Week 7 Homework

Week 7 Lesson Synopsis

The master budget can be a powerful tool for successful planning and control. Organizations benefit from an
effective budgeting process in several ways. First, the budget assigns responsibility for decision-making to
specific managers. Second, it enhances the degree of planned coordination among organizational units. Third,
performance evaluation is improved since the budget assigns responsibility and allows comparison between
actual and expected outcomes.

The master budget is developed as a set of interrelated plans. These are derived sequentially beginning with a
sales forecast. The sales forecast leads to a production schedule and an integrated set of manufacturing cost
budgets. A plan for ending inventory then leads to a budget for the cost of goods sold. Budgeting for operating
expenses completes the operating budget. With the operating budget in hand, we next prepare a budgeted
income statement. One of the objectives in so doing is to emphasize that a firm may be profitable but cash poor
due to the length of its operating cycle.
The cash budget is the key to identifying the points in the operating cycle causing the cash flow problem.
Development of the cash budget requires assumptions regarding the timing of cash receipts and payments.
These assumptions combined with the operating budget yield the cash budget.
The chapter concludes with an illustration of flexible budgeting. This analysis emphasizes that the flexible
budget improves performance evaluation by isolating the effects of unanticipated volume changes.
Chapter 23 Learning Objectives
1. Explain how a company can be "profit rich, yet cash poor."
2. Discuss the benefits that a company may derive from a formal budgeting process.
3. Explain two philosophies that may be used in setting budgeted amounts.
4. Describe the elements of a master budget.
5. Prepare the budgets and supporting schedules included in a master budget.
6. Prepare a flexible budget and explain its uses.

Week 7 Practice Quiz

Question 1
(1 point) Save
A budget that adds a new month when the current month ends is called a
Rolling budget
Capital budget
Master budget
There is no such budget
Question 2

(1 point)

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June Corporation had planned to produce 60,000 units of product during the first quarter of the current year. The
company prepared the above budget on May 1:
During the first quarter, June produced 70,000 units and incurred total manufacturing costs of $180,000.
The cost-volume relationship used to prepare June's flexible budget for various production levels includes:

Total cost of $2.70 per unit.

Fixed cost of $0.98 per unit.
Variable costs of $1.73 per unit.
Manufacturing overhead costs of $1.35 per unit.
Question 3

(1 point)

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A flexible budget:
Is designed to be adjusted at frequent intervals for changes in the general price level.
Is better suited for use with a job cost system than a standard cost system.
Consists of advance estimates of costs and expenses for various possible levels of activity.
Cannot be prepared when a standard cost system is in use.
(1 point)
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Question 4
A master budget usually includes all of the following except
A sales forecast
A cash budget
A projected tax return
Projected financial statements
Question 5

(1 point)

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Monroe Promotions, Inc. sells T-shirts decorated for a variety of concert performers. The company has
developed the above budget for the coming year based on a sales forecast of 80,000 T-shirts:
Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at
all levels of operating income.
If the concert season is slow due to poor weather, Monroe estimates that sales could fall to as low as 60,000 Tshirts.
Assume Monroe actually achieves the 60,000 unit sales level, and that net income actually earned at this level
was $70,000. A performance report would indicate that net income was:
$40,500 under budget.
$90,000 under budget.

$1,400 over budget.

At the budgeted level.
Question 6

(1 point) Save
Which of the following is considered a financial budget estimate?
The cost of goods sold budget.
The prepayments budget.
The operating expense budget.
The manufacturing cost budget.
Question 7

(1 point) Save
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:
Actual fixed costs per unit may be expected to exceed budgeted levels.
Comparison of budgeted results and actual results will be misleading unless the company
uses a flexible budget.
Actual cost per unit will be higher than standard cost per unit.
Both total production costs and unit production costs should be approximately 25% above
budgeted levels.
Question
(1 point)
8
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Eagle Company has budgeted sales for the upcoming quarter as above:
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 $4 per pound, and must be
paid for in the month of purchase, the budgeted direct materials purchases (in dollars) for April are:
$19,980.
$18,000.
$20,700.
$19,800.
Question 9 (1 point) Save
A segment of a master budget relating to that portion of a business under the control of a particular manager is
termed a:
Cash budget.
Responsibility budget.
Performance report.

Production report.
Question 10

(1 point) Save
Skyways, Inc. uses a flexible budget. Skyways produced 15,000 units in May incurring direct materials cost of
$19,200. Its master budget for the year projected direct materials cost of $360,000, at a production volume of
288,000 units. A flexible budget for May should reflect direct materials cost of:
$18,750.
$21,000.
$19,200.
$18,150.