 3 quarters of 2015 for both models.

Question 73

Cash receipts budget
The director of budgeting for Bond Products is beginning the process of preparing a cash budget for each month of the coming year.The sales forecast for the month of January is as follows: In the past,the accounts receivable originating from credit sales have been collected in the following pattern: Credit sales in the last two months of the current year,some of which remain uncollected at year-end,were as follows: Compute the amount of cash expected to be collected from customers in January of the coming year.

Question 74

Budgeted debt service costs
On April 1,Fisher Corporation borrowed $400,000 from its bank by signing a 9%,5-year note payable.The note calls for 60 monthly payments of $6,150,which includes both interest and principal components.
(a)Interest expense budgeted for April amounts to: $_______________
(b)The carrying value of the note to be reported in the company's budgeted balance sheet as of April 30 is: $_______________
(c)Interest expense budgeted for May amounts to (round to nearest whole dollar): $_______________
(d)The carrying value of the note to be reported in the company's budgeted balance sheet as of May 31 is (round to nearest whole dollar): $_______________

Question 75

A flexible budget:

A)Consists of estimates of costs and expenses for various possible levels of activity.
B)Is designed to be adjusted at frequent intervals for changes in the general price level.
C)Is better suited for use with a job cost system than a standard cost system.
D)Cannot be prepared when a standard cost system is in use.

Question 76

Production and purchases budgets
Brian Furniture,Inc.manufactures a variety of desks,chairs,tables,and shelf units which are sold to public school systems throughout the Midwest.The controller of the company's School Desk Division is currently preparing a budget for the second quarter of 2015.The following sales forecast has been developed by the division's sales manager:
April 6,500 desk and chair sets
May 7,500 desk and chair sets
June 9,000 desk and chair sets
July 8,700 desk and chair sets
August 8,800 desk and chair sets
The inventory of finished desk and chair sets at the end of each month must be equal to 30% of the budgeted sales for the next month.On April 1,there will be 1,950 units of desk and chair sets on hand.
Work-in-process inventories are negligible and can be safely ignored.
Each desk and chair set requires 10 board feet of pine planks.Pine planks cost $0.75 per board foot,and the division ends each month with enough pine to cover 20% of the next month's production requirements.This requirement will be met on April 1 of 2015.
Required.Prepare a production budget and a materials purchases budget for April,May,and June and in total for the three-month period.

Question 77

Flexible budget-variances
The cost accountant for Bradley,Inc.,prepared the following monthly performance report relating to the Finishing Department: (a)Compute the amounts that should be included for each of the following in a flexible budget prepared for a 6,500-unit level of production:
(1)Direct materials: $_______________
(2)Direct labor: $_______________
(3)Fixed manufacturing overhead: $_______________
(b)Assume that a revised performance report is prepared for the 6,500-unit level of production using a flexible budget approach.Compute the cost variances for each of the following.Indicate whether each variance is favorable (F)or unfavorable (U).

Question 78

Preparation of cash budget
Use the following information to prepare a cash budget for Knightsbridge Corporation for the month of June 2015.
In May,30-day credit sales were $175,000; 80% of this amount is estimated to be collectible in June.
June sales are estimated to be $425,000; cash sales are usually 25% of total sales.Only 10% of credit sales are collected in the month in which the sale is made.
Total fixed expenses are $60,000 per month,including $26,000 depreciation.Variable expenses are 55% of sales.All expenses requiring payment are paid in cash when incurred.
A $40,000 note payable must be paid on June 30.
As of May 31,the cash balance is $94,000.

Question 79

Harding Company expected sales to be 50,000 units in February,45,000 in March,and 55,000 units in April.Each unit sells for $18.00 each.The following costs pertain to each unit: Harding is considering an advertising campaign which will cost $15,000 per month from January to March and is expected to increase sales by 8% a month.At the same time Harding will reduce sales prices to $17.00 per unit while keeping costs steady.
Required:
(A.)What will operating income be in each of the three months before the advertising campaign?
(B.)If Harding goes ahead with the advertising campaign,how much would operating income increase or decrease each month? Would you advise them to go ahead with the campaign?