ch10 TB

CHAPTER 10
USING BUDGETS TO ACHIEVE ORGANIZATIONAL OBJECTIVES

TRUE/FALSE
1.
Budgeting involves forecasting the demand for flexible resources, intermediate-term

capacity resources, and long-term capacity resources.
a.
True
b.
False
2.
Budgeting helps management anticipate and adjust for trouble spots in advance.
a.
True
b.
False
3.
Budgets can play both planning and control roles for management.
a.
True
b.
False
4.
The usual starting point in budgeting is to make a forecast of net income.

a.
True
b.
False
5.
The sales plan should be based on the production plan.

a.
True
b.
False
6.
If amounts in the sales forecast change, amounts in the production budgets will also change.
a.
True
b.
False
7.
After a budget is agreed upon and finalized by the management team, the amounts should
not be changed for any reason.
a.
True
b.
False
8.
In periodic budgeting, organizations budget continuously.

a.
True
b.
False
9.
Zero-based budgeting requires that proponents of discretionary expenditures justify these

outlays for each budgeting period.
a.
True
b.
False
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10.
Sensitivity analysis is the process of selectively varying the key estimates of a plan or
budget.
a.
True
b.
False
11.
The essence of variance analysis is that it captures a departure from what was expected.
a.
True
b.
False
12.
It is most meaningful to compare cost targets in the master budget to actual cost results.
a.
True
b.
False
13.
A favorable variance indicates managements attention is not needed.

a.
True
b.
False
14.
An unfavorable variance may be due to poor planning rather than due to inefficiency.
a.
True
b.
False
15.
If standards are lax, cost variances will tend to be favorable.

a.
True
b.
False
16.
To compute the direct material price variance, the actual cost is compared to the amount
budgeted at the beginning of the year for the material.
a.
True
b.
False
17.
The use of high-quality raw materials is likely to result in a favorable usage variance and an
unfavorable price variance.
a.
True
b.
False
18.
The labor rate variance is likely to be favorable if higher-skilled workers are put on a job.
a.
True
b.
False
19.
Planning variances are the focus of cost control.

a.
True
b.
False
20.
The role of budgeting in planning and control is more important in manufacturing than in a
not-for-profit environment.
a.
True
b.
False
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21.
When the operating budget is used as a control device, managers are more likely to be
motivated to budget higher sales than actually anticipated.
a.
True
b.
False
22.
Budgeting slack is most likely to occur when a firm uses the budget only as a planning
device and not for control.
a.
True
b.
False
23.
Authoritative budgeting occurs when a superior simply tells subordinates what their budget
will be.
a.
True
b.
False
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MULTIPLE CHOICE
24.
A budget should/can do all of the following EXCEPT that it:

a.
should be prepared by managers from different functional areas working independently
of each other
b.
should be adjusted if new opportunities become available during the year
c.
can help management allocate limited resources
d.
can become the performance standard against which firms can compare the actual
results
25.
Budgeting provides all of the following EXCEPT:

a.
a means to communicate the organization's short-term goals to its members
b.
support for the management functions of planning and coordination
c.
a means to anticipate problems
d.
an ethical framework for decision making
26.
Budgeting always includes:

a.
control
b.
planning of short-term activities
c.
evaluating performance
d.
preparing pro forma financial statements
27.
Budgeting does NOT require:

a.
knowledge of the organizations activities
b.
specialized expertise in financial management and control
c.
knowledge about how activities affect costs
d.
the ability to see how the organizations different activities fit together
28.
All of the following are true statements about the role of budgets and budgeting EXCEPT
that:
a.
a budget is a quantitative summary of the expected allocations and financial
consequences of the organizations short-term operating activities
b.
budgeting includes the process of estimating money inflows and outflows to determine
a financial plan that will meet objectives
c.
the difference between actual results and the budget plan are called variances
d.
budgeting solves most business challenges because it coordinates activities and
communicates the organizations short-term goals to its members
29.
In regard to the amount of detail, a budget should:

a.
show the detail for each product
b.
group products into pools of products
c.
strike a balance between detail and aggregated information
d.
not consider the cost of gathering the information
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30.
If initial budgets prove unacceptable, planners achieve the MOST benefit from:
a.
repeating the budgeting cycle with a new set of decisions
b.
deciding not to budget this year
c.
accepting an unbalanced budget
d.
using last years budget
31.
When discussing the roles of budgets, a planning role in the budgeting process includes:
a. measuring outcomes against planned amounts
b. developing the master budget
c. assessing performance
d. reporting actual amounts at the end of the budgeting period
32.
When discussing the roles of budgets, a control role includes:

a. identifying organizational objectives and short-term goals
b. developing long-term strategies and short-term plans
c. measuring and assessing performance against budgeted amounts
d. developing the master budget
33.
Operating budgets and financial budgets:

a.
combined form the master budget
b.
are prepared before the master budget
c.
are prepared after the master budget
d.
have nothing to do with the master budget
34.
Operating budgets include all of the following EXCEPT:

a.
a sales plan
b.
a labor hiring and training plan
c.
an administrative and discretionary spending plan
d.
expected financial results
35.
Operating budgets include the:

a.
projected balance sheet
b.
projected income statement
c.
capital spending plan
d.
expected cash flow statement
36.
Financial budgets are prepared:

a.
to specify expectations for selling, purchasing, and production
b.
to evaluate the financial results of the proposed decisions
c.
so that financial statements can be prepared for shareholders
d.
to plan for production capacity
37.
Financial budgets include the:

a.
b.
production plan
c.
labor hiring and training plan
d.
expected cash flow statement
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38.
__________ include an expected cash flow statement, the projected balance sheet, and the
projected income statement.
a.
Annual reports
b.
Financial budgets
c.
Operating budgets
d.
Capital budgets
39.
__________ provide(s) the starting point and the framework for evaluating the budgeting
process.
a.
The sales plan
b.
Organizational goals
c.
The production plan
d.
Expected cash flows
40.
A demand forecast is:

a.
an estimate of sales demand at a specified product price
b.
developed primarily to prepare next years marketing campaign
c.
an estimate of market demand based on the amount sold in the previous year
d.
a summary of product costs that influence pricing decisions
41.
The budgeting process is MOST strongly influenced by the:

a.
b.
statement of expected cash flows
c.
demand forecasts
d.
production plan
42.
In which order are the following developed?

A = Production plan B = Materials purchasing plan
C = Demand forecast D = Sales plan
a.
first to last: A, B, C, D
b.
first to last: C, D, A, B
c.
first to last: D, C, B, A
d.
first to last: C, A, D, B
43.
The __________ provides the foundation for the production plans.

a.
inventory policy
b.
sales plan
c.
administrative and discretionary spending plan
d.
44.
The sales plan identifies:

a.
expected cash flows from the sales of each product
b.
actual sales from last year for each product
c.
the budgeted level of sales
d.
the variance of sales from actual for each product
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45.
The __________ summarizes planned revenues from each product.

a.
b.
production plan
c.
administrative and discretionary spending plan
d.
sales plan
46.
Which of the following statements is TRUE regarding capacity resources?

a.
Raw materials and supplies are examples of intermediate-term resources.
b.
Long-term capacity usually varies directly with production levels.
c.
Flexible resources are usually purchased to acquire intermediate-term capacity.
d.
Long-term capacity resources are expensive and referred to as committed resources.
47.
__________ specifies when items such as acquisitions for buildings and special-purpose
equipment must be made to meet activity objectives.
a.
The capital-spending plan
b.
The production plan
c.
The materials purchasing plan
d.
The administrative and discretionary spending plan
48.
The sales plan is matched with inventory policy and capacity levels and __________ is
determined.
a.
an aggregate plan
b.
a new sales plan
c.
a materials purchasing plan
d.
an administrative and discretionary spending plan
49.
Aggregate planning:
a.
determines the projected financial statements
b.
compares the sales plan with the demand forecast
c.
assesses the feasibility of the proposed production plan
d.
provides a detailed production schedule for all product lines
50.
Discretionary expenditures:
a.
are usually planned for first
b.
are amounts paid for the use of flexible resources
c.
are not determined by the organizations level of production
d.
increase in amount during periods of greater activity
51.
__________ summarizes expenditures for advertising and research and development.

a.
The labor hiring and training plan
b.
The production plan
c.
The administrative and discretionary spending plan
d.
The aggregate plan
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52.
All of the following are true regarding the labor hiring and training plan EXCEPT that it:
a.
may include retraining plans to redeploy employees to other parts of the organization
b.
determines discretionary spending for research and development
c.
works backward from the date when personnel are needed
d.
can include plans for both expansion and contraction
53.
Financial analysts use the projected cash flow statement to do all of the following EXCEPT:
a.
plan for when excess cash is generated
b.
plan for short-term cash investments
c.
project cash shortages and plan a strategy to deal with the shortages
d.
project sales
54.
The cash flow statement does NOT include:

a.
cash inflows from the collection of receivables
b.
cash outflows paid toward committed resources
c.
all sales revenues
d.
interest paid and collected
55.
The financing section of the cash flow statement includes:

a.
cash flows from retail sales
b.
borrowing made and repaid
c.
amounts paid for advertising costs
d.
cash outflows for flexible resources
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 56 THROUGH 59.

For the next six months, Brett Company projects the following information (in units).
Retail demand
Dealer demand
Shop capacity
Painting capacity
Jan
200
400
1,000
700
Feb
200
500
1,000
700
Mar
300
600
1,000
700
April
300
700
1,000
1,200
May
400
800
1,000
1,200
June
400
900
1,000
1,200
Demand drives production for that month and cannot be carried over from one month to another.
Retail customers are satisfied first.
56.
The production for January is projected to be:

a.
200 units
b.
600 units
c.
700 units
d.
1,000 units
57.
The number of dealer units that will be produced and sold in March is:
a.
600 units
b.
700 units
c.
1,000 units
d.
400 units
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58.
Painting capacity appears to be:

a.
short-term capacity
b.
intermediate-term capacity
c.
long-term capacity
d.
total demand
59.
In May, production appears to be limited by:

a.
short-term capacity
b.
intermediate-term capacity
c.
long-term capacity
d.
total demand

The following information pertains to the January operating budget for Casey Corporation.
Budgeted sales for January $100,000 and February $200,000.
Collections for sales are 60% in the month of sale and 40% the next month.
Gross margin is 30% of sales.
Administrative costs are $10,000 each month.
Beginning accounts receivable $20,000.
Beginning inventory $14,000.
Beginning accounts payable $60,000. (All from inventory purchases.)
Purchases are paid in full the following month.
Desired ending inventory is 20% of next months cost of goods sold (COGS).
60.
For January, budgeted cash collections are:

a.
$20,000
b.
$60,000
c.
$80,000
d.
None of the above is correct.
61.
At the end of January, budgeted accounts receivable is:

a.
$20,000
b.
$40,000
c.
$60,000
d.
62.
For January, budgeted cost of goods sold is:

a.
$20,000
b.
$30,000
c.
$40,000
d.
63.
For January, budgeted net income is:

a.
$20,000
b.
$30,000
c.
$40,000
d.
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64.
For January, budgeted cash payments for purchases are:

a.
$14,000
b.
$60,000
c.
$70,000
d.
65.
At the end of January, budgeted ending inventory is:

a.
$20,000
b.
$28,000
c.
$40,000
d.

The following information pertains to Tiffany Company:
Month
January
February
March
Sales
$30,000
$40,000
$50,000
Purchases
$16,000
$20,000
$28,000
Cash is collected from customers in the following manner:

Month of sale
30%
Month following the sale 70%
40% of purchases are paid for in cash in the month of purchase, and the balance is paid
the following month.
Labor costs are 20% of sales. Other operating costs are $15,000 per month (including
$4,000 of depreciation). Both of these are paid in the month incurred.
The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at
the end of the month. Money can be borrowed in multiples of $1,000.
66.
How much cash will be collected from customers in March?

a.
$43,000
b.
$47,000
c.
$50,000
d.
67.
How much cash will be paid to suppliers in March?

a.
$23,200
b.
$28,000
c.
$44,000
d.
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68.
How much cash will be disbursed for labor and operating costs in March?
a.
$21,000
b.
$25,000
c.
$44,200
d.
$48,200
69.
What is the ending cash balance for March?

a.
($25,000)
b.
$3,000
c.
$3,200
d.
$3,800
70.
In __________, as one budget period passes, planners delete that budget period from the
master budget and add another one.
a.
zero-based budgeting
b.
periodic budgeting
c.
incremental budgeting
d.
continuous budgeting
71.
Although planners update or revise the budgets during the period, __________ is typically
performed once per year.
a.
zero-based budgeting
b.
periodic budgeting
c.
incremental budgeting
d.
continuous budgeting
72.
__________ requires that each discretionary expenditure be justified.

a.
Zero-based budgeting
b.
Periodic budgeting
c.
Incremental budgeting
d.
Continuous budgeting
73.
__________ bases a period's expenditure level for a discretionary item on the amount spent
on that item during the previous period.
a.
Zero-based budgeting
b.
Periodic budgeting
c.
Incremental budgeting
d.
Continuous budgeting
74.
In zero-based budgeting:
a.
the prior years budgeted amounts or actual results are used to build the new operating
budget
b.
the budget is prepared by the top managers
c.
managers must justify each item within the operating budget as if it were a new budget
item
d.
the budget is updated every month
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75.
__________ is the process of varying key estimates to identify those estimates that are the
most critical to a decision.
a.
A demand forecast
b.
A sensitivity analysis
c.
A pro forma income statement
d.
The cash flow statement
76.
Assume only the specified parameters change in a sensitivity analysis. If the contribution
margin increases by $2 per unit then operating profits will:
a.
also increase by $2 per unit
b.
increase by less than $2 per unit
c.
decrease by $2 per unit
d.
be indeterminable
77.
Assume that only the specified parameters change in a sensitivity analysis. The contribution
margin ratio increases when:
a.
total capacity-related (fixed) costs increase
b.
total capacity-related (fixed) costs decrease
c.
flexible (variable) costs per unit increase
d.
flexible (variable) costs per unit decrease
78.
The break-even point decreases if the:

a.
flexible (variable) cost per unit increases
b.
total capacity-related (fixed) costs decrease
c.
contribution margin per unit decreases
d.
selling price per unit decreases
79.
(CPA adapted, November 1992) The strategy MOST LIKELY to reduce the break-even
point would be to:
a.
increase both the capacity-related (fixed) costs and the contribution margin
b.
decrease both the capacity-related (fixed) costs and the contribution margin
c.
decrease the capacity-related (fixed) costs and increase the contribution margin
d.
increase the capacity-related (fixed) costs and decrease the contribution margin

Cathy Manufacturing produces a single product that sells for $80. Variable (flexible) costs per
unit equal $32. The company expects the total fixed (capacity-related) costs to be $72,000 for the
next month at the projected sales level of 2,000 units. In an attempt to improve performance,
management is considering a number of alternative actions. Each situation is to be evaluated
separately.
80.
What is the current break-even point in terms of number of units?

a. 1,500 units
b. 2,250 units
c. 3,333 units
d. None of the above is correct.
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81.
Suppose that Cathy Manufacturings management believes that a $16,000 increase in the
monthly advertising expense will result in a considerable increase in sales. How much must
sales increase to justify this additional expenditure?
a. 200 units
b. 334 units
c. 500 units
d. None of the above is correct.
82.
Suppose that Cathy Manufacturing's management believes that a 10% reduction in the
selling price will result in a 10% increase in sales. If this proposed reduction in selling price
is implemented, then:
a. profit will decrease by $8,000
b. profit will increase by $8,000
c. profit will decrease by $16,000
d. profit will increase by $16,000
83.
The PRIMARY reason for using cost variances is:

a.
that they diagnose the cause of a problem and what should be done to correct it
b.
for superiors to communicate expectations to lower level employees
c.
to administer appropriate disciplinary action
d.
for financial control of operating activities
84.
A favorable cost variance of significant magnitude:

a.
is the result of good planning
b.
may lead to improved production methods if it is investigated
c.
indicates that management does not need to be concerned about lax standards
d.
does not need to be investigated
85.
The variances that should be investigated by management include:

a.
only unfavorable variances
b.
only favorable variances
c.
all variances, both favorable and unfavorable
d.
both favorable and unfavorable variances that are considered significant in amount for
the company
86.
A flexible budget contains:

a.
cost targets for actual output
b.
cost targets for planned output
c.
the difference between planned and actual output
d.
actual costs for actual output
87.
All of the following are true of flexible budgets EXCEPT that they:
a.
use the same flexible (variable) cost per unit as the master budget
b.
result in higher total costs for greater levels of production
c.
allow comparison of actual results to targets based on the achieved level of production
d.
reflect the same level of production as the master budget
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88.
The variance that LEAST affects cost control is the __________ variance.
a.
flexible budget
b.
direct material price
c.
planning
d.
direct labor efficiency
89.
A flexible budget variance is $800 favorable for unit-related costs. This indicates that:
a.
costs were $800 more than the master budget
b.
costs were $800 less than standard for the achieved level of activity
c.
the sum of the planning and efficiency variances totals $800
d.
costs were $800 less than for the planned level of activity
90.
A favorable price variance for direct materials indicates that:

a.
a lower price than expected was paid for materials
b.
a higher price than expected was paid for materials
c.
less material was used during production than planned for actual output
d.
more material was used during production than planned for actual output
91.
A favorable efficiency variance for direct labor indicates that:

a.
a lower wage rate than expected was paid for direct labor
b.
a higher wage rate than expected was paid for direct labor
c.
less direct labor hours were used during production than expected for actual output
d.
more direct labor hours were used during production than expected for actual output
92.
A favorable wage rate variance for direct labor might indicate that:
a.
employees were paid more than planned
b.
a corporate-wide wage adjustment was implemented
c.
less skilled and qualified employees are being hired
d.
an efficient labor force
93.
An organization planned to use $82 of material per unit of activity but it actually used $80
of material per unit of activity, and it planned to make 1,200 units but it actually made 1,000
units. The flexible budget amount is:
a.
$80,000
b.
$82,000
c.
$96,000
d.
$98,400
94.
units. The flexible budget variance is:
a.
$2,000 favorable
b.
$14,000 unfavorable
c.
$16,400 unfavorable
d.
$2,400 favorable
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95.
units. The planning variance is:
a.
$2,000
b.
$14,000
c.
$16,400
d.
$2,400

These questions refer to flexible budget variance formulas with the following descriptions for the
variables: A = Actual; P = Price; Q = Quantity; S = Standard.
96.
The best label for the formula (AQ SQ) x SP is the:

a.
quantity variance
b.
price variance
c.
total cost variance
d.
wage rate variance
97.
The best label for the formula (AP SP) x AQ is the:

a.
quantity variance
b.
price variance
c.
total cost variance
d.
efficiency variance
98.
The best label for the formula [(AP) x (AQ) (SP) x (AQ)] is the:
a.
quantity variance
b.
price variance
c.
total cost variance
d.
efficiency variance
99.
The best label for the formula [(AP) x (AQ) (SP) x (SQ)] is the:
a.
quantity variance
b.
price variance
c.
total cost variance
d.
efficiency variance
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Triglobal Industries, Inc., (TII) developed the following standard costs for direct material and
direct labor for one of their major products, the 10-gallon plastic container.
Direct materials
Direct labor
Standard quantity
0.10 pounds
0.05 hours
Standard price
$30 per pound
$15 per hour
During June, TII produced and sold 5,000 containers using 490 pounds of direct materials at an
average cost per pound of $32 and 250 direct labor hours at an average wage of $15.25 per hour.
100. Junes direct material cost variance was:
a.
$980 unfavorable
b.
$300 favorable
c.
$680 unfavorable
d.
101. Junes direct material price variance was:
a.
$980 unfavorable
b.
$300 favorable
c.
$680 favorable
d.
102. Junes direct material quantity variance was:
a.
$980 unfavorable
b.
$300 favorable
c.
$680 favorable
d.
103. Junes direct material planning variance was:
a.
$134,320 favorable
b.
$135,300 unfavorable
c.
$680 unfavorable
d.
indeterminable using the above information
104. Junes direct labor rate variance was:
a.
$62.50 unfavorable
b.
$62.50 favorable
c.
$71,187.50 favorable
d.
105. Junes direct labor efficiency variance was:
a.
$62.50 unfavorable
b.
$62.50 favorable
c.
d.
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Sanders Industries, Inc., developed the following standard costs for direct material and direct
labor for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials
Direct labor
Standard quantity
0.20 pounds
0.10 hours
Standard price
$25 per pound
$15 per hour
During July, Sanders produced and sold 10,000 containers using 2,200 pounds of direct materials
at an average cost per pound of $24 and 1,050 direct labor hours at an average wage of $14.75
per hour.
106. Julys direct material price variance was:
a.
$2,800 favorable
b.
$2,200 favorable
c.
$5,000 unfavorable
d.
107. Julys direct material quantity variance was:
a.
$2,800 unfavorable
b.
$2,200 favorable
c.
$5,000 unfavorable
d.
108. Julys direct labor cost variance was:
a.
$750.00 unfavorable
b.
$262.50 favorable
c.
$487.50 unfavorable
d.
109. Julys direct labor rate variance was:
a.
$750.00 unfavorable
b.
$262.50 favorable
c.
$487.50 favorable
d.
110. Julys direct labor efficiency variance was:
a.
$750.00 unfavorable
b.
$262.50 favorable
c.
$487.50 favorable
d.
111. Julys direct labor planning variance was:
a.
b.
$ 487.50 favorable
c.
$ 487.50 unfavorable
d.
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The actual information pertains to the month of August. As part of the budgeting process, Dales
Fencing Company developed the following master budget for August. Dale is in the process of
preparing the flexible budget and understanding the results.
Sales volume (in units)

Sales revenues
Flexible (variable) costs
Contribution margin
Capacity-related (fixed) costs
Operating profit
Master
Budget
# 25,000
Flexible
Budget
========
$
$ _________
$1,250,000
600,000
650,000
Actual
Results
# 20,000
$1,000,000
512,000
450,000
$ 200,000
$ _________
$
488,000
458,000
30,000
112. The flexible budget will report $__________ for the flexible (variable) costs.
a.
$512,000
b.
$600,000
c.
$480,000
d.
$640,000
113. The flexible budget will report $__________ for the capacity-related (fixed) costs.
a.
$458,000
b.
$450,000
c.
$360,000
d.
$572,500
114. The flexible (variable) cost variance is:
a.
$32,000 unfavorable
b.
$120,000 unfavorable
c.
$32,000 favorable
d.
$120,000 favorable
115. The PRIMARY reason for low operating profits was:
a.
the flexible (variable) cost variance
b.
increased capacity-related (fixed) costs
c.
a poor management accounting system
d.
lower sales volume than planned
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Lynns Camera Shop has prepared the following flexible budget for September and it is in the
process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.
Flexible
------------Variances------------Budget
Price/Rate
Use/Efficiency
Material A
$20,000
$1,000 F
$3,000 U
Material B
30,000
500 U
1,500 F
Direct labor
40,000
500 U
2,500 F
116. The MOST LIKELY explanation of the above variances for Material A is that:
a.
a lower price than expected was paid for Material A
b.
higher quality raw materials were used than were planned
d.
the company used a new supplier
d.
Material A used during September was $2,000 less than expected
117. The MOST LIKELY explanation of the above direct labor variances is that:
a.
the average wage rate paid to employees was less than expected
b.
employees did not work as efficiently as expected to accomplish the job
c.
the company may have assigned more experienced employees this month than
originally planned
d.
management may have a problem with budget slack and may be using lax standards for
both labor wage rates and expected efficiency
118. In the service sector, __________ rather than machines usually represent(s) the capacity
constraint, which underscores the importance of budgeting even in nonmanufacturing
organizations.
a.
people
b.
knowledge
c.
familiarity with processes
d.
potential for sales
119. _________ occur(s) when a superior simply tells subordinates what their budget will be.
a.
Authoritative budgeting
b.
Stretch targets
c.
Consultative budgeting
d.
Budget slack
120. _________ mean(s) that the organization will attempt to reach much higher goals with the
current budget.
a.
b.
Stretch targets
c.
d.
Budget slack
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121. _________ occur(s) when managers ask subordinates to discuss their ideas about the
budget, but no joint decision-making occurs.
a.
b.
Stretch targets
c.
d.
Budget slack
122. _________ involve(s) a joint decision-making process in which all parties agree about
setting the budget targets.
a.
The pseudo-participation
b.
Budgeting games
c.
Budget slack
d.
The participation method
123. _________ occur(s) when subordinates ask for excess resources above and beyond what
they need to accomplish budget objectives.
a.
Pseudo participation
b.
Effective budgeting
c.
Budget slack
d.
Participative budgeting
124. The BEST description of participative budgeting is that:
a.
lower-level managers and employees initially prepare the budget
b.
managers and employees at many levels are involved with the budgeting process
c.
the budget is prepared by the top managers
d.
top management sets figures for all operating activities and these amounts are not
negotiable
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EXERCISE/PROBLEMS
125. For the next six months, Barton Manufacturing projects the following information (in units).
Retail demand
Dealer demand
Shop capacity
Painting capacity
July
200
400
800
700
Aug
200
500
800
700
Sept
300
600
800
700
Oct
400
600
800
1,100
Nov
Dec
500
600
600
600
800
800
1,100 1,100
Demand drives production for that month and cannot be carried over from one month to
another. Retail customers are satisfied first.
Required:
a.
Prepare a schedule that shows the number of retail and dealer units to be made and
sold each month.
b.
Review the above information and comment on your observations. What suggestions
do you have for Barton Manufacturing?
126. The following information pertains to Amigo Corporation:

Month
July
August
September
October
November
December
Sales
$30,000
34,000
38,000
42,000
48,000
60,000
Purchases
$10,000
12,000
14,000
16,000
18,000
20,000

Month of sale (2% cash discount)
30%
Month following sale
50%
Two months following sale
15%
Amount uncollectible
5%
40% of purchases are paid for in cash in the month of purchase, and the balance is paid
the following month.
Required:
a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.
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127. The following information pertains to Maximillion Corporation:

Month
July
August
September
October
November
December
Sales
$40,000
30,000
20,000
50,000
60,000
70,000
Purchases
$20,000
15,000
10,000
25,000
30,000
35,000

Month of sale
20%
Month following the sale
50%
Two months following sale
28%
Amount uncollectible
2%
Thirty percent of purchases are paid for in cash in the month of purchase, and the
balance is paid the following month. A 2% discount is allowed on cash paid out at the
time of purchase.
Maximillion Corporation incurs labor costs equal to 20% of sales, and other operating
costs of $5,000 per month (including $2,000) of depreciation. Both of these are paid in
the month incurred.
The cash balance on October 1 is $4,300. A minimum cash balance of $4,000 is required
at the end of the month. Money can be borrowed in multiples of $1,000.
Finally, Maximillion Corporation will issue $6,000 of common stock and pay out
$10,000 in dividends in October.
Required:
Prepare a projected cash flow statement in good form for the month of October.
128. Sunshine, Inc. sells a single product. The company's 2005 income statement is given below.
Sales (4,000 units)
Less flexible (variable) expenses
Less capacity-related (fixed) expenses
$800,000
$200,000
$300,000
In an attempt to improve performance, management is considering a number of alternative

actions. Each situation is to be evaluated separately.
Required:
a. Calculate operating income and the break-even point for 2005.
b. Management believes that a $100,000 increase in equipment improvements will result
in a considerable increase in sales. How much must sales increase to justify this
additional capital expenditure?
c. Assume management believes that flexible costs can be decreased by 10%. As a result
management wants to reduce the selling price by 2% and expects this reduction will
result in a 5% increase in sales. What are projected profits if these proposals are
implemented?
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129. Tatro Industries, Inc., (TII) developed standard costs for direct material and direct labor. In
2005, TII estimated the following standard costs for one of their major products, the 50gallon plastic container.
Standard quantity
Standard price
Direct materials
0.25 pounds
$40 per pound
Direct labor
0.03 hours
$18 per hour
During August, TII produced and sold 8,000 containers using 1,900 pounds of direct
materials at an average cost per pound of $41 and 250 direct labor hours at an average wage
of $18.25 per hour. Determine the following variances for August:
Required:
a.
Total direct material cost variance.
b.
Direct material price variance.
c.
Direct material quantity variance.
d.
e.
f.
Total direct labor cost variance.

Direct labor rate variance.
Direct labor efficiency variance.
130. As part of the budgeting process, Dales Fencing Company developed the following master
budget for September. Dale is in the process of preparing the flexible budget and
understanding the results.
Master
Budget
# 30,000
Flexible
Budget
Actual
Results
# 25,000
========
Sales revenues
$3,600,000
2,160,000
$
$ _________
Contribution margin
1,440,000

Operating profit
900,000
$ 540,000
$ _________
$
$3,000,000
1,930,000
1,070,000
970,000
$ 100,000
Required:
a.
Prepare the flexible budget in the area provided above.
b.
Determine the flexible (variable) cost variance.
c.
Determine the flexible (variable) planning variance.
d.
Should the manager be congratulated for keeping costs under control? Explain.
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131. Bobs Camera Shop has prepared the following flexible budget for October and it is in the
process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.
Flexible
----------------Variances--------------Actual
Budget
Price/Rate
Quantity/Efficiency
Results
Material A
$30,000
$1,000F
$3,000U
$32,000
Material B
40,000
500U
1,500F
39,000
Direct labor
50,000
500U
2,500F
48,000
Required:
a.
Explain what each of the following variances indicates.
1.
For Material A, the favorable price variance indicates that
2.
For Material A, the unfavorable quantity variance indicates that
3.
For direct labor, the unfavorable price variance indicates that
4.
For direct labor, the favorable efficiency variance indicates that
b.
Which two variances do you think should be investigated by management? Why?
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CRITICAL THINKING/ESSAY
132. What is budgeting? What is its role?
133. Describe the benefits to an organization of preparing an operating budget.
134. Describe operating and financial budgets and give at least two examples of each that are
discussed in the textbook.
135. Discuss the importance of the sales forecast and items that influence its accuracy.
136. Discuss the terms discretionary expenditures and committed expenditures and give an
example of each.
137. Explain when a manager would use what-if analysis.
138. What is the primary reason for conducting cost variance analysis?
139. Explain what each of the following variances indicates, and discuss what conditions might
have caused each variance.
Direct material price variance:
$1,000 F
Direct material quantity variance:
$500 U
Direct labor rate variance:
$700 U
Direct labor efficiency variance:
$200 F
140. What is the primary role of the flexible budget?
141. How is the role of budgeting similar for a manufacturing firm and a not-for-profit
organization?
142. Describe some of the drawbacks of using the operating budget as a control device.
143. What is stretch budgeting? Why is it used?
144. What is budget slack? What are the pros and cons of building slack into the budget from the
point of view of (a) an employee and (b) a senior manager?
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CHAPTER 10
SOLUTIONS
USING BUDGETS TO ACHIEVE ORGANIZATIONAL OBJECTIVES

TRUE/FALSE
LO1
LO1
LO2
LO3
LO3
1.
2.
3.
4.
5.
a
a
a
b
b
LO3
LO3
LO4
LO4
LO5
6.
7.
8.
9.
10.
a
b
b
a
a
LO6
LO6
LO6
LO6
LO6
11.
12.
13.
14.
15.
a
b
b
a
a
LO6
LO6
LO6
LO6
LO7
16.
17.
18.
19.
20.
b
a
b
b
b
LO8
LO8
LO8
21.
22.
23.
b
b
a
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MULTIPLE CHOICE
LO1
LO1
LO1
LO1
LO1
24.
25.
26.
27.
28.
a
d
b
b
d
LO3
LO3
LO3
LO3
LO3
59.
60.
61.
62.
63.
c
c
b
d
a
LO6
LO6
LO6
LO6
LO6
94.
95.
96.
97.
98.
a
c
a
b
b
LO1
LO1
LO2
LO2
LO3
29.
30.
31.
32.
33.
c
a
b
c
a
LO3
LO3
LO3
LO3
LO3
64.
65.
66.
67.
68.
b
b
a
a
a
LO6
LO6
LO6
LO6
LO6
99.
100.
101.
102.
103.
c
c
a
b
d
LO3
LO3
LO3
LO3
LO3
34.
35.
36.
37.
38.
d
c
b
d
b
LO3
LO4
LO4
LO4
LO4
69.
70.
71.
72.
73.
d
d
b
a
c
LO6
LO6
LO6
LO6
LO6
104.
105.
106.
107.
108.
a
d
b
c
c
LO3
LO3
LO3
LO3
LO3
39.
40.
41.
42.
43.
b
a
c
b
b
LO4
LO5
LO5
LO5
LO5
74.
75.
76.
77.
78.
c
b
a
d
b
LO6
LO6
LO6
LO6
LO6
109.
110.
111.
112.
113.
b
a
d
c
b
LO3
LO3
LO3
LO3
LO3
44.
45.
46.
47.
48.
c
d
d
a
a
LO5
LO5
LO5
LO5
LO6
79.
80.
81.
82.
83.
c
a
b
a
d
LO6
LO6
LO6
LO6
LO7
114.
115.
116.
117.
118.
a
d
a
c
a
LO3
LO3
LO3
LO3
LO3
49.
50.
51.
52.
53.
c
c
c
b
d
LO6
LO6
LO6
LO6
LO6
84.
85.
86.
87.
88.
b
d
a
d
c
LO8
LO8
LO8
LO8
LO8
119.
120.
121.
122.
123.
a
b
c
d
c
LO3
LO3
LO3
LO3
LO3
54.
55.
56.
57.
58.
c
b
b
d
b
LO6
LO6
LO6
LO6
LO6
89.
90.
91.
92.
93.
b
a
c
c
b
LO8
124. b
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MULTIPLE CHOICE
56.
57.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
80.
81.
82.
93.
94.
95.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
Retail demand 200 + Dealer demand 400 = 600 units

Painting capacity 700 - Retail demand 300 = 400 units
(January $100,000 x 60% = $60,000) + (Beginning accounts receivable $20,000) = $80,000
January $100,000 x 40% = $40,000
$100,000 x (1- 30%) = $70,000
Sales $100,000 COGS $70,000 Administrative costs $10,000 = $20,000
Beginning accounts payable $60,000
February sales $200,000 x (1 30%) = $140,000 COGS x 20% = $28,000
(February sales $40,000 x 70% = $28,000) + (March sales $50,000 x 30% = $15,000) =
$43,000
(February purchases $20,000 x 60% = $12,000) + (March purchases $28,000 x 40% =
$11,200) = $23,200
(March sales $50,000 x 20% = $10,000) + (Cash operating costs $15,000 - $4,000 =
$11,000) = $21,000
(Cash March 1 $4,000 + cash collected from customers +$43,000 (See No. 66) cash paid
to suppliers $23,200 (See No. 67) operating expenses paid $21,000 (See No. 68) =
$2,800 + borrowed for minimum balance $1,000 = $3,800.
$72,000 / ($80 - $32) = 1,500 units
$16,000 / ($80 - $32) = 334 units
($80 - $32) x (2,000 units) - $72,000 = $24,000
($72 - $32) x (2,200 units) - $72,000 = $16,000
Will decrease operating profit by $8,000
1,000 units x $82 = $82,000
(1,000 units x $82) (1,000 x $80) = $2,000 favorable variance
(1,200 units x $82) (1,000 x $82) = $16,400 planning variance
Total direct material cost variance
= Actual direct material cost Standard direct material cost
= (490# x $32) (5,000 x 0.10# x $30) = $15,680 - $15,000 = $680 U
(AP SP) x AQ = ($32 - $30) x 490# = $980 U
(AQ SQ) x SP = [490# - (5,000 x 0.10#)] x $30 = $300 F
Planned quantity of containers was not disclosed.
(AR SR) x AH = ($15.25 - $15.00) x 250 = $62.50 U
(AH SH) x SR = [250 - (5,000 x 0.05)] x $15 = Zero variance
(AP SP) x AQ = ($24 - $25) x 2,200# = $2,200 F
(AQ SQ) x SP = [2,200# - (10,000 x 0.20#)] x $25 = $5,000 U
Total direct labor cost variance = Actual direct labor cost Standard direct labor cost
= (1,050 x $14.75) (10,000 x 0.10 x $15) = $15,487.50 - $15,000.00 = $487.50 U
(AR SR) x AH = ($14.75 - $15.00) x 1,050 = $262.50 F
(AH SH) x SR = [1,050 - (10,000 x 0.10)] x $15 = 750 U
Planned quantity of containers was not disclosed.
$600,000 / 25,000 units = $24 standard cost per unit x 20,000 actual units = $480,000
$450,000 expected capacity-related (fixed) costs from the master budget
Actual cost Flexible cost = $512,000 - $480,000 (See No. 112) = $32,000 U
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EXERCISE/PROBLEM
LO3
125. a.
Retail production
Dealer production
Total production
b.
July
200
400
600
Aug
200
500
700
Sept
300
400
700
Oct
400
400
800
Nov
500
300
800
Dec
600
200
800
October through December shop capacity is a limiting factor and painting capacity is
not being fully utilized.
Barton Manufacturing may want to consider renting additional space during the last
three months of the year to take advantage of the increased demand and painting
capacity at the end of the year.
LO3
126. a. Cash collections total $125,200 = Oct $36,448 + Nov $40,812 + Dec $47,940.
August
September
October
November
December
October
$ 5,100
19,000
12,348
November
-------$36,448
--------$40,812
5,700
21,000
14,112
December
6,300
24,000
17,640
-------$47,940
b. Cash disbursements total $50,400 = Oct $14,800 + Nov $16,800 + Dec $18,800.
September
October
November
December
October
8,400
6,400
November
-------$14,800
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9,600
7,200
--------$16,800
Page 29
December
10,800
8,000
-------$18,800
Schoenebeck
LO3
127. Cash collections from customers:
August (0.28 x $30,000)
September (0.50 x $20,000)
October (0.20 x $50,000)
Cash outflows for operating:
Suppliers
Labor
Operating costs
$8,400
10,000
10,000
$28,400
** $14,350
10,000
3,000
$27,350
Net cash flows from operations

Add: opening cash
Add: cash from stock issuance
Less: cash paid as dividends
Add: cash borrowed
Ending cash
$1,050
4,300
6,000
(10,000)
3,000
$4,350
**$7,350 + $7,000 = Oct (0.30 x $25,000 x .98) + Sept (0.70 x $10,000).
LO5
128. a.
2005 operating income equals $300,000 = $800,000 sales revenue - $200,000 variable
costs - $300,000 fixed costs.
2005 breakeven point $400,000 in total sales dollars. $600,000 CM / $800,000 sales
revenue = 0.75 CM ratio. $300,000 total fixed costs / 0.75 CM ratio = $400,000 in
total sales to break even. OR $800,000 / 4,000 units = $200 selling price. $200,000 /
4,000 units = $50 flexible cost per unit. $300,000 / ($200 - $50) = 2,000 units to break
even.
b.
$100,000 / 75% CM ratio = $133,334 in increased sales to break even. OR $100,000 /

($200 - $50) = 667 additional units to breakeven.
c.
($200 - $50) (4,000 units) - $300,000 = $300,000 current production and pricing
($196 - $45) (4,200 units) - $300,000 = $334,200 proposed production and pricing
Operating profit is expected to increase by $34,200
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LO6
129. a.
Total direct material cost variance.

= Actual direct material cost Standard direct material cost
= (1,900# x $41) (8,000 x 0.25 x $40)
= $77,900 - $80,000
= $2,100 favorable
b.
Direct material price variance.

= (AP SP) x AQ
= ($41 - $40) x 1,900#
= $1,900 unfavorable
c.
Direct material quantity variance.

= (AQ SQ) x SP
= [1,900# - (8,000 x 0.25)] x $40
= $4,000 favorable
d.
Total direct labor cost variance.

= Actual direct labor cost Standard direct labor cost
= (250 x $18.25) (8,000 x 0.03 x $18)
= $4,562.50 - $4,320.00
= $242.50 unfavorable
e.
Direct labor rate variance.

= (AR SR) x AH
= ($18.25 - $18.00) x 250
f.
Direct labor efficiency variance.

= (AH SH) x SR
= [250 - (8,000 x 0.03)] x $18
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LO6
130. a.
Master
Budget
# 30,000
Flexible
Budget
# 25,000
Actual
Results
# 25,000
$3,600,000
2,160,000
$3,000,000
$1,800,000
$3,000,000
1,930,000
Contribution margin
1,440,000
$1,200,000
1,070,000

Operating profit
900,000
$ 540,000
$ 900,000
$ 300,000
970,000
$ 100,000

Sales revenues
b.
Determine the flexible (variable) cost variance.

= Actual cost Flexible budget cost
= $1,930,000 - $1,800,000
= $130,000 unfavorable
c.
Determine the flexible (variable) planning variance.

= Flexible budget cost Master budget cost
= $1,800,000 $2,160,000
= $360,000 less than planned
d.
As these results suggest, the manager should not be congratulated for keeping costs
under control. Flexible (variable) costs were $130,000 over budget for actual output
and capacity-related (fixed) costs were also $70,000 over budget. These variances
from the flexible budget highlight the amounts that are different than planned. Since
variances simply signal a deviation from what was planned, these differences need to
be investigated before corrective actions can be taken.
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LO6
131. a.
b.
1.
For Material A, the favorable price variance indicates that direct material costs
were lower than planned because the purchase price per unit of raw material was
lower than expected.
2.
For Material A, the unfavorable quantity variance indicates that direct material
costs were higher than planned because more Material A was used during
production than was expected to be used for the actual output.
3.
For direct labor, the unfavorable price variance indicates that direct labor costs
were higher than expected because the average wage paid per hour was greater
than planned.
4.
For direct labor, the favorable efficiency variance indicates that direct labor costs
were lower than planned because fewer direct labor hours were used during
production than was expected to be used for the actual output.
It appears that both the $3,000 unfavorable Material A quantity variance and the
$2,500 favorable direct labor variance should be investigated by management since
these are greatest in magnitude. The unfavorable variance should be investigated so
that the cause of the problem can be identified and corrected. The favorable variance
should be investigated so that the favorable conditions may possibly be replicated to
continue these cost savings.
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CRITICAL THINKING/ESSAY
LO1
132. What is budgeting? What is its role?
Solution: Budgeting is the process of preparing budgets, plans, schedules, and forecasts,
and the process requires several important skills, including forecasting, a knowledge of how
activities affect costs, and the ability to see how the organization's different activities fit
together.
The role of budgets includes coordination, problem signaling, and problem-solving activities
as organization control.
LO1
133. Describe the benefits to an organization of preparing an operating budget.
Solution: A well-prepared operating budget should serve as a guide for a company to follow
during the budgeted period. It is not set in stone. If new information or opportunities
arise, the budget should be adjusted.
A well-prepared operating budget assists management with the allocation of scarce
resources. It can help management see trouble spots in advance, and decide where to
allocate its limited resources.
A well-prepared operating budget fosters communication and coordination among various
segments of the company. The process of preparing a budget requires managers from
different functional areas to work together and to communicate performance levels they
both want and can attain.
A well-prepared operating budget can become the performance standard against which firms
can compare the actual results.
LO3
134. Describe operating and financial budgets and give at least two examples of each that are
discussed in the textbook.
Solution: Operating budgets specify the expected outcomes of any selling, capital spending,
manufacturing, purchasing, labor management, and administrative activities during the
planning period. Operations personnel use these plans to guide and coordinate activities
during the planning period.
Examples of operating budgets include the sales plan, capital spending plan, production
plan, materials purchasing plan, labor hiring and training plan, and the administrative and
discretionary spending plan.
Financial budgets are used to evaluate the financial consequences of a proposed decision.
Examples of financial budgets include the projected balance sheet, projected income
statement, and projected cash flow statement.
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LO3
135. Discuss the importance of the sales forecast and items that influence its accuracy.
Solution: All other budgets are based on information from the sales forecast.
The sales forecast is a challenge to predict because its accuracy depends on the ability to
forecast the state of the general economy, changes in the industry, actions of the
competition, the ability of the sales staff, and developments in technology. Each of these
items affects individual products or product lines and are quantified and aggregated to
obtain the sales forecast.
LO4
136. Discuss the terms discretionary expenditures and committed expenditures and give an
example of each.
Solution: Discretionary expenditures provide the infrastructure required by the emerging
production and sales plan. There is no direct relationship between the level of spending on
these activities and actual production levels.
Examples of discretionary expenditures include amounts spent on employee training and
research and development.
Committed expenditures are expensive. In addition, they are costs that are the same
whether the facility is used or not, and the level of these costs is very difficult to change in
the short term.
An example of a committed expenditure would be a payment on a long-term lease.
LO5
137. Explain when a manager would use what-if analysis.
Solution: What-if analysis is helpful for evaluating alternative marketing, production, and
selling strategies.
LO1
138. What is the primary reason for conducting cost variance analysis?
Solution: Conducting cost variance analysis can help managers in several ways. If the
managerial actions are identified that led to actual costs being lower than estimated costs,
similar cost savings can be realized by repeating those actions in the production of other
jobs. If factors resulting in actual costs being higher are identified, then managers may be
able to take the necessary actions to eliminate or control those factors. If cost changes are
likely to be permanent, however, the revised cost information can be used in bidding for jobs
in the future.
LO6
139. Explain what each of the following variances indicates, and discuss what conditions might
have caused each variance.
Direct material price variance: $1,000 F
Direct material use variance:
$500 U
Direct labor rate variance:
$700 U
Direct labor efficiency variance: $200 F
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Solution:
Direct material price variance: $1,000 F A favorable variance indicates that the materials
used cost $1,000 less than expected. This could be the result of the purchasing agent
negotiating a good price or the result of purchasing inferior materials.
Direct material quantity variance: $500 U An unfavorable variance indicates that more
materials were used than expected. This could be caused by inferior materials, wastage, or a
faulty standard.
Direct labor rate variance: $700 U An unfavorable variance indicates that the wage rate
paid was higher than expected. This could be the result of using more experienced and,
therefore, higher-paid employees, or an unanticipated increase in wages for the company.
Direct labor efficiency variance: $200 F A favorable variance indicates that the actual time
on the job was less than expected. This could be the result of using more experienced and,
therefore, more efficient employees, or a lax standard.
LO6
140. What is the primary role of the flexible budget?
Solution: The primary role of the flexible budget is to provide a realistic standard against
which to compare actual costs. The differences in costs between the master budget and
flexible budget reflect the effect of differences between the planned and the actual achieved
output quantity. The differences in costs between the flexible budget and actual costs reflect
variances between actual and the allowable standard costs.
LO7
141. How is the role of budgeting similar for a manufacturing firm and a not-for-profit
organization?
Solution: As in manufacturing firms, budgeting helps nonmanufacturing organizations
perform their planning function by coordinating and formalizing responsibilities and
relationships and communicating the expected plans.
LO8
142. Describe some of the drawbacks of using the operating budget as a control device.
Solution: When the operating budget is used as a control device, it can lead to behavior that
is actually detrimental to the organization.
The major problem with the budget performance report is not the report itself, but rather the
way it is used. In general, managers are rewarded for favorable variances, and disciplined
for unfavorable variances. This encourages managers to set lax standards for both sales and
costs so favorable variances result. It can also lead to budget games.
Another drawback is that, once the budget is established, if there is any variance between
budget and actual, it is assumed to be because of actual. However, as we know, the budget
will never be totally accurate due to the uncertainties of predicting the future.
If used properly, however, the operating budget can be a tremendous benefit to any
company.
LO8
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143. What is stretch budgeting? Why is it used?

Solution: A stretch budget is one that exceeds a previous target by a significant amount and
usually requires an enormous increase in effort to achieve.
Research has shown that the most motivating type of budget is one that is "tight," meaning
targets are perceived as ambitious, but attainable.
LO8
144. What is budget slack? What are the pros and cons of building slack into the budget from the
point of view of (a) an employee and (b) a senior manager?
Solution: Budget slack occurs when subordinates (1) ask for excess resources above and
beyond what they need to accomplish budget objectives and (2) distort information by
claiming they are not as efficient or effective at what they do, thus lowering management's
performance expectations of them.
Employee's point of view: There are two benefits from this point of view. First, the
subordinate may be able to obtain excess resources to achieve desired goals. This may take
a lot of pressure off the subordinate and reduce job anxiety. Second, the subordinate may be
able to convince senior management to lower their work expectations of him or her. This
may also lead to lower pressure on the subordinate to perform. Both of these types of
slack-building are designed to reduce job stress for the subordinate. However, if incentives
are graduated in such a way that achieving higher and higher goals provides the subordinate
with more and more compensation in the form of bonuses, then the subordinate may lose
income by selecting lower goals.
Senior management's point of view: When subordinates build in slack, they are either
using unnecessary resources to achieve a goal that they should have been able to achieve
with fewer resources, or they are understating their performance capabilities. Thus, the
organization is either not running as efficiently as it can, or it is losing potential productivity
from employees who are not working as hard as they can. In some cases, senior
management may believe that subordinates build in slack to relieve job pressure. If burnout
of employees has been happening in the organization, then perhaps senior management may
be more forgiving and view some slack-building as necessary to keep their employees from
quitting.
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CHAPTER 10

USING BUDGETS TO ACHIEVE ORGANIZATIONAL OBJECTIVES

Budgeting involves forecasting the demand for flexible resources, intermediate-term

The usual starting point in budgeting is to make a forecast of net income.

The sales plan should be based on the production plan.

In periodic budgeting, organizations budget continuously.

Zero-based budgeting requires that proponents of discretionary expenditures justify these

AKY 4E Test Bank

A favorable variance indicates managements attention is not needed.

If standards are lax, cost variances will tend to be favorable.

Planning variances are the focus of cost control.

AKY 4E Test Bank

AKY 4E Test Bank

A budget should/can do all of the following EXCEPT that it:

Budgeting provides all of the following EXCEPT:

Budgeting always includes:

Budgeting does NOT require:

In regard to the amount of detail, a budget should:

AKY 4E Test Bank

When discussing the roles of budgets, a control role includes:

Operating budgets and financial budgets:

Operating budgets include all of the following EXCEPT:

Operating budgets include the:

Financial budgets are prepared:

Financial budgets include the:

AKY 4E Test Bank

A demand forecast is:

The budgeting process is MOST strongly influenced by the:

In which order are the following developed?

The __________ provides the foundation for the production plans.

The sales plan identifies:

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The __________ summarizes planned revenues from each product.

Which of the following statements is TRUE regarding capacity resources?

__________ summarizes expenditures for advertising and research and development.

AKY 4E Test Bank

The cash flow statement does NOT include:

The financing section of the cash flow statement includes:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 56 THROUGH 59.

The production for January is projected to be:

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Painting capacity appears to be:

In May, production appears to be limited by:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 60 THROUGH 65.

Budgeted sales for January $100,000 and February $200,000.

Gross margin is 30% of sales.

Administrative costs are $10,000 each month.

Beginning accounts receivable $20,000.

Beginning inventory $14,000.

Beginning accounts payable $60,000. (All from inventory purchases.)

Purchases are paid in full the following month.

For January, budgeted cash collections are:

At the end of January, budgeted accounts receivable is:

For January, budgeted cost of goods sold is:

For January, budgeted net income is:

AKY 4E Test Bank

For January, budgeted cash payments for purchases are:

At the end of January, budgeted ending inventory is:

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 THROUGH 69.

Cash is collected from customers in the following manner:

How much cash will be collected from customers in March?

How much cash will be paid to suppliers in March?

AKY 4E Test Bank